Best class of real estate in a post Covid world?
Rental Property Investor · Tel Aviv, Israel · Member since 2019 · 15 posts · 5 votes
Best class of real estate in a post Covid world?
Most Popular Reply
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
6yI love retail. Give it to me all day long. I have been busier than I have ever been. People are buying a ton of it.
NOW the key is if you are buying sub-standard tenants than you better make sure the rents are below market and you have some LIFT (upside) on re-purposing.
The bad deals now in my opinion are small operators at market lease rates where the long term risk of default is HIGH and UPSIDE is low. Developers love to sell off that trash for a premium and new commercial brokers love to push that trash because they need a paycheck and sale to survive. The buyer is left scratching their head years later saying ( What happened? Why did they sell this to me?)
Just like any other asset class retail is not immune to buying the wrong lease structures, wrong location, wrong tenant type, etc. You have to know what you are doing in underwriting these properties.
The discount is going to be the mom and pop to more regional type tenants. A Mcdonald's in GA just traded for about a 3.7 cap rate. Ultra high net worth investor that couldn't take anymore stock fluctuations. Just wanted to own investment grade and have certainty.
When buyers are worth 20,50, 75 million dollars they tend to make decisions differently than those at the 3,4 million level. Most of the higher net worth have already made their money so more in wealth preservation mode rather than wealth creation to wealth stabilization mode. This isn't always the case but lots of investors hit ages and inflection points where the desire to push yield goes down as they have way more than enough to live comfortably and value time and no headaches as worth more value.
I have clients in hospitality but they own A assets and they are still doing well. The distressed properties will usually be more from certain loan structures that do not allow hardly any workouts, weak net worth operators, sub-standard class of property within the asset class, etc.
Most of the NNN my clients are buying right now are investment grade ( ESSENTIAL BUSINESSES). Lenders are still giving pretty much the same exact loans or better for them than pre-covid. The reason is lenders want high quality tenant NNN properties on the books and stronger borrowers. They want to clean up their books so not stuck with too much dead weight properties with losses.
We often go into multiple offer situation with my clients and have to write the offer within a few days to market or even internally listed showing to a small group.
I laugh when I hear from others not an expert in the space. Knowledge level is different for those that have been evaluating tens of thousands or more of these properties over the years versus the casual lookie loo that has viewed a few properties online and read some random articles about what the retail market is going to become or do next.
Risk profile tends to be higher in cold belt states where overall growth regardless of the asset class is taking a hit with net migration and retirees moving away to warm belt states. There are pockets still performing well.
My clients are not really buying anything on the coast lines. Sea levels are expected rise and inter canal waterways can cause lots of flooding issues especially for areas at or below sea level. In those areas if buying it's good to check what is their long term plan to protect the the shores and how are they funding it to prevent loss of areas potentially reclaimed by the sea.
There is talk of an even greater push into NNN if certain political parties get in. More pressure could be put on residential landlord/tenant laws. The additional headaches could cause some long term multifamily owners to say they no longer want to deal with it and sell to younger investors willing to wait out changes going back in their favor again. It's all perspective on the individual investor.
Jonathan I would be interested to hear more about the specifics of the property you offered on, what was discovered, and why you passed on it?
22 Replies
- Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes6y
Industrial, self-storage and commercial multifamily will be solid asset classes into the future. Many of these assets classes in growing areas of the country have actually increased in value.
- Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes6y
Originally posted by @Jonathan Levi:
Hi all,
When I first came to BiggerPockets I was interested in multi family. Over time, I became convinced that I needed to go to triple net properties since I live Abroad and loved the idea of mailbox money with zero work required. I even moved on a deal, but it fell through in due diligence
Now, with COVID-19 upon us, I am wondering what the best investment class is for commercial-sized investors. Obviously, retail has suffered a lot. But then again, many people are also not paying rent right now! And is there really that much opportunity in buying up warehouses that are not Amazon sized?
How have you changed your strategy since COVID-19? Are you still hot on retail? What do you feel is the safest investment right now?Thanks for sharing
As we have seen from the current environment housing is always going to be resilient. Single family and Class A and B For Core plus are the most recession proof in our current economy. If things were to get bad enough storage would take a hit but that sector has remained strong historically. I would not pursue single tenant deals, office or hospitality other than adaptive reuse of those spaces. Industrial will require caution and specific knowledge as those assets will now be in completion with converted Big Box spaces that now serve as distribution centers including last mile.
Originally posted by @Greg Dickerson:
Originally posted by @Jonathan Levi:
Hi all,
When I first came to BiggerPockets I was interested in multi family. Over time, I became convinced that I needed to go to triple net properties since I live Abroad and loved the idea of mailbox money with zero work required. I even moved on a deal, but it fell through in due diligence
Now, with COVID-19 upon us, I am wondering what the best investment class is for commercial-sized investors. Obviously, retail has suffered a lot. But then again, many people are also not paying rent right now! And is there really that much opportunity in buying up warehouses that are not Amazon sized?
How have you changed your strategy since COVID-19? Are you still hot on retail? What do you feel is the safest investment right now?Thanks for sharing
As we have seen from the current environment housing is always going to be resilient. Single family and Class A and B For Core plus are the most recession proof in our current economy. If things were to get bad enough storage would take a hit but that sector has remained strong historically. I would not pursue single tenant deals, office or hospitality other than adaptive reuse of those spaces. Industrial will require caution and specific knowledge as those assets will now be in completion with converted Big Box spaces that now serve as distribution centers including last mile.
I'm wondering same thing: The future of commercial RE. Offices and hospitality reuse is exactly what I was thinking as these spaces may be had for much lower than before. But how to repurpose these? Most of these spaces are surrounded by like-use real estate or zoned only for such purpose. Whoever has an idea can be quite successful.
Thinking......
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
I love retail. Give it to me all day long. I have been busier than I have ever been. People are buying a ton of it.
NOW the key is if you are buying sub-standard tenants than you better make sure the rents are below market and you have some LIFT (upside) on re-purposing.
The bad deals now in my opinion are small operators at market lease rates where the long term risk of default is HIGH and UPSIDE is low. Developers love to sell off that trash for a premium and new commercial brokers love to push that trash because they need a paycheck and sale to survive. The buyer is left scratching their head years later saying ( What happened? Why did they sell this to me?)
Just like any other asset class retail is not immune to buying the wrong lease structures, wrong location, wrong tenant type, etc. You have to know what you are doing in underwriting these properties.
The discount is going to be the mom and pop to more regional type tenants. A Mcdonald's in GA just traded for about a 3.7 cap rate. Ultra high net worth investor that couldn't take anymore stock fluctuations. Just wanted to own investment grade and have certainty.
When buyers are worth 20,50, 75 million dollars they tend to make decisions differently than those at the 3,4 million level. Most of the higher net worth have already made their money so more in wealth preservation mode rather than wealth creation to wealth stabilization mode. This isn't always the case but lots of investors hit ages and inflection points where the desire to push yield goes down as they have way more than enough to live comfortably and value time and no headaches as worth more value.
I have clients in hospitality but they own A assets and they are still doing well. The distressed properties will usually be more from certain loan structures that do not allow hardly any workouts, weak net worth operators, sub-standard class of property within the asset class, etc.
Most of the NNN my clients are buying right now are investment grade ( ESSENTIAL BUSINESSES). Lenders are still giving pretty much the same exact loans or better for them than pre-covid. The reason is lenders want high quality tenant NNN properties on the books and stronger borrowers. They want to clean up their books so not stuck with too much dead weight properties with losses.
We often go into multiple offer situation with my clients and have to write the offer within a few days to market or even internally listed showing to a small group.
I laugh when I hear from others not an expert in the space. Knowledge level is different for those that have been evaluating tens of thousands or more of these properties over the years versus the casual lookie loo that has viewed a few properties online and read some random articles about what the retail market is going to become or do next.
Risk profile tends to be higher in cold belt states where overall growth regardless of the asset class is taking a hit with net migration and retirees moving away to warm belt states. There are pockets still performing well.
My clients are not really buying anything on the coast lines. Sea levels are expected rise and inter canal waterways can cause lots of flooding issues especially for areas at or below sea level. In those areas if buying it's good to check what is their long term plan to protect the the shores and how are they funding it to prevent loss of areas potentially reclaimed by the sea.
There is talk of an even greater push into NNN if certain political parties get in. More pressure could be put on residential landlord/tenant laws. The additional headaches could cause some long term multifamily owners to say they no longer want to deal with it and sell to younger investors willing to wait out changes going back in their favor again. It's all perspective on the individual investor.
Jonathan I would be interested to hear more about the specifics of the property you offered on, what was discovered, and why you passed on it?
@Jonathan Levi shalom
I read your post and your bio, and yes you have a challenge in picking a viable RE investment strategy for your situation. While it sounds like you did well with your Bay Area townhouse, if you're not living locally it will be difficult to buy locally (my preferred approach) and add value to the project. Worse case just keep the townhouse until something clearly better comes along. Yeah we're in a market dip now, but you're sitting on prime real estate in Santa Clara (although holding an SFH would be more ideal) which will preserve value and appreciate long term. During that time rent will increase, you'll pay down the loan, write off depreciation, and keep property taxes low (prop 13). That's your default position IMO.
As for NNN, the challenge, as @Joel Owens mentions is that the safest properties aren’t usually appreciation plays. More like wealth preservation. And anything lesser in commercial, you better really know what the hell you're doing, which takes a lot of experience. Or, you end up doing deals with syndications, managing partners, funds, etc. Then you’re totally relying on their talents. Also keep in mind that they have a job- recruit funds for their projects. Cyclically we just started a down market, and I believe that some of the recently formed syndications (especially those based on pre covid analyses) are going to get spanked. Hence, I personally don’t like giving up control and investing passively. I prefer investing in prime quality markets which I know well.
Sooo given all that, I’d ask you if you gave any thoughts to investing locally in Tel Aviv. Although to an outsider reading this it may seem like a whatever market, we locals know that Tel Aviv is prime real estate. Even if it’s not SF or NYC, as long as they keep making Jews (joke;) Tel Aviv will always have a built in global market, which helps keep it stable in bad times, and juices up returns in boom markets (similar to SF, etc.) Plus with the recent peace accords with UAE and Bahrain the region just got a major development and investment financial boost. I think it’s worth looking into. Personally I’m looking to buy a 2nd home in TLV in next year or two. Tama 38 is interesting to me for instance. And there may be other opportunities in less expensively markets for rentals. Only thing I find challenging in Israel in general with rentals is that the rents are low relative to the apartment costs. It’s the same thing in San Francisco, but here I know how to add a ton of value to change the fundamentals of the asset (I detail this in my BP profile). I imagine there are ways to do the same in Israel. I’d be interested in your take on this.
- Residential Real Estate Broker · San Mateo, CA · Member since 2013 · 585 posts · 264 votes6y
@Jonathan Levi I don't know how the international investing process goes, but you might just look at a dialed-in syndication or get more into note investing. I think you would probably be able to get some mailbox money in those scenarios with proper diligence for what it is worth. On those, you might be able to focus on screening the person a bit more vs. having to overall screen the property (assuming the right equity positions/LTVs/etc.) Just a thought.
- 6yAJ ShepardPro MemberReal Estate Syndicator · Portland, OR · Member since 2014 · 453 posts · 312 votes
@Jonathan Levi
I second the residential and multifamily sector. There are plenty of syndications in that space out there that can give you that “mailbox” money you are looking for.
Where I think I would disagree with some of the thoughts already listed here is the “core” and A class properties. In a recession or a downturn there will be people that have to make hard decisions. The first thing they are going to give up is their luxury’s. We have seen that the 0bed and 1bed markets have had an oversupply in the last couple years due to new units and rents actually dropped and some issues in leasing up. The lower class, A- to C+ had steady gains with also a lot of growth in the tertiary markets. Generally these type of properties have larger units and are not as updated.
My suggestion is that if you want true mail box money, get into a B class property with high sq ft to low cost that is very close, but not in a big city. We are always a big fan of a value add component as well.
- 6yMack BensonPro MemberRental Property Investor · Woodbury, MN · Member since 2018 · 299 posts · 299 votes
@Jonathan Levi, I'm a firm believer in the multifamily sector and am still actively looking for deals. My underwriting has changed with Covid and I am being even more conservative than I was before. My projections have delayed rental increases and increased economic vacancy. While I know this downturn is different than that of 2008 I am leaning on what was learned during the Great Recession to plan for the future.
I am also taking into account how the US has changed in the last 10 years. For example, before Covid there had already been a flight from density where people were moving away from the city centers in favor of apartments that ride the line between urban and suburban. These little communities are almost self sustaining with multiple eating and shopping establishments. With Covid and people's fear of density, I have seen an uptick in non-core multifamily properties continue to sell well. Another thing that has changed is the physical brick and mortar retail establishment. Malls are dying and being repurposed for uses such as self-storage and industrial which shows the demand those two sectors still have.
In the apartment world it is true that a lot of people are not paying rent right now but there are also a lot of people who are paying rent. Last I heard September collections were at about 80% nationwide which is lower than normal but still very good considering how other industries are struggling. I also know many operators who are well over 90% for their collections. It seems that the operators with better operations and rental criteria are fairing better than the mom and pop owners.
For international investors there are ways to get your overseas assets into the US to be able to invest in syndications. I am connected to a couple international investors today who are VERY active in US real estate and neither are US citizens. I would be more than happy to make an introduction.
- 6yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
By asking that question here, you might get as many (random) opinions as there are people. Also, some people will tell you that whatever category in which they're involved (or have something to sell) is the best one.
If I want to make an educated guess, the first thing I'd do is to look at what the smart money, the biggest and smartest real estate investors are doing. And these are the REITs. Moreover, the REITs, by virtue of being listed on the stock market, anticipate the future much more than the slow-reacting real estate market itself does.
What has the price action in the REITs been telling us?
In spite of the huge rise in the stock market lately, the apartment, hotel and retail REITs have been hammered and there are obvious reasons to that. Even for apartment buildings, which have been very resilient in past recessions. Indeed, their business model never anticipated what Zillow's CEO calls the great reshuffle, i.e. the move from the cities to the suburbs and the country due to the work from home trend, combined with the sudden disappearance of the income of many renters. Which REITs have seen their stock price booming? The datacenter and the industrial/storage REITs because of the rise in e-commerce.
A very shrewd friend of mine was partner in a student housing apartment business and provided very high and low-risk returns, while limiting their risks as much as he could. He rode the wave up for many years and sold at the top in March. He's now syndicating industrial/storage investment opportunities. People who want to invest in the area can buy stocks of the REIT Prologis. However, it's become very expensive and so the dividend yield isn't very attractive anymore. My friend identifies undervalued properties, which allows him to pay much higher yields to his investors. And his ultimate objective is to list as a REIT on the stock market, in which case his investors would hit the jackpot. I always listen to him when it comes to all things real estate and what he says confirms the action in the REITs.
Finally if, like me, you believe that the retail apocalypse has been exaggerated and want to invest in retail as prudently as possible, you could pick up some shares of the REIT Simon Property Group. This would allow you to invest with David Simon, who is widely recognized as the best retail real estate investor of all times. You would pick up a very large dividend payment, which most likely will rise significantly post-Covid and could get a huge capital gain, as the stock would triple if it just gets back to its pre-Covid level. I don't know of any other retail investment that would beat that without taking significantly higher amount of risk. This is an SEC-regulated and a totally liquid investment and, if you really believe in it, you could borrow 50% at less than 1% and pay interest out of your 8% dividend yield. If things go right, you'd end up with huge returns but you could end up with a large loss if you borrow and the stock tanks because of the leverage you created. While I'm a stock market investor coach, I'm not a financial advisor so don't take this as financial advice and make your own due diligence.
- Investor · Southeast, MI · Member since 2016 · 425 posts · 184 votes6y
Hi @Jonathan Levi,
You have heard many responses. I'll speak for my experience. I invest in commercial multi-family, all wholly owned to this point (not syndication), and we have seen very little delinquency, thankfully. I have thought about short-term rentals, and may look at them again in the future, but Covid-19 has shown that some investments are natively more resilient than others, because they are more important to the consumer than other things. I recorded a podcast on this topic that you can find in my profile. People need a place to live, so when income comes in, living expenses are typically pretty high priority, in my opinion, and from the data of our investments.
I have considered opening my business to include investors. You might want to consider investing in something like this, not necessarily my business, but something like it, as @Ryan Landis stated.
- 6yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
Originally posted by @Mike Lambert:
By asking that question here, you might get as many (random) opinions as there are people. Also, some people will tell you that whatever category in which they're involved (or have something to sell) is the best one.
If I want to make an educated guess, the first thing I'd do is to look at what the smart money, the biggest and smartest real estate investors are doing. And these are the REITs. Moreover, the REITs, by virtue of being listed on the stock market, anticipate the future much more than the slow-reacting real estate market itself does.
What has the price action in the REITs been telling us?
In spite of the huge rise in the stock market lately, the apartment, hotel and retail REITs have been hammered and there are obvious reasons to that. Even for apartment buildings, which have been very resilient in past recessions. Indeed, their business model never anticipated what Zillow's CEO calls the great reshuffle, i.e. the move from the cities to the suburbs and the country due to the work from home trend, combined with the sudden disappearance of the income of many renters. Which REITs have seen their stock price booming? The datacenter and the industrial/storage REITs because of the rise in e-commerce.
A very shrewd friend of mine was partner in a student housing apartment business and provided very high and low-risk returns, while limiting their risks as much as he could. He rode the wave up for many years and sold at the top in March. He's now syndicating industrial/storage investment opportunities. People who want to invest in the area can buy stocks of the REIT Prologis. However, it's become very expensive and so the dividend yield isn't very attractive anymore. My friend identifies undervalued properties, which allows him to pay much higher yields to his investors. And his ultimate objective is to list as a REIT on the stock market, in which case his investors would hit the jackpot. I always listen to him when it comes to all things real estate and what he says confirms the action in the REITs.
Finally if, like me, you believe that the retail apocalypse has been exaggerated and want to invest in retail as prudently as possible, you could pick up some shares of the REIT Simon Property Group. This would allow you to invest with David Simon, who is widely recognized as the best retail real estate investor of all times. You would pick up a very large dividend payment, which most likely will rise significantly post-Covid and could get a huge capital gain, as the stock would triple if it just gets back to its pre-Covid level. I don't know of any other retail investment that would beat that without taking significantly higher amount of risk. This is an SEC-regulated and a totally liquid investment and, if you really believe in it, you could borrow 50% at less than 1% and pay interest out of your 8% dividend yield. If things go right, you'd end up with huge returns but you could end up with a large loss if you borrow and the stock tanks because of the leverage you created. While I'm a stock market investor coach, I'm not a financial advisor so don't take this as financial advice and make your own due diligence.
I'll disagree with this. the REITS and big (billions or 100s of millions) have very different goals than individuals or families investing sub $100million. If your goals are different, why would you follow them into assets that you can't hope to compare? For example, they can buy a national tenant with stock pledged as collateral, defeasance clause and allocate $1 million to legal if tenant breaches.
I don't think most investors here want or could budget for a protracted legal battle against a national tenant who chooses to cite some LL breach and stop paying rent.
For the OP, I recommend syndications in an asset class, then look at direct ownership afterwards. Thats the control that my clients like. Hire your own CPA, your own lawyer, your own lender. You control your universe.
- Developer · Boise, ID · Member since 2020 · 173 posts · 198 votes6y
@Jonathan Levi NNN properties are fantastic RE play when you look at eh commercial grade tenant for payment and as we have seen a real lack of government interference in this market right now, the future is bright for these properties. More specifically small to mid size multi tenant properties, or incubator spaces that offer the opportunity for small business to operate out of are one of the most resilient classes out there.
When I look across our broad spectrum of tenants I see a slice of Americana from window tinters to cabinet shops, welders to ice cream makers, we have them all. And with over 60% of new jobs created in America every year by small business we have always had a great tenant base looking to put down roots and grow a business. Personal and business Guarantees along with 3-5 year leases scream stability. and even in the Great Recession of 2008 we did not see notable increase in vacancies.
It is a great space to be in past, present and future
- Investor · Fishers, IN · Member since 2012 · 520 posts · 499 votes6y
Hey Jonathan!
I'm bullish on Self Storage investing and have been for quite some time, especially as we stand on the precipice of who-knows-what regarding the market, economy, and so forth.
Self Storage has proven to be historically Recession-Resistant mainly because we're in the Transition & Trauma business, and as long as (unfortunately) there's divorce, death, down-sizing, & so forth, and as long as Americans are addicted to our stuff, there's going to be a need for Self Storage, basically 7 SQ FT per person all across this land. So all signs point that it is NOT going away any time soon.
Also, there's numerous articles (so it's not just my feelings) that I could link to that show this to be true. But what is even more exciting is that the move seems to be from the Primary Markets out into the Secondary and Tertiary Markets, a place that we've been advising folks to look at and invest in for years.
Anyhow, that's my two cents. Please let me know if I can be of any help to you or any others on Bigger Pockets who might like to learn more about Self Storage investing.
Scott
- 6yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
Originally posted by @Ronald Rohde:
Originally posted by @Mike Lambert:
By asking that question here, you might get as many (random) opinions as there are people. Also, some people will tell you that whatever category in which they're involved (or have something to sell) is the best one.
If I want to make an educated guess, the first thing I'd do is to look at what the smart money, the biggest and smartest real estate investors are doing. And these are the REITs. Moreover, the REITs, by virtue of being listed on the stock market, anticipate the future much more than the slow-reacting real estate market itself does.
What has the price action in the REITs been telling us?
In spite of the huge rise in the stock market lately, the apartment, hotel and retail REITs have been hammered and there are obvious reasons to that. Even for apartment buildings, which have been very resilient in past recessions. Indeed, their business model never anticipated what Zillow's CEO calls the great reshuffle, i.e. the move from the cities to the suburbs and the country due to the work from home trend, combined with the sudden disappearance of the income of many renters. Which REITs have seen their stock price booming? The datacenter and the industrial/storage REITs because of the rise in e-commerce.
A very shrewd friend of mine was partner in a student housing apartment business and provided very high and low-risk returns, while limiting their risks as much as he could. He rode the wave up for many years and sold at the top in March. He's now syndicating industrial/storage investment opportunities. People who want to invest in the area can buy stocks of the REIT Prologis. However, it's become very expensive and so the dividend yield isn't very attractive anymore. My friend identifies undervalued properties, which allows him to pay much higher yields to his investors. And his ultimate objective is to list as a REIT on the stock market, in which case his investors would hit the jackpot. I always listen to him when it comes to all things real estate and what he says confirms the action in the REITs.
Finally if, like me, you believe that the retail apocalypse has been exaggerated and want to invest in retail as prudently as possible, you could pick up some shares of the REIT Simon Property Group. This would allow you to invest with David Simon, who is widely recognized as the best retail real estate investor of all times. You would pick up a very large dividend payment, which most likely will rise significantly post-Covid and could get a huge capital gain, as the stock would triple if it just gets back to its pre-Covid level. I don't know of any other retail investment that would beat that without taking significantly higher amount of risk. This is an SEC-regulated and a totally liquid investment and, if you really believe in it, you could borrow 50% at less than 1% and pay interest out of your 8% dividend yield. If things go right, you'd end up with huge returns but you could end up with a large loss if you borrow and the stock tanks because of the leverage you created. While I'm a stock market investor coach, I'm not a financial advisor so don't take this as financial advice and make your own due diligence.
I'll disagree with this. the REITS and big (billions or 100s of millions) have very different goals than individuals or families investing sub $100million. If your goals are different, why would you follow them into assets that you can't hope to compare? For example, they can buy a national tenant with stock pledged as collateral, defeasance clause and allocate $1 million to legal if tenant breaches.
I don't think most investors here want or could budget for a protracted legal battle against a national tenant who chooses to cite some LL breach and stop paying rent.
For the OP, I recommend syndications in an asset class, then look at direct ownership afterwards. Thats the control that my clients like. Hire your own CPA, your own lawyer, your own lender. You control your universe.
@Ronald Rohde, yes, REITs can do things that smaller investors can't do. Nevertheless, they're going to invest one the areas giving the best return given a certain amount of risk. Investors following them might make slightly less money but they'll still make superior returns, provided that the investment thesis is right. It's like investors following Warren Buffett in the stock market. They haven't been able to mimic all his deals but they've been following close behind and done much better than the market over time.
Moreover, REITs are professionally managed and awash with money and their managers won't necessarily make too much of an effort to get the best deals. Also, some of the better deals will be too small to be worth their time and efforts. This explains why smaller operators like the friend I mentioned can actually get even better returns.
- 6yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
Originally posted by @Mike Lambert:
Originally posted by @Ronald Rohde:
Originally posted by @Mike Lambert:
By asking that question here, you might get as many (random) opinions as there are people. Also, some people will tell you that whatever category in which they're involved (or have something to sell) is the best one.
If I want to make an educated guess, the first thing I'd do is to look at what the smart money, the biggest and smartest real estate investors are doing. And these are the REITs. Moreover, the REITs, by virtue of being listed on the stock market, anticipate the future much more than the slow-reacting real estate market itself does.
What has the price action in the REITs been telling us?
In spite of the huge rise in the stock market lately, the apartment, hotel and retail REITs have been hammered and there are obvious reasons to that. Even for apartment buildings, which have been very resilient in past recessions. Indeed, their business model never anticipated what Zillow's CEO calls the great reshuffle, i.e. the move from the cities to the suburbs and the country due to the work from home trend, combined with the sudden disappearance of the income of many renters. Which REITs have seen their stock price booming? The datacenter and the industrial/storage REITs because of the rise in e-commerce.
A very shrewd friend of mine was partner in a student housing apartment business and provided very high and low-risk returns, while limiting their risks as much as he could. He rode the wave up for many years and sold at the top in March. He's now syndicating industrial/storage investment opportunities. People who want to invest in the area can buy stocks of the REIT Prologis. However, it's become very expensive and so the dividend yield isn't very attractive anymore. My friend identifies undervalued properties, which allows him to pay much higher yields to his investors. And his ultimate objective is to list as a REIT on the stock market, in which case his investors would hit the jackpot. I always listen to him when it comes to all things real estate and what he says confirms the action in the REITs.
Finally if, like me, you believe that the retail apocalypse has been exaggerated and want to invest in retail as prudently as possible, you could pick up some shares of the REIT Simon Property Group. This would allow you to invest with David Simon, who is widely recognized as the best retail real estate investor of all times. You would pick up a very large dividend payment, which most likely will rise significantly post-Covid and could get a huge capital gain, as the stock would triple if it just gets back to its pre-Covid level. I don't know of any other retail investment that would beat that without taking significantly higher amount of risk. This is an SEC-regulated and a totally liquid investment and, if you really believe in it, you could borrow 50% at less than 1% and pay interest out of your 8% dividend yield. If things go right, you'd end up with huge returns but you could end up with a large loss if you borrow and the stock tanks because of the leverage you created. While I'm a stock market investor coach, I'm not a financial advisor so don't take this as financial advice and make your own due diligence.
I'll disagree with this. the REITS and big (billions or 100s of millions) have very different goals than individuals or families investing sub $100million. If your goals are different, why would you follow them into assets that you can't hope to compare? For example, they can buy a national tenant with stock pledged as collateral, defeasance clause and allocate $1 million to legal if tenant breaches.
I don't think most investors here want or could budget for a protracted legal battle against a national tenant who chooses to cite some LL breach and stop paying rent.
For the OP, I recommend syndications in an asset class, then look at direct ownership afterwards. Thats the control that my clients like. Hire your own CPA, your own lawyer, your own lender. You control your universe.
@Ronald Rohde, yes, REITs can do things that smaller investors can't do. Nevertheless, they're going to invest one the areas giving the best return given a certain amount of risk. Investors following them might make slightly less money but they'll still make superior returns, provided that the investment thesis is right. It's like investors following Warren Buffett in the stock market. They haven't been able to mimic all his deals but they've been following close behind and done much better than the market over time.
Moreover, REITs are professionally managed and awash with money and their managers won't necessarily make too much of an effort to get the best deals. Also, some of the better deals will be too small to be worth their time and efforts. This explains why smaller operators like the friend I mentioned can actually get even better returns.
Thats fair. I do agree with reviewing other investors' thesis and following. Your Buffet example again could be two different investments. He makes specific market investments, say Apple, we can follow that assuming that we A) have the same time horizon and B) risk reward profile. If yes or close to yes on both accounts, then by all means go with him (if the price hasn't gone up since he bought!)
On the other hand, when Buffet buys Heinz or some large elephant type deal, eg. BOA. How can any investor match or follow that? I see REITS doing $300m purchases of portfolios, buying a 30 year old warehouse nearby isnt nearly the same.
Agree on the smaller deals though, thats how I source most of my investments, sub $5 million, not worth even the regional equity guys to bother buying. So we have that in common!
Numerous people here took the time to write quality suggestions. I’d be nice if OP made efforts to acknowledge this...
Originally posted by @Joel Owens:
I love retail. Give it to me all day long. I have been busier than I have ever been. People are buying a ton of it.
NOW the key is if you are buying sub-standard tenants than you better make sure the rents are below market and you have some LIFT (upside) on re-purposing.
The bad deals now in my opinion are small operators at market lease rates where the long term risk of default is HIGH and UPSIDE is low. Developers love to sell off that trash for a premium and new commercial brokers love to push that trash because they need a paycheck and sale to survive. The buyer is left scratching their head years later saying ( What happened? Why did they sell this to me?)
Just like any other asset class retail is not immune to buying the wrong lease structures, wrong location, wrong tenant type, etc. You have to know what you are doing in underwriting these properties.
The discount is going to be the mom and pop to more regional type tenants. A Mcdonald's in GA just traded for about a 3.7 cap rate. Ultra high net worth investor that couldn't take anymore stock fluctuations. Just wanted to own investment grade and have certainty.
When buyers are worth 20,50, 75 million dollars they tend to make decisions differently than those at the 3,4 million level. Most of the higher net worth have already made their money so more in wealth preservation mode rather than wealth creation to wealth stabilization mode. This isn't always the case but lots of investors hit ages and inflection points where the desire to push yield goes down as they have way more than enough to live comfortably and value time and no headaches as worth more value.
I have clients in hospitality but they own A assets and they are still doing well. The distressed properties will usually be more from certain loan structures that do not allow hardly any workouts, weak net worth operators, sub-standard class of property within the asset class, etc.
Most of the NNN my clients are buying right now are investment grade ( ESSENTIAL BUSINESSES). Lenders are still giving pretty much the same exact loans or better for them than pre-covid. The reason is lenders want high quality tenant NNN properties on the books and stronger borrowers. They want to clean up their books so not stuck with too much dead weight properties with losses.
We often go into multiple offer situation with my clients and have to write the offer within a few days to market or even internally listed showing to a small group.
I laugh when I hear from others not an expert in the space. Knowledge level is different for those that have been evaluating tens of thousands or more of these properties over the years versus the casual lookie loo that has viewed a few properties online and read some random articles about what the retail market is going to become or do next.
Risk profile tends to be higher in cold belt states where overall growth regardless of the asset class is taking a hit with net migration and retirees moving away to warm belt states. There are pockets still performing well.
My clients are not really buying anything on the coast lines. Sea levels are expected rise and inter canal waterways can cause lots of flooding issues especially for areas at or below sea level. In those areas if buying it's good to check what is their long term plan to protect the the shores and how are they funding it to prevent loss of areas potentially reclaimed by the sea.
There is talk of an even greater push into NNN if certain political parties get in. More pressure could be put on residential landlord/tenant laws. The additional headaches could cause some long term multifamily owners to say they no longer want to deal with it and sell to younger investors willing to wait out changes going back in their favor again. It's all perspective on the individual investor.
Jonathan I would be interested to hear more about the specifics of the property you offered on, what was discovered, and why you passed on it?
Wealth preservation.. love that terminology
- Investor · Fort Worth, TX · Member since 2019 · 120 posts · 147 votes5y
@Jonathan Levi SO MUCH OPPORTUNITY in Large Multifamily right now... you just need to make sure you're in landlord-friendly markets without Rent Control and extended eviction-free policies. We're seeing so many pocket listings come through from brokers right now - a lot of operators who mismanaged their working capital are in hot water and needing to sell. Our 173 unit property has performed extremely well throughout the Covid crisis and we're about to take on another 200+ unit property. If you're in the right markets there is a lot of action and we're confident that Multifamily will continue to perform well for years to come.
@Joel Owens couldn't have said it better. I am in the growth phase so I purchase $500k-$1mm mom and pop strips/office, ideally with some vacancy. I love properties in neighborhood locations that provide essential neighborhood services and are land locked. 30% cash on cash with vacancy and 60-80% if filled. This is not as passive but I am a full time investor and self manage all of my holdings. A lot of these properties are being held by people who cannot stomach recent vacancies or are panicking about the state of affairs and are desperate to sell. Good luck.
- Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes5y
Originally posted by @Joel Owens:
I love retail. Give it to me all day long.
Knock yourself out. Look at NYC with all those properties sitting empty at $70/sqft. THey can't go lower since it may default their loans, so they sit empty.
Apartments still offer consistent income since everyone needs a place to live - Even the homeless.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes5y
NYC is an inflated market with lot's of clothing type retail goods. So you have high rents per Ft some of the highest in the nation for retail. That leaves a lot of empty spaces as other retailers business models DO NOT WORK at 70 bucks a foot rent.
Most of the stuff I buy and my clients buy is 15 to 40 bucks a foot on the top end for good locations. I like warm belt states for long term growth way, way better than cold belt states.
You have an anti-business political state, high urban core concentration for New York, and a cold belt state that is a triple Whammy.
Right now suburbs are booming in warm belt states. With Corona people want to be more spread out and not live in close quarters next to everyone.
I have been through some cycles. 10 years ago you couldn't give multifamily away. Landlords were fighting with rent reductions to keep occupancy levels up to service the debt levels against their competitors. Unlike retail which costs are mostly reimbursed by tenants multifamily the higher insurance costs, property taxes, flattening of rents, and rise of utilities can really eat into returns.
Right now people are paying 5 caps for multifamily because they can get debt close to 3% or better. They are underwriting to perfection that rents with improvements will keep going up, up, up.
Depending on who gets into office if federal mandates are pushed across the country for residential house and multifamily tenant protections it could really hurt the investors stability to cash flow and increase operating costs.
Multifamily is a game of musical chairs right now with those being bought existing and in new development some will still land on a soft cushion and others will fall on their butt.
Class A tends to go downhill on a down cycle. The renters want to live in nice places but don't want to pay the top money so move down to B. Still acceptable with nice amenities but less rent.
C to D gets crushed because the renters government assistance programs start drying up and or their full time job goes to part-time and the default in rents start accelerating. So in a down turn the B properties tend to hold up the best because those renters still have good money they just want to pay less than the A properties. The C and D tenants also on an upcycle tend to take on lots of debt and live above their means. On the down cycle credit dries up to marginal consumers because credit lenders want to mitigate projected losses on their books. Instead they keep extending credit to those existing relationships and those with great wealth and income.
I am not on the multifamily train and think it is highly inflated right now (upside is low, down risk is high). I am sure there are some deals where that is not the case but overall the markets are inflated heavily. Lot's of these syndicators like to syndicate big apartment buildings because they take a fat fee.
I like retail because I understand it on a deep level so have comfort with it where others tend to be scared reading the latest news soundbite of the day.
I think retail is poised for a nice rebound 2023-2025. Buying the deals now for the future.
No matter what asset class I hope everyone does well with their investment choices. It's a personal decision what we do with our hard earned capital and those of our investors. At the end of the day you have to believe in a company or individuals vision of where they want to go with investing and strategy. I am buying up value add right now ( cleared and zoned land, dark buildings, blend and extend, etc.)
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes5y
I am selling a lot of my Class C assets because tenants are most vulnerable. Sticking to B and A in the future. Still nothing considered luxury.
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