Investment Opportunities in an Unsteady Market?

The market for real estate, much like the broader market today, is unsteady. Investors are often faced with a choice of investing in lower-yield properties, or parking their funds in near-zero-rate liquid investments and taking a wait-and-see attitude for opportunities that may offer better yields.

This kind of environment is particularly concerning, because with so much money sitting on the sidelines, there’s a temptation among some investors, particularly the newer ones, to get excited when they spot something that appears to offer a better opportunity. Often, these newbies will substantially overpay just to get into what they think is a good deal.

This trend was illustrated by a recent UBS Global Real Estate Bubble Index study that pointed to New York, San Francisco and Los Angeles as overinflated domestic markets. For example, based on the average annual income for individuals in the highly skilled service sector, buying a 650-square-foot apartment would eat up 11 years’ salary in New York. So there’s a very legitimate concern that newer investors in particular — who may not have directly experienced the 2008 financial crisis — may jump in without considering all of the risks, and could get burned when the bubble eventually bursts.

When will that happen? No one knows the exact date, but there are worrisome indications, including recent calls to aggressively reduce U.S. interest rates, even emulating Europe and dropping to below-zero yields. When policy makers begin to seriously discuss that scenario, it sends a message that they’re running out of tools to spark the economy.

During this kind of economic environment, investment funds should continue to look for deals, but they should not be afraid of parking excess cash in appropriate, liquid vehicles that offer competitive short-term returns. Fund managers and owners should also communicate to investors — who are legitimately frustrated over the low yields they’re getting — why the fund is following this wait-and-see course.

For those who are willing to make some moves now, one potentially bright spot appears to be real estate parcels that are currently being occupied by certain retailers, specifically the ones that have proven they can weather the e-commerce storm that has shaken up so many of their less-able competitors. This class of properties offers investment funds the opportunity to either structure a business loan secured by the underlying real estate, or a real estate loan that’s secured by the business’ assets. There’s still some risk, of course, but at least the hybrid nature of the collateral tends to minimize the downside.

We may be in a spooky market, but prudent investors can still find reasonable deals.

Posted on on 10/31/19.