Why Timing the Market is Hard: Insights from a 35-Year Real Estate Veteran
The real estate market has always been a dynamic landscape, filled with challenges and opportunities for both investors and professionals. With over 35 years of experience in the real estate business, I’ve seen numerous cycles and many opportunities arise. One common theme I’ve encountered is the desire among many investors to time the market perfectly. However, timing the market is incredibly difficult, and this approach can often lead to missed opportunities.
Market Conditions & Investment Opportunities
The real estate market is currently experiencing a shift that has created a favorable environment for buyers:
- Institutional fund inflows are down approximately 80% from previous years, resulting in reduced competition.
- This reduced competition allows us to acquire assets at historically favorable cap rates of 5.5% to 6% and significantly below replacement cost.
Consistent investment over a long period of time tends to produce the best results. Trying to time the market precisely, aiming to buy at the absolute low, often means missing out on great opportunities. Today’s market presents an interesting scenario where the assets we purchase now are likely to be sold in the future when interest rates are lower, potentially resulting in better cap rates on the resale. While we are not underwriting this, it is a valid consideration in todays marketplace.
Strategic Focus, Targeting High-Quality Assets
Our strategic focus is on acquiring high-quality, newer properties (10-15 years old) located in prime areas.
Acquiring high quality assets in quality locations today with excess supply and at a time when capital is scarce provides the opportunity to achieve NOI growth that exceeds our expectations and sell in a more aggressive capital markets environment in three to five years to achieve outsized value growth.
Additionally, we are leveraging opportunities to buy out institutional investors at attractive prices, reflecting the current favorable acquisition conditions.
Market Dynamics & Future Outlook, Tighter Market and Revenue Growth
In recent years, the market saw significant excess supply created. This has lead to higher vacancies and softened rent growth. However, according to CoStar, new construction starts have slowed significantly, with projections suggesting only 50,000 units per quarter by mid-2024.
As the market starts to absorb this excess supply, we anticipate several positive developments:
- Improved occupancy rates
- Reduced concessions
- Higher rents
This tighter market could result in gross revenue growth of approximately 15-20% over the next 2-3 years, significantly increasing property values. But how?
Consider the impact of market tightening on revenue. If offering one-month free costs you 5-6 % of gross revenue in a year, improving occupancy from 91% to 94% adds another 3%, totaling around 8% growth. Combined with potential rent growth of 6-10% over the hold due to tighter market conditions, this can result in gross revenue growth of 15-20% on a particular property, greatly impacting its value.
Exciting Times Ahead
Investing in private real estate today is particularly exciting. I, myself, am fully committed and have placed more money into Fund VI than any previous Fund. I am enthusiastic about the opportunities this market presents and encourage others to share in this excitement. We believe it is an excellent time to invest, and participation in Fund VI reflects this belief.
In conclusion, while timing the market is hard and often not advisable, taking a consistent and strategic approach to investing in high-quality real estate can yield significant benefits. The current market conditions create a favorable environment for investment, and the future outlook suggests strong growth potential.
Exciting times are ahead for those who are prepared to invest wisely in the ever-evolving real estate market. To speak with a team member, please visit: mlgcapital.com/get-started-form/
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Past performance and results are not indicative of future results.
