While it would appear at first glance that “buying at the bottom, selling at the top” would be all you need to know with regards to investing through market cycles, this is rarely the case.
There’s more to investing in real estate than timing the market. Each part of the market cycle offers a unique set of opportunities, risks and factors that play a material part in any real estate investment.
At MLG Capital, our goal is to consistently acquire properties, regardless of market cycles, as both strong and weak market environments create different types of investment opportunities.
Bottom of The Market Cycle
Looking at real estate investments purely on a cost basis and making acquisitions during a tough real estate market (such as the one experienced in the years following the Great Recession) is definitely a great opportunity and the market has proven that over the last 5-8 years.
It is important, however, to separate value from purchase price when making any investment: while properties may be selling at multi-year lows (perhaps below replacement cost), this does not always indicate the investment will be successful. An economic downturn can create weak demand for commercial property, which can make it harder to generate sufficient income due to lowered rental demand.
For example, say you purchase a retail property during a market downturn selling at a large discount to replacement cost. The property has a high vacancy rate, and is not generating sufficient NOI to cover carrying costs. On paper, all you needed to do was bring up occupancy rates to market levels; however, with a weakened demand for retail space, even a strong occupancy-improvement strategy would be difficult to execute. In a market such as late 2017, a vacancy retail lease up approach can be very lucrative in the right location and execution plan due to overall market strength.
While MLG Capital takes a proactive approach in driving NOI growth by improving occupancy and rental rates, there’s only so many available options before the many dynamics of the market play their role.
This is not to say purchasing at the bottom is always a bad strategy. The fact is, every real estate transaction and cycle is drastically different. Purchasing during a weak market can require more patience. To produce the asset’s anticipated returns, you’ll need the ability to wait things out until the market recovers and the property’s intrinsic value can be fully realized.
Top of the Market Cycle
On the flip-side, while making real estate investments in a strong commercial real estate market can produce fewer value opportunities (on a cost basis), it does allow for greater opportunity to enhance operating income and asset value by ensuring all efficiencies are being applied to the asset.
As the demand for commercial space increases during the top of the market, investors have a greater chance to take an undervalued property and make proactive decisions (improve occupancy rates/rental rates) leading to value creation (dependent on the geographic location and market dynamics).
Therefore, a strong, consistent, and expansive sourcing strategy is key to real estate investing. MLG Capital leverages their rich sourcing network to find the best opportunities across the US. A strong market creates a more favorable environment for a real estate investor when enhancing the value of a property. Ultimately, this market environment, combined with the right uncovered asset, can make for a successful investment, even if prices (on a cost basis) are at multi-year highs.
Moving Beyond The “Market Timing” Mindset
As you move beyond the steep learning curve that comes with investing in commercial real estate, you begin to realize you can’t “time” the market. While it would be ideal to buy properties only at the nadir, and dispose of them exclusively during a frothy market, life (and real estate investing) doesn’t work this way.
You play the hand you’re dealt. During tough times, you ride things out, use less leverage and capitalize on your sourcing
network to find deals where cash flow and asset value improvement are realistic. During strong markets, you can potentially rely more on your strong sourcing network to find the diamonds in the rough. In other words, properties selling at higher prices but still with substantial upside potential from NOI growth via efficiency or other underlying factors.
MLG Capital bases its real estate investing strategy on the dynamics of the market at the time of purchase, viewed through a local and national lens, combined with a critical concentration of targeting NOI growth. This strategy allows us to find opportunities no matter what part of the market cycle we happen to be experiencing. Combining this tailored strategy with a proactive approach to improve cash flow and valuation – not relying on the market to just “buy low, sell high” – we are better able to execute our mission: delivering value to our investors.
People Make Mistakes: It’s Our Job to Find Them and Correct Them, Delivering Value to Our Investors
MLG Capital, using this statement as the bedrock of our investing philosophy, seeks, and has historically sourced, opportunities at every point of the market cycle. Over the last 30 years many cycles of occurred, each with their own challenges and causes. When we dig deeper, separating the relevant from the irrelevant, opportunities are often hiding in plain sight. We minimize risk beyond our control and maximize potential options available to us on acquisitions. No easy task! Here are things we look for:
- Simply put, realizing an opportunity to complete a purchase without having to bid
against any other groups/buyers. No seller should sell off-market, but it happens.
MLG will strive to establish local real estate relationships with sponsors that have
local relationships with local owners.
- Focusing on opportunities that yield returns from current owner mistakes. For
example, a property may have been under capitalized for new tenants to lease
space, causing lower than market occupancies.
- Identifying errors made by previous ownership, and capitalizing on such errors.
For example, a property may be 60% occupied in a sub-market that is 85%
occupied due to their inability to lease property, or lack of focus on the property.
- Realizing an opportunity missed by previous ownership. For example,
renovation of apartment units to achieve an increase in rents, thus, increasing
property cash-flows and value.
- Key Relationship Referrals of Local Sponsors. Capitalizing on local
knowledge, and referrals. Relationships and reputation are everything.