The REAL in Real Estate

It has been a while since I chose a topic to discuss in detail, but I think the current status of the overall market and what will come in 2019 is more than blog-worthy.  Any and every expert will tell you that we’re in the end of a bullish 10-year run in the market.  That no time in history has the market continued to increase; equities, stock market, real estate, etc.  The only difference now is that we’re facing a rising-interest rate environment and extremely low unemployment, so how bad can it really be, right?

We can discuss the retail market, multi-family market, or single-family market individually, but they’re all connected.  Most of the news in the real estate market is the FED’s monetary policy as it relates to rising interest rates.  Most are hedging (as I write this) that there can be up to 4 rate increases in 2019 alone. You see, even if 12 months from now that turns out NOT to be the case, the market is behaving and hedging for that event.  With the rise in interest rates inevitably comes a rise in cap rates, and a lower valuation for many property owners, right?  Maybe not.  Investors continue to see the value in long-term real estate investments, particularly ones that are internet proof and provide long-term cash flow.  Good assets are still rare, and supply is low.  With the stock market trending downwards, real estate will give you the best and safest return out of any asset class and it may become more sought after, even with a rate increase.  There will be more buyers looking at investment properties chasing a safer and higher return.

I’m not one for generalizing or predicting mass market changes as every deal and location stands on its own fundamentals.  If you can buy a 100-unit class B garden-style apartment community in Austin, Texas for below replacement value and in a high employment trade area, that’s a good investment, no matter where rates are.  Alternatively, if you can purchase a 3.5 cap rate mixed use building in Brooklyn that is solely being underwritten by 15-25% annual appreciation, that’s a risky proposition.

SO be aware of the capital markets, the trends, the internet, construction costs, etc. but don’t be paralyzed by it.

Good returns are hard to find, great returns seldomly exist, and bad returns can be avoided.