Investment Strategy in The Current Environment of Real Estate Asset Prices


We are currently in the expansion phase of the business cycle.  We are typically not buyers during this phase.  We are usually buyers during the  recovery phase of the cycle. The rewards during the recovery phase are great.   Values can more than double or triple over time.

We have a very difficult time navigating the expansion phase of the cycle for investment opportunities. During this phase, as is now now occurring, values reach record highs and are hard to reconcile with our past experience.  As the expansion continues, prices reach ever higher levels, and many short term investors reap very high IRR yields.  For example, many offices properties are selling for $800 to $1,100 per square foot in Los Angeles and San Francisco.  Investors who purchased and renovated properties at $600 per square foot or even higher during the last few years are now selling and making attractive IRR yields given the short holding period.  Investors who purchased Westside apartment buildings at 4 to 5% cap rates are now the selling them at higher rents at 3 to 4% cap rates.   We view this as a risky enterprise.  The longer the expansion continues, the more overly conservative we appear.  Up it goes until it blows, and the higher it goes, the bigger it blows.

During this expansion phase, we are reaping the fruits of our gains by selling, raising rents, and refinancing in order to distribute money to our investors; building the stability of our portfolio by pursuing better credit tenants and longer term lease;,  bolstering our cash resources by refinancing to replenish reserves; and asking our investors to keep some dry powder in preparation for the next great buying opportunity.”  We have experienced several of these buying opportunities where certain real estate prices fall to shocking levels.

We seem to follow the musings of Warren Buffet in his recent (February 25, 2017) letter to investors:

“…I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons….”

Real estate investors tend to be optimists. It takes a lot of patience and discipline to deploy this strategy.