Market Mayhem: 3 Real Estate Investment Strategies to Navigate Volatility
What's your next move?
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If you’re not hiding under a rock or in a remote fishing lodge in Alaska, you probably know that the stock market imploded over the past week.
So what does that mean for the real estate business? Among other things, 10 Year US Treasury yields and SOFR drive our business due to most construction loans being tied to a spread over SOFR and 10 Year US Treasury yields compete with real estate for investment dollars.
When I got into the business a trusted mentor explained to me real estate development is driven by debt. That is so true. If the cost of capital is too high, deals don’t work.
There is also the element of greed and fear that drives prices. Real estate investment sentiment is influenced by the wealth created or destroyed in the stock market.
This has been the case for Pugh Management’s merchant build model for the past two-plus years. This model in most cases is not working right now. I am a General Partner (GP) in three deals right now and an investor in two more as a Limited Partner (LP).
One of the deals is actively being marketed for sale as land for a commercial owner-occupier. Another is a small multigenerational housing development deal in Tampa that is in an Opportunity Zone. In the third deal, my partners and I own an urban last mile deal in Boston.
And the projects I am invested in as an LP are both in St Petersburg, FL. One is an urban retail redevelopment play with Rahul Gupta of RKG Holdings and the other is a value-add, multifamily project with August Biniaz and Ava Benesocky of CPI Capital.
All of the projects I’m in as a GP, except the multigenerational housing deal, I entered 2 years+ ago…because the numbers haven’t worked in that long.
So with the market in flux and so much instability, what is a real estate entrepreneur to do? Below are some real estate investment strategies that work today.
Covered Land Plays: This refers to land that is used for a purpose that is less valuable than its potential use. For instance, a small retail building on a large plot of land in a rapidly developing area could be considered covered land. While the current use may produce some cash flow, the primary focus is to achieve appreciation of the land or redevelop it in the future.
Land Banking: Buying land as an investment, holding onto it for future sale or development. Investors rely on the land value increasing due to factors like urban gentrification, local development trends, or changes in zoning laws.
Multigenerational Housing: Right now we are trying to figure out how to build well-located, multi-generational housing. It is a challenging climate to build in and we are considering a design-build approach. Demand is definitely not slowing for this type of product. If anything it continues to grow. Building luxury, fully amenitized, urban 500 sf studios is so 2020.
Other strategies that we believe can work include luxury storage for Baby-Boomers and retail redevelopment.
What are you seeing in the market place? Are you actively investing in any new projects?
Outside of real estate I’m in short term treasuries, private debt, crypto, and stocks. DM me if you want to talk about investment strategies.
Until next week, John
Disclaimer: This post is not intended as investment advice. Always seek the counsel of a licensed financial professional before making any investment decisions.
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