What the Big Boys Are Doing Now

What the big players are doing now

For several months now I have been advising real estate clients not to pin their hopes on flipping, condo conversion or other buy-and-sell methods of profiting from a hoped-for capital gain. I have been suggesting, instead, that investors consider acquiring properties that can generate positive rental-based cash flow at a rate competitive with other investment vehicles. If such a rental property then experiences an increase in value sufficient to warrant taking a profit on the capital gain, then that's just gravy on top of the steak.

There is no shortage of properties available in which to invest for cash-flow and income - if you're willing to look outside of New York City or other major urban centers. Properties that are available at very attractive capitalization rates, within about a 100-mile radius of my office come to my attention almost every day. They come in multi-family residential, commercial and strip-mall flavors.

Now it looks like the biggest fish in the real estate pond are coming to the same conclusion, according to news reported by CoStar.

A new headline on their web site reads, "Time Running Out On Quick-Buck Turnaround Deals? Experts Foresee Market Shift Away from Cap Rate Compression In Favor of Owner-Operators".

What does this mean? It means big players have, in the past, made a lot of money by buying and quickly flipping office buildings, shopping centers and other large real estate assets.

But now those same players see a change in the investment climate. They see debt markets tightening. They see fewer buyers willing to pay ever higher per-square-foot prices. They see more and more reasons to favor long-term buy-hold-and-manage strategies over fast flips.

The Co-Star reporter quoted Chris Wood, senior vice president and managing director of UGL Equis: "The window of opportunity to make acquisitions, turn them around and make any kind of meaningful profit is closing." According to Wood, we are seeing the beginning of a move "back to long-term, operating-oriented owners, as opposed to the more financially driven category where people buy buildings and already have in their minds a near-term exit strategy as an arbitrage play."

Observers are betting that large-cap owners are going to hold onto their buildings from now on. Valuation of assets will be driven by holding them, rather than selling them. This is especially true of assets that may have been bought at a hefty premium.

A recent example of this happened in Chicago, where Tishman-Speyer paid a handsome sum for a class-A office property. Another potential buyer who lost out thinks Tishman won because they came up with very aggressive terms, a big deposit and moved fast, without much due diligence.

Why would a normally conservative institutional investor like Tishman act like that? Because there is a lot of pent-up institutional demand for Chicago office buildings, which are enjoying rent growth, positive absorption and falling vacancy rates. Most observers believe Tishman was willing to pay a premium for a property they believe they can manage with an eye to increasing leasing cash flows and operating efficiencies.

What does all this have to do with the average real estate investor? Plenty!

I believe in applying lessons from one area to others - especially where money and human behavior are concerned. For example, I like to take concepts from the stock market and apply them to real estate. One stock-market tactic that consistently makes money is to watch what the big institutional investors do, and then do what they do. This works because when mutual funds, pension funds and other large investors make trades, volume can spike up, and volume drives prices.

Besides, the people running those mutual and pension funds are a pretty smart bunch, and it never hurts to watch what smart people do and then do the same.

I think the same idea applies in real estate. If you watch what the big boys are doing, you can get a very clear sense of where the dollars are going. You and I may not be able to offer a big down payment on a class-A office tower, but we can look for and invest in cash-flow positive rental properties. These exist in all shapes and sizes, from one to four-family townhouses to commercial taxpayers and small strip malls.

You just have to open yourself to the idea that the time to buy and flip or buy and convert might have passed, and that now is the time to buy, manage, hold and lease.