Can Investors Time The Real Estate Market?
Think for a moment about today’s real estate market. The rebound from the pandemic is real, and rental and sales numbers are breaking records every day. Is now a good time to jump in? It’s a controversial topic, but unfortunately, unless you can predict the future, I do not believe there is a way to time the market.
Yes, the typical real estate cycle is 18 years and runs through 4 phases (recovery, expansion, hyper supply and recession)—but it’s not so easy to know where you are in the cycle until after it ends.
Over the course of my career, I can’t tell you how many times I’ve heard, “The market is too down (or too hot) to invest or develop that site right now,” or “I’m going to wait for the market correction to buy on the cheap” or “I’m going to wait for rates to rise or for local inventory to drop.” Almost every time, the inflection point investors were seeking never came. The market zigged when everyone thought it would zag.
In my experience, real estate and housing, in particular, is an investment class where one’s economic projections could be spot on for the market at large but completely off the mark on the particular sub-market. For example, a price drop a buyer was looking for may take five years longer than expected to develop, keeping an investor on the sidelines. Or one could be right about fears of an interest rate change, but during that time, the demand may have gone in the opposite direction and nullified the effect of the rate change.
That doesn’t mean investors and real estate professionals can’t find some luck. Take the early days of Covid-19’s spread, for example: If you happened to be developing real estate in Florida or Texas in 2020, today, you might look like a genius! If you were developing in New York or San Francisco, today, you may still be licking your wounds (or bankrupt). The pandemic created a lottery we didn’t know we bought a ticket for—some markets did really well, and others got crushed, all by circumstances that were unpredictable a year earlier.
Timing is certainly everything, but I’m not sure how much we are driving the key factors. We can never ignore the market cycle, but there are other variables at work. There are factors we can control and use to evaluate and deliver a successful project. Here are my thoughts on a few
Experience is an advantage. There is nothing like going through the pain of several rough markets or downturns to make one wiser and able to plan against the downside.
Know your market. As the saying goes: “Once you read in the paper that the market is on fire, you’ve probably missed the boat.” Knowing your market allows you to quickly look at deals and determine what makes sense and what doesn’t—where there is value and what is overpriced. I’m not a fan of buying a site or starting underwriting based on a Google Earth snapshot where I have no idea about the neighborhood. It works for many, but it’s not my thing.
Don’t try to be a fortune teller. Base your analysis on what’s going on today. Don’t view a pro forma report or Excel model based on what happened in the past, what trends or experts say or what you think will happen in the future. Stick to fundamentals. If rent is $10 today, run your numbers on $10, not a guess that you think the rent is going to go up 25% by the time a project is done. Upside is nice, but I recommend being conservative.
Don’t panic. Following logic and clear thinking can get you pretty far. It’s not always easy to do—but real estate markets usually move pretty slow, and one can usually adapt as a project is under development. In a construction project that will take several years to complete, the day-to-day swings in the market become irrelevant.
Be strategic when it comes to liquidity and leverage. Leverage is great when the market is good, but it can quickly kill a project when the market turns and developers are not ready. Liquidity is just as important in a market shift, but it can also help a project get through a short-term cost overrun or delay.
“Buy low and sell high” sounds easy, but there is a lot of nuance in that phrase. Market analysis is never black and white. We try to use our knowledge and experience to acquire good properties and develop buildings we can be proud of, while at the same time protecting and building investor capital—brick by brick, one project at a time.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.