In It To Win It
If you are not in the real estate market you lose
I learned the hard way a long time ago if I’m not in-it-to-win-it and out of the market I will lose. It’s really that simple, but even as simple as it is to say it’s not simple to explain. The type of market is of little significance. Stocks, bonds (ok 1990’s) Bitcoin (Ethereum now) precious metals, or real estate. When I’m out of any market I lose, even when those markets are at historical highs. Have you heard the saying, you must be in-it-to-win-it? Well you must be in the real estate market to win.
TIMING THE MARKET
Buyers can’t time markets. It’s statistically stacked against you. The odds aren’t in your favor to enter and exit a market in any way that favors your position, This is learning from the experience of tens of millions of others throughout history in markets before you. These learnings are used by astute buyers of assets as a competitive advantage. They employ these learned lessons in markets whether the markets are up or down.
I’ve been in the stock market at the right time, and probably like many of you the wrong time. Likewise, the same goes for the real estate market. The lesson has been this; if I’m not consistently in the market (in-it-to-win-it) then I lose. I lose way more than anything I’ve tried to save by either pulling out of the market or electing not to enter the market.
Experience Makes All The Difference
Why should this matter to you? Because I’m not alone and neither are you. The experience of tens of millions of others can be a great teacher. The entire financial industry Modus Operandi (e.g. Banks, Stockbrokers, Mutual funds, and the IRA/401k) is predicated on preaching the historically proven statistical fact that if you’re out of the market or try to time the market (e.g. wait for prices to recede) there is a very high probability you will lose. And by high probability I really mean an almost guarantee you’ll lose. When I say lose, the meaning is actually lose money or earn such a meager return it was hardly worth the risk to have invested in the asset. A hard reality pill to swallow when the asset is valued in the millions, and quite possibly the returns too.
What does any of this have to do with Commercial Real Estate? Well, as mentioned if you attempt to time the market and buy at the right time or wait for a better time to pull the trigger you are likely to lose out on potential millions.
A Historical Look at the So Cal Market
How can this impact an owner/user of Commercial Real Estate? Let’s take a look at the Southern California Commercial Real Estate marketplace as an example. Looking back to the turn of the Century an Urban Land Institute report shows industrial prices up 75% since 2000, but property in the core Los Angeles basin has more likely doubled in value and or grown beyond two-fold. This market advancement equates to approximately five percent (5%) equity appreciation each year during this period. This equity appreciation doesn’t take into account the other leg of increased equity, loan amortization.
Many of you might ask about the market dislocation brought on by the Great Recession during the period 2007-2010? And my answer is the dislocation caused a momentary period where prices slid a small percentage for most non functionally obsolete properties. A slide of approximately five to ten percent. The higher the quality of asset the smaller the slide in value. Some properties didn’t experience any decrease in value during this market dislocation period. The slide lasted but a mere a moment in time, as in extended months and maybe not even years.
The vast majority of businesses were not geared to expect this market dislocation. Frankly most business owners and executives were more concerned with the overall functioning of the economy and or their business during this period. Their focus was not on a quick minor dip in real estate prices and thus they were not in a position to capitalize during the dislocation period. Most businesses aren’t during these periods (1990-1994/2001-2003 respectively). Yet I continue to hear from business owners they’re waiting for the next time prices adjust.
I speak to business owners nearly everyday who tell me they think prices are to high and they’ll buy when they can find a property at a price they want to buy (typically lower than the market at the time) or they’ll wait until prices come back down. Some business owners simply can’t afford to buy a property at the then market price(s) and if this is the case then leasing makes better business sense. However, if its a desire not to buy at a certain price, not the economic inability to buy, and them hoping the market moves downward before buying then you need look no further than this brief historical snapshot of mine to see that not buying will likely be counter productive to the end goal of property ownership.
I talk to dozens of business owners regularly who have been waiting for years and some a decade to buy a property. I can hear the regret in their voice when they mention not buying this property or that property we previously toured when the property was on the market and the price was lower (but still to psychologically high for them then). This while lease rates creep ever higher.
In contrast the property owners who continued to own during the dislocation period of the Great Recession have been rewarded with property values that are today, in mid 2017, at all time highs. As you can see in the image below industrial real estate asking prices are up +/- 20% Y-O-Y from June 2016.
History Repeats In Today’s Market
And some may say, that’s great for them but what happened to those who bought between then and now. And the answer still remains the same. In each year from the beginning of the Great Recession until now the markets have returned similar or greater returns as those during the twenty years dating back to 1997.
The Time To Buy Is Now
The point is if you are not in the market (in it to win it) you lose. You must be in the market to earn appreciation. You-will-win if you are in the market owning property. History has statistically proven this point.
If you are a small business owner and you are waiting for some time to roll along when prices might recede then you-will-lose. You lose every month you don’t own the property that houses your business. As in the stock market you can’t time an ideal time to buy an asset.
The best time to buy is now. I know this sounds salesy and self serving, but its truly my best advice. Advise I’ve given to many over the years who have earned millions or tens of millions and in some cases hundreds of millions. And the best option to buy is when you can buy. Muster up the downpayment needed to buy a property, arrange the financing, and then buy. Buy and then let the market stack the market odds in your favor.
Allow the market mechanics to return wealth to you and your family while your business uses the property and prospers. You will be thankful you buy, as will generations of your lineage that follows.
Note: This same advise also applies to investment property.
If we can be of assistance with Commercial Real Estate advise please contact us:
(213) 631-2600 | (323) 515-8500 or find us on the web spacestandard.com
Christopher Telles is President of Space Standard a full service Commercial Real Estate Brokerage Company servicing the real estate needs of small business owners, corporate executives, and real estate investors in the Los Angeles, Vernon, and Commerce area marketplace.