Success Means Timing, Boots on the Ground

Having been in the real estate industry for over 40 years, I have learned two things that apply to today's troubled times: real estate investment success is primarily determined by timing, and the importance of experienced "boots on the ground" cannot be overemphasized.

A recent Trepp forecast notes that more than half of the $363 billion of commercial real estate loans maturing this year will be underwater and, we believe, the Western US will account for a significant part of the problem.

As a court-appointed receiver who has handled over $750 million of similar troubled assets, I have seen a myriad of the "bad" deals across almost all asset classes. Two primary characteristics are evident: the property was acquired or developed at the wrong time, and the borrower did not have experience in the basic fundamentals of the property type and or location.

Moreover, in the wake of recently moderating a number of industry panels involving sophisticated buyers and financiers discussing their recent deals, we also see the possibilities of what good deals may look like.

First, a number of deals have been traded to public companies whose buying decision is driven by low cost of capital, the need to be in the market and a long term view. In other instances the purchase was made to satisfy capital partner expectations and allowed the company to stay in business for another year. In both cases, the timing criteria was predetermined. They were going to buy and they were going to win their fair share of deals. The timing of their purchases will be the primary factor in determining their success.

Second, the deals that appear to have the best possibility of success have been consummated by local talent, with a long track record of success in both the geographic market and product type. This local buyer profile is able to navigate through the maze of hurdles of most troubled real estate. Other investments that appear to have the most chance of success involve owners of troubled properties who have been able to attract new capital. Using experience with the asset and application of the basic, local fundamentals, the owner can negotiate new loan terms and/or a short sale can be negotiated with the lender. Those who have provided the new capital under these circumstances may have maximized the timing and boots-on-the-ground formula.

There are possibly two larger strategies at work. If you have large quantities of capital and must deploy it now, and the timing is right given the price you have to pay, you are making deals. If you have local expertise and can access capital, you have the opportunity to maximize the value of the property.

Real estate investment is not just a financial bet. It requires true knowledge of a market and product type, boots on the ground and timing, timing, timing to maximize your chance of success.