4 More Ways to Wring More Value From CRE

MIAMI—Unfortunately, incomes have not been rising meaningfully, as more of the economic output is accruing to capital in the form of profits and dividends. So says Gary Carmell, president of CWS Capital Partners.

“As the average required credit scores have risen since the downturn, the trend does not look very favorable for first-time homebuyers to enter the market in any meaningful fashion,” he tells GlobeSt.com. “They're generally lacking the credit, down payments, and incomes. This should keep people renting longer than they otherwise would, especially combined with the other factors cited previously.

By contrast, Carmell says, apartments have proven themselves to be an asset class that has staying power. While individual properties can face obsolescence and deteriorating location fundamentals, he says renting will always be in demand. And from what he can tell, the demand fundamentals should remain quite strong for a number of years to come.

With all that said, Carmell offers four more ways to wring value from commercial real estate. If you missed part one, you can still read it: 5 Ways to Wring More Value from CRE.

1. Potential Inflation Hedge: Real estate has generally proven to be a hedge against inflation. As excess money is created, it needs to find a home, and real estate is one of the most desired asset classes when this is the case.

Apartments are particularly well suited, because the average lease term is approximately eleven months. So it's easy to reprice the apartments in an environment of escalating rents given the relatively short lease terms, especially when compared to office, retail, and industrial properties.

2. Lacks the Volatility of Daily Pricing: We value our investments once a year as compared to freely tradable securities whose prices fluctuate minute by minute. Not worrying about daily valuations can take a lot of the emotion out of investing and allow one to focus on adding value each day without being distracted by highly volatile market fluctuations.

3. Direct Control of Cash Flows: I believe that having directly owned and managed properties over the years has made the men and women of CWS Capital Partners much better decision makers and businesspeople. We have to deal with real-world problems, rather than evaluating management teams from afar as many stock and bond portfolio management teams do.

We are more grounded and can use our vast amount of experience to evaluate opportunities and risks and separate the signal from the noise. We can also take direct action to add value to our investments, because we control the cash flows.

4. Future of Apartments: We've talked a lot about the advent of the renter nation at CWS for a number of years. When the housing bubble was in full force, we were pretty sure that there would be a day of reckoning, as loans were originated on a huge scale to individuals who had very little margin of safety if their income were interrupted and/or home values declined.

Sure enough, the house of cards collapsed, and the housing market went down in flames. My new book shows graphs that highlight new single-family sales going back to 1959 and existing home sales (resales) going back to 1999.

We can see how frothy the housing market became for both new homes and resales from 2003–2007. New home sales subsequently collapsed and remain at depressed levels. Meanwhile, the mortgage market remains tight, the price of many resale homes is low enough to discourage the building of new ones, the labor market is soft, and consumer psychology is weak.