Definition of ‘Winning’ in CRE
- May 06, 2015
The definition of “winning” is interpretive when it comes to investing in commercial real estate. Winning does not necessarily result in being successful. I would characterize winning as achieving investment objectives. Of course, it always starts with the buy side. Buyers who are also winners are usually the ones who possess one or more of the following four key characteristics (none of which involve running an Argus model): 1) patient-yield profile, 2) prescience, 3) speed and 4) transaction flexibility.
- Patient Yield Profile: An investor’s yield profile is a simple function of risk/return. There are many variables that factor into the yield profile of a particular investor, but the two that have the greatest bearing are cash returns and time horizon. The lesser the need for a quick return on or of capital, the further out a buyer can play on the risk curve, and the more aggressive that buyer can push on pricing. Likewise, buyers with long term investment horizons rarely lose money as they can wait for the cycles to come to them.
- Prescience is the ability to see through transformation and cycles to deliver purposeful product to the customer of tomorrow. Office, industrial, retail, residential, etc. have not fundamentally changed. What has changed is the way people use real estate and interact with co-workers and customers. Technology is driving functional obsolescence at hyper speed. Buyers with prescience will be way out in front of evolving tenant space demands and “grossly” overpay what the rest of the pack will pay for properties, but almost always wind up making tremendous returns because they understood about skating to where the puck will be, not where it was.
- Speed: When you are competing with the rest of the world without much differentiation, often, speed is the only distinguishing characteristic that wins the day. The ability to have a process that can analyze, assess and execute faster than the next guy will almost always win. Speed sounds simple but just watch two-time Olympic gold medalist Ted Ligety in the downhill. The work that goes into picking up 1/100 of a second can be years. Being able to execute with speed is a pretty reliable indicator that the buyer is at the top of their game when the cost of a mistake can be significant.
- Finally, there is transactional flexibility. Cash is plentiful, but execution flexibility is remarkably still very constrained. Caution and discipline are very important, but being overly restrictive to transaction structuring today can be an inhibitor to winning. Technology and innovation are changing the rules. Whether it’s a sovereign fund co-investing with a US partner, or a hedge fund using EB-5 money, a private investor crowd sourcing the capital stack or existing owners creatively recapitalizing an L.L.C., the game is changing. Investors are learning to disintermediate traditional capital structures to “win” opportunities.
There are many ways to win, but the successful winners pick a strategy and run with it, and usually have patient money, the prescience to know how to add value, a machine that can execute with speed and an investment platform that allows transactional flexibility to take advantage of opportunity.