Location, Liquidity, Luck: A Modern Precept in CRE
- Nov 25, 2020
For decades, the age-old precept in commercial real estate has been based on location. To reinforce its importance on the viability of a property, the word was repeated three times. “Location, Location, Location” became the adage everyone recited.
Billions of dollars in real estate and related decisions were made, by tenants, developers, and investors, based on the premise that success was a foregone conclusion with a AAA-rated location.
That premise held true for decades. Then, more than 10 years ago we began seriously reevaluating the merits of that premise and its ability to withstand the financial implications of the Great Recession and the economic hardship that ensued. Today the questioning of the premise is further warranted as health and economic crises once again, change the shape of the commercial real estate landscape.
With these events, we suggest amending the time-honored formula for success to reflect our current environment. “Location, Location, Location” should give way, at least for the foreseeable future, to our adage: “Location, Liquidity, Luck®.”
Location is, and likely will remain, one of the basic and most critical fundamentals of real estate. Current economic conditions won’t change that. In our industry, all parties covet and protect their best locations, regardless of asset type.
However, in this day, you can no longer rely on the “build it and they will come” philosophy, regardless of location. A “Main and Main” site isn’t mandatory, but an appealing location in the center of the right demographics or in the path of progress, attracts developers and investors. More importantly, a well-located, appropriately designed retail center attracts merchants. A strong retail tenant roster brings in the consumer. For other property types, a strategically located, well-designed industrial facility or office property attracts and helps retain tenants to sustain competitive and profitable property operations.
Key questions to be answered when selecting a commercial site include:
- Will tenants pick your location as the best site in the immediate trade area?
- Will tenants overlook shortcomings because your property has the best location in a competitive set?
- Will businesses remain committed to the property, or perhaps even pay a premium, or will they select properties whose locations are inferior but come with financial incentives?
- Are there barriers to entry that prohibit, or at least delay, the development of new competitive properties?
Issues related to liquidity have assumed their rightful place of importance alongside location. Liquidity—having cash reserves and/or easy access to inexpensive capital—allows an owner, developer or occupier to endure difficult times. Liquidity is critical in unstable, uncertain markets like those caused by the economic crisis in 2008 and the current pandemic.
Liquidity allows an owner flexibility to meet financial (loan) obligations when tenants may be delayed or delinquent in rent, when marketing spaces to fill vacancies and negotiate renewals, and while maintaining established programs for capital improvements and property maintenance.
The relevant questions to be asked and answered about liquidity include:
- Are your pockets deep enough to weather negative cash flow situations … to make debt service and tax payments even if tenants can’t meet their obligations, and for how long?
- Do you have the access to capital sources to bridge any gaps or to make strategic decisions related to a property?
- Can you fulfill tenant improvement requests?
- Are tenants confident in your viability?
Another popular saying, not exclusive to real estate, suggests that sometimes “it is better to be lucky than good.” Many agree that a little bit of luck goes a long way, because there are certain situations you just can’t anticipate, even with the best-conceived, well-thought-out projects.
When it comes to luck, there are no checklists or series of questions to be asked and answered that will bring luck to you. If you are fortunate, it finds you:
- You delayed making the decision to fund the extensive buildout for a tenant that closed because it couldn’t weather the increased financial burden of the pandemic.
- Your portfolio of tenants includes many who are deemed essential services; they continue to thrive.
- The decision was made to keep large cash balances on hand … before the pandemic struck.
- Your portfolio didn’t have space available to go all in on experiential entertainment concepts that would have been shuttered, and troubled, during the pandemic.
- You took advantage of an opportunity to acquire well-located, single-story office buildings that are now deemed safer than traditional, multistory buildings.
- Many restaurants in your portfolio have adequate room for outdoor seating and space to accommodate curbside pickup.
These are interesting and challenging times in commercial real estate. The industry and the world around us are reacting to a global crisis that will have long-lasting impact. For good reason, liquidity and luck have taken their rightful place next to location creating this current, modern precept: Location, Liquidity, Luck®.
Those who can use location and liquidity to their advantage—along with a healthy dose of luck—likely will create opportunities, and, at the very least, they will hopefully minimize any downside from their real estate investment.
Andy Hochberg is the CEO & managing principal of Next Realty, a Chicago-based real estate investment and management firm. He can be reached at [email protected].