The market today is radically different when compared with just a year ago. Who predicted in 2019 that more than 45 million people would apply for unemployment insurance in just a few months? That worries about the federal deficit would be drowned in a sea of emergency spending programs and $1,200 checks? That the Fed would create new and vast facilities to assure marketplace liquidity? Or that wearing masks would be a necessity and not a fashion statement?
What are common real estate risk management strategies?
“Risk management,” said Federal Reserve Chairman Jay Powell last year, “enters our decision making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy.”
For investors and advisors the three central goals of real estate ownership remain unchanged. The objectives are to avoid excess risk, preserve buying power, and increase wealth over time. What’s changed are not the reasons for real estate ownership, but rather the fundamental market forces which have long guided investment decisions.
Let’s look at four proven real estate risk management strategies.
Own where tenants do business
Tenants tend to build their businesses where the talent is, and lately secondary markets have outperformed. Secondary markets offer employees a lower cost of living while still providing the amenities of a major gateway market.
Invest in amenities
Amenities are important because they help tenants attract desirable employees, employees who produce, innovate and are central to business growth and development.
Locate near leading universities
Universities are not just classrooms and laboratories; they’re centers of innovation and new technologies which bring people together and act as incubators that spur new businesses and employ lots of people.
Lifestyle counts
Successful commercial real estate opportunities can be found outside massive population centers. Think of Austin and Charlotte as well as Raleigh, Portland, and Salt Lake City. What’s the key? Lifestyle. Talented employees are in demand, they can work anywhere, and many prefer to work in smaller markets.
No one would criticize an investor or advisor who used any of these strategies to manage risk. But, go back to Chairman Powell. Think about today’s uncertainties and recent developments. Fundamental ideas are being challenged by new realities.
Developing a real estate risk management policy
The reason to have a risk management policy is to better prepare for a world which is in constant flux. While the approach used can vary among companies and business sectors the basic elements are common to risk management plans.
- What are your current concerns?
- Is a given risk a material problem or just an irritation?
- How are others handling identified risks?
- What steps can be taken today to reduce future risk?
- What are the results of today’s risk management efforts?
- Review and repeat.
How risky is real estate investing compared to the general stock market?
Advisors and investors are always testing the waters, trying to see whether stocks, bonds or real estate are the better investment option at any given time. The answer is complicated by several factors.
First, most investors aren’t buying assets in general. They’re buying specific properties, stocks and bonds based on our understanding of various market factors.
Second, real estate is a localized commodity, the reason why many invest their y’re dollars in some markets more than others.
Third, as Wall Street tells us, past performance does not guarantee future results. This is the central reason to see risk management in an economic world where markets are frequently shifting.
How do you manage a large portfolio of real estate properties?
The best approach is to have work with a sponsor with localized expertise coupled with an understanding of national trends and requirements. For example, federal tax policies are a national issue while the groundbreaking of an exciting mixed-used development could be a big local opportunity . It’s important for investors to understand the primary opportunities or potential challenges facing an investment opportunity and local expertise is the key to understanding the complex analyses.
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