Recently I attended the S. Dale High Center for Family Business session taught by Peter Linneman, Ph.D. Dr. Linneman is recognized as one of the 25 most influential people in real estate, according to Realtor Magazine. He is the principal of Linneman Associates and also serves as the Albert Sussman Professor of Real Estate, Public Policy, and Finance at the Wharton School of Business.
The main point of his session was to help answer the question, “Why invest in real estate?” He focused not only on the practical reasons as it relates to property and plant usage, but also from an investment perspective. He gave 4 main reasons why people would invest in real estate:
1. Create wealth.
2. A tool for the business/operation (property/plant).
3. Control – to control your real estate.
4. To reduce operational costs.
The whole presentation flowed from there.
He presented numerous facts about real estate with the key one being that it is not always a good investment. Historically, real estate doesn’t appreciate much beyond inflation.
However, one way to make real estate returns grow is through the use of leverage. But as many people learned during this past recession, anything that is levered has risk related to it and the more you remove the equity cushion, the greater the risk.
He challenged investors to review the arbitrage, which is the spread between the return you get from investing in real estate versus the return you would get using that same capital to invest in your operations.
He spoke about commercial real estate and that it only exists to serve the demands of the economy (think in terms of retail stores, malls, office space…). He noted that at the beginning of 2008 this supply and demand was basically in balance. However, since that time the economy has lost 8.5 million jobs plus. Also, during those same 2 plus years we have added additional space that was in the construction pipeline and that space equates to about 1.5 million jobs. So coming into 2010 we have the equivalent of 10 million jobs of excess space available in the commercial real estate market.
This presents several problems:
1. Unlike residential space, which tends to have a price point which you can sell it, commercial real estate does not. Even at bargain prices, a vacant shopping strip can struggle to entice tenants during a deep recession.
2. Historically, we have added 1.8 million jobs in a normal year. Therefore with normal growth in our economy, we are 6-7 years away from utilizing this capacity and getting back normal (and this assumes no new supply going online). This is not good news for commercial builders.
He also touched on the different kinds of real estate you can invest in – land, multifamily, industrial, hotel, and office.
But in all instances he cautioned people to do the analysis and to model out the return on investment to determine if it is a good deal. He challenged us to use extreme caution as it relates to leverage. In many cases, real estate is not a great investment for a business however; there are times when it makes sense – know the difference.
.jpg)
.jpg){kind=logo}
Comments