Here are some weird but important facts.
My friend and marketing expert, Perry Marshall, pointed this out:
- Plans for construction of the Empire State Building started in a boom time, 1929. It was completed in a bust, the Great Depression, in 1931.
- The Willis Tower started construction during a boom in 1970. It was completed in a bust, the energy crisis of 1973.
- The Petronas Towers started in the boom time of the 1990s. They were completed just before the dot-com bust of the early 2000s.
- The Burj Khalifa broke ground in 2004. It was completed in the worst financial crisis since The Great Depression, in 2009.
What do these buildings share in common? They’ve all been the world’s tallest buildings at some point. Coincidence? I don’t think so. In fact, there was an entire study done on this in 2008 and an Investopedia definition to boot.
Right now, most of the world’s large skyscrapers are set to be built in China. It just so happens that China’s economy has had the fastest GDP growth of all major nations over the past few years. It’s also potentially heading for a serious downfall in the coming years. Coincidence again? Nope.
People make big expansion plans when things are going well. They contract their plans, cancel, and downsize when things are going poorly. But as real estate investors, you should do the exact opposite.
A lot of investors are going to make disastrous moves in the next 2-3 years. In chaotic economic times, that’s what happens because most investors don’t really get how economic cycles work and how to take advantage of them. Most importantly, many don’t know how to avoid making foolish decisions that can tank their portfolios.
If investors don’t understand these cycles, we can’t possibly make the best strategic decisions about how, when, and where to invest.
Hedge fund manager Howard Marks wrote an outstanding book, Mastering the Market Cycle – Getting the Odds on Your Side. I recommend you pick it up.
But until then, I recommend you internalize one of his most important concepts: The worst of deals are made during the best of times. And the best of deals are made during the worst of times.
Are we entering the worst of times? I can’t say. I won’t predict the future. However, I can see signs of a massive contraction in the real estate investing realm all around me. You can see them, too. Credit markets are tightening, price growth is falling drastically in several of the boom markets of the pandemic, interest rates in the multifamily space are surpassing cap rates, large firms are constantly changing their price forecasts for the worse, and consumer confidence is way down.
Things sound rough. But I encourage you to keep your head on straight and prepare for opportunities. Investments you may not find when everything is rosy and all signs are pointing up.
Investing With A Downturn In Mind
I’ve been to several recent conferences, and I’ve been on dozens of investor calls. It’s funny. I’m getting the same question everywhere: “How are you investing differently in light of the current economy?”
I don’t mean to sound snooty in reply, but I say something like: “No different at all. Smart real estate investors always invest with a downturn in mind.”
What steps can investors take in good times and bad to invest with a downturn in mind?
- Invest in a diversified portfolio of recession-resistant asset types.
- Perform rigorous due diligence and say no to almost every opportunity you review.
- Set up a system to acquire off-market deals from (typically) mom-and-pop operators.
- Conservatively underwrite your assets and look for what can go wrong more than what will go right.
- Structure your deals with conservative, fixed, long-term debt.
- Look for hidden intrinsic value and execute proven strategies to raise both income and asset value, creating a wider margin of safety between debt and income.
- Plan to hold for the long haul. Then wait for the ideal time to market your portfolio to the right buyer. These are sometimes institutional investors who pay a premium for their stabilized assets or portfolio.
In all fairness, I’m a commercial real estate fund manager. I have a particular bias toward what we do best. You should modify these answers to best fit your situation.
So how does this apply to your situation? As I said, my niche is diversified commercial real estate. While I love what we do and believe in it with all my heart, you are likely in a different situation. But I believe these boom and bust principles should apply to whatever you’re doing.
So how are you investing with a downturn in mind? Are you investing differently now, given the looming economic contraction? Are you prepared to make “the best of deals” in any upcoming “worst of times?” I know I am.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.