Analyzing Real Estate Investment Returns

Analyzing Real Estate Investment Returns in an Uncertain Market

What a year this has been.  From daily updates on COVID-19 along with everything going virtual to non-stop political turmoil, it would seem almost impossible to predict how a real estate asset will perform within the upcoming months.  In fact, you may have wondered, how does one accurately analyze future real estate investment returns in an uncertain market?  The main approach that we have here at HLC Equity is to be as realistic as possible with our projected returns and understand that the market is too volatile to expect the same rent growth that was achieved in the past.  We always strive to under-promise and over-deliver.  That being said, while some firms may be sitting back until the Corona period ends, we believe that this period of time presents a unique opportunity.  Interest rates are at an all-time low and, with the right approach, significant long-term growth can be achieved.

Unique Value-Add Approach

It is time to think outside the box.  While there has always been the traditional value-add strategy, we have developed our own unique value-add approach with a successful property management brand called Layers, which has utilized its hybrid management model and centralized operations to achieve higher rent growth.  At the same time, while other firms may still be aggressively projecting a standard two or three percent annual rent increase, we typically assume no standard rent growth or at least minimal rent growth for this period of COVID-19.  In addition, we assume higher vacancy than in a typical year.  It’s important to pay close attention to the historic financials and current rent status of each potential acquisition to understand the real impact of COVID-19 on any particular property and what to expect going forward.  In addition, the comparable properties within the vicinity of the potential acquisition can provide plenty of information on what rent level can be realistically achieved.

Future Insights by Identifying Today’s Trends

What lies ahead remains to be seen.  While unemployment is high and we assume higher delinquencies than normal, there are several fundamental trends that we are paying attention to.  For example, there have been residents moving out of metropolitan areas to enjoy the suburbs.  While we do believe that in the long term the urban core will still provide plenty of opportunities, our research is showing us that people working from home more frequently while enjoying the benefits of the suburbs is a trend that began before the pandemic and has only been accelerated as a result of COVID-19.  The efficiency of telecommunication and e-commerce has not only impacted office and retail space, it has also impacted where people want to live.  Therefore, we have spent significant time focusing on expanding suburban markets, where cap rates may be more attractive and long-term growth prospects are promising.  Suburban markets can provide additional benefits, such as lower real estate tax rates.  

Opportunity Through Positioning

While 2020 has been quite a year, we continue to pursue a wide range of opportunities that have opened up in this shifting market.  The key is how to best position yourself with a deal that should outperform the market over the next several years.  While we have significantly adjusted our growth projections, we are able to uncover real estate opportunities that offer the core fundamentals which have allowed our firm to benefit from real estate opportunities for several decades.  

Happy and Healthy Holidays!