How to Invest in Real Estate During a Credit Crisis

As one financial institution after another fails, not only in the United States but also around the world, it has become increasingly clear that the crisis affecting the credit markets is deeper and more pervasive than had been imagined when the crisis started over a year ago. It is probably impossible to say today how long or how deep the economic recession will be in the United States and Europe as a result of this crisis. As we have commented repeatedly over the past year, the current economic problems will not begin to abate until the credit markets begin to function again. Whether the rescue package reluctantly adopted by the U.S. Congress will help restore the credit markets remains to be seen. However, it does seem clear that a prolonged period of economic uncertainty lies ahead.

The U.S. commercial real estate market cannot fail to be affected by the crisis in the credit markets and the probable recession in the U.S. economy. But it is usually during periods of crisis and recession that the best buying opportunities arise. One need only think of the historic buying opportunities that occurred in the late ‘80’s and early’90’s following the savings and loan crisis and the meltdown in the U.S. commercial real estate market at that time. In anticipation of the buying opportunities that seem certain to arise as the recession in the U.S. and Europe unfolds, we would suggest that potential investors keep the following points in mind:

1. 1. Have a long-term time horizon.
2. 2. Concentrate on finding properties in premier markets and in the premier locations within those markets.
3. 3. Understand U.S. and local market conditions before making an offer.
4. 4. Be willing to assume some leasing risk.
5. 5. Be sure there is sufficient secure cash flow or sufficient reserves to cover all operating expenses and debt service charges until economic conditions improve.
6. 6. Do not wait for the market bottom. You will only know when the bottom was reached six or nine months after the event.
7. 7. Diversify within a country and even consider investing in other countries not affected by the credit crisis.

Real estate as an asset class is not strongly correlated with other assets, such as common stocks and bonds. Therefore, properly selected real estate can be an appropriate investment during uncertain economic times.

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1. Have a Long-Term Time Horizon

One of the primary facts that an investor must keep in mind is that real estate is a hard asset and it does have a certain intrinsic value. Over almost any time period measured, the value of real estate has risen, and that rise has occurred primarily due to inflation. Land prices have risen historically, as have building costs. And rents have also moved higher over time to reflect those higher costs. There are cyclical fluctuations, of course, but on a long-term basis the value of well-situated, quality real estate has been in a consistent upward trend. Therefore, real estate purchased at depressed prices during a period of economic uncertainty and held for the long-term is likely to prove to be a rewarding investment.

2. Concentrate on Premier Locations:

When making a long-term investment in real estate, it is important to concentrate on premier locations in principal cities in the United States. The old axiom – that the three most important factors in real estate are location, location, location – is undoubtedly true. It is particularly important during periods of economic uncertainty to concentrate on cities with the best underlying economic fundamentals, and to select the prime locations within those cities. These are the properties where tenant demand and rental growth are likely to recover the most quickly, and where property values will follow those upward movements.

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