We have all heard the phrase “timing is everything.” In the world of real estate investment sales, that phrase carries more weight than you may realize. Every owner's goal is to maximize the value of an asset. However, achieving this goal is not as simple as assembling a voluminous list of buyers and directing a call center of brokers.
Properties realize their highest value when they are sold at the peak of not one, but three different cycles — the individual asset, geographic market, and capital market cycles. Owners must utilize an experienced investment sales team that can effectively evaluate each cycle and offer strategic advice to clients on when to sell.
That's a far cry from relying solely on a mass-marketing approach to generate a bidding war. A comprehensive strategic analysis that considers all three cycles will determine the best time to market assets in order to maximize values and reap the greatest returns.
Individual asset cycle: Smart sellers recognize the importance of evaluating an asset's age and physical condition. The leasing velocity and tenant mix are also examined as keys to achieving the greatest return. Property fundamentals, such as occupancy rate and rents, play a critical role in this analysis.
For example, a 90% occupied building will get investors' attention. Plus, the value can be significantly affected by tenants with strong credit ratings and corporate guarantees on leases. Real estate owners can easily determine the optimal timing and know when they should ideally bring an asset to market. However, if an owner is looking for a maximum return, the asset cycle is only one piece of the puzzle.
Geographic market cycle: While it's a bit more difficult to measure, this cycle refers to the property's appeal based on its location within its submarket, and if the market's region and size are desirable. For example, California might be designated as a hot location, but if a particular submarket has lost a major employer or for other reasons doesn't have a favorable perception, then a sale of the asset in that submarket will not yield maximum results at that specific time. A savvy buyer gains leverage in this case.
Different markets are cyclically favored depending on the economic growth and future value projections. Trends to look for include new development in the area, low overall vacancy in the region, and capital improvements, such as the city investing in new infrastructure.
Demographics also play an important role. Sellers marketing a property in a challenging submarket who can show an increase in average household income or new home construction will improve their leveraging power.
Capital market cycle: This third cycle takes the greatest expertise to evaluate, and yet is the most important to measure. It not only refers to the flow of debt and equity into real estate, but also the amount of capital favoring a particular asset class. When the capital markets favor one asset class, it creates a market valuation for that class which is disproportionate to traditional real estate principles.
It is important to note, however, that the swing of capital to one asset class is never permanent. For this reason, it is critical to study the capital market's appetite for each asset class and determine its peak before taking an asset to market.
A good example of this swing of capital occurred in May 2000, when pension funds claimed that the retail market was dead. Everyone predicted the Internet would dramatically encroach on brick-and-mortar retailers. Everyone was dumping their retail assets for well below market value.
However, we understood what was happening in the market with the swing of capital, so we then advised clients to invest in retail. Soon after, retail emerged as the hottest asset class. Today, we are seeing the shift again. The frenzy for retail has diminished as competition for trophy assets in primary markets compressed cap rates at the expense of returns.
Strategize, then mobilize
Because there is so much capital chasing real estate today, investment services teams are being pressured to move at lightning speed. It is essential, however, to slow down and take the time to develop a strategy. It is vital to analyze how the asset fits into the bigger picture by identifying what stage it is in for all three cycles. This is the only way to make accurate projections and create a strategic plan.
Hitting the pinnacle for all three valuation cycles requires astute awareness and counsel. When investment teams begin to strategically position assets rather than simply mass market them, they will be able to realize the maximum property value for their clients' assets.
Stephannie Mower is executive vice president and managing director of the national investment services division for PM Realty Group. Her e-mail address is [email protected].