In today’s frothy commercial real estate market, buying at the top of the market can be risky business. If you don’t understand the downside and the risks, you may very well be buying someone else’s problem. As Sam Zell says, “I am very focused on understanding the downside.”
Recentric Realty Capital’s approach to real estate involves three principals. Safety, Income and Growth. While this may seem like an ideal, commonly held philosophy in the private equity world, this three-legged stool only works when all three principals are on solid ground.
CBRE, one of the biggest real estate asset managers in the world, recently bought a 95% stake in a portfolio comprising 25 medical office buildings, reports The Wall Street Journal’s Peter Grant. “If someone needs a hip replacement, they need to go get that done regardless of where the economic cycle is,” Matt Tepper, managing director of CBRE Global Investment Partners told The Wall Street Journal.
Health care real estate is a complex asset. When underwriting a deal, there are many future costs to account for such as: tenant improvements, leasing commissions, capital improvements, vacancies and more. Given the attraction to this sector, we are seeing investors purchase real estate without accounting for these costs. This will have a very large impact on the ability to generate the anticipated income for their investors.
While population growth in certain markets will provide some assurance of a stable occupied asset, the biggest component to asset appreciation or growth is rent increases. Stable assets within commercial real estate are valued primarily on their income. If an asset has steady rent increases over the life of the leases, that asset can rely on steady asset appreciation.
Health care is still the safest sector of commercial real estate to invest in given the necessity of bricks and mortar to provide care. Recentric takes a very conservative approach when underwriting our investment opportunities. If we can’t provide an acceptable return given all the costs associated, we will pass on the deal. As the 9-year bull run in commercial real estate continues, Recentric is taking a very cautious approach to ensure our strategy does not leave us with the stool tipping over.