When investing in commercial real estate, it is indeed a good strategy to buy low and sell high. But over the long run, successful (read: profitable) investing in income-producing real estate comes from the consistent production of income that you can actually put in your pocket.
Institutional investment data readily supports that as much as 60-80 percent of the total return an owner gets from owning real estate is from the cash flow generated by good leasing and good management; not to understate, of course, a functionally good physical asset in a good location.
Commercial real estate “value” is generally expressed, in the simplest of terms, as net income divided by a “cap rate.” (A cap rate is basically synonymous with a “stock price multiple,” except it is a “rate” not a “multiple.”) The recent unprecedented decline in commercial real estate values over the last couple of years was primarily attributable to the also unprecedented and abrupt increase in the cap rate side of the value formula.
Now, in the stock market, when multiples go up, that’s usually a good thing. But the opposite is true for cap rates: being the denominator in the formula, as rates go up, values go down. Unfortunately, as an owner, there is not much you can do to control the movement of cap rates: those trends are mostly in the invisible hands of the market.
So in today’s volatile market, the focus in commercial real estate investing is where it should be: on the numerator side of the value formula—that is, the consistent production of consistently increasing net income.
The good news is, Dallas is the home of some of the great real estate operators and brokerage firms in the world: Trammell Crow, Lincoln, Vantage, Folsom, and Weitzman are all time-tested, respected household names. Then there are the relative newcomers like Cassidy Turley, The Retail Connection, Peloton, Stream, The Robert Lynn Co., Mohr Partners, and Pillar Commercial, to name just a few. In addition, these local experts compete head-to-head with the strong, influential regional offices of the international behemoths CB Richard Ellis, Jones Lang LaSalle, Grubb & Ellis, Cushman & Wakefield, and Marcus and Millichap.
By any measure, and in comparison to any other major market, there is no shortage of really top-notch real estate talent in Dallas.
This exceptionally deep field of local expert leasing and management firms is an indispensable asset in attracting major commercial real estate investors from all over the world. Sophisticated investors want to invest in North Texas commercial real estate because they know that in the short-and-long term, the creation of value in real estate lies in the numerator, not the denominator, of the value formula.
Chuck Dannis is co-founder of Crosson Dannis Inc., which provides real estate appraisal and consultation services for many of the nation’s largest real estate lenders and owners. Contact him at email@example.com.