Everyone has heard the old real estate adage “location, location, location.” In the aftermath of the recent downturn, many will agree that, once again, “timing, timing, timing” is equally true. This is obviously valid for all types of investments, not just real estate. However, it is perhaps more important for real estate than for many other assets, in large part because of its illiquidity.
Savvy investors in commercial property know that the greatest contributors to value changes, both up and down, are changes in required rates of return (“cap rates”, for example). Such required returns move in the same direction as perceived risk—more risk, higher required returns, and vice versa.
The opportunistic investor purchases when required returns are relatively high and sells when rates are low. Over time, returns tend to regress toward an historical “average.” The trick, of course, is to be able to understand where current returns are in the real estate cycle. Failure to do so portends less-than-stellar investment results.
During periods of low returns, if you hear “experts” assert that “the rules have changed and this time is different,” run for cover with all haste.
Steve Crosson is chairman and CEO of Crosson Dannis Inc., which provides real estate appraisal and consultation services. He also serves as chairman and editor in chief of The Appraiser Journal.