I was on a real estate entrepreneurship panel at NYU Schack last week and was asked, “what can real estate companies do to prepare for a potential market correction?”
While the real estate market has had a nice run over the past 6 years, there looms concern over rising interest rates, increased construction, and an over-supply of capital chasing too few deals.
At Atlas, our new deal pipeline is slower today than it’s been over the previous 5 years. This slowdown has allowed us to step back and analyze our portfolio on a deal-by-deal basis. While we are not market prognosticators, we like to have an idea of what the current landscape looks like so we can better position our deals for a range of outcomes that tilt towards the most likely outcomes, but leave room for error because as we know, “most likely” is not synonymous with “will happen”.
As Howard Marks says, “we cannot predict the future, we can only prepare.” Here are a few of things we’re doing to prepare for the future:
- We’re not chasing deals. After exiting and refi’ing a number of deals over the past 12 months, we have an over-supply of capital eager to be put to work. While we’re ready to act decisively when we find a deal that fits our target profile, we’re not going to do deals just to do deals. The beauty of our deal-by-deal syndication structure is the ability to be patient and only do the best deals that maximize returns for our investors.
- We’re working primarily with lending institutions that offer “moderate” leverage and flexible structure such as bank lenders. We prefer to work with lenders who “get” the real estate the most and are relationship-focused. Therefore, they’ll be more willing to work things out in a downside scenario.
- We’re putting long-term permanent debt on all existing deals. We have a number of deals in various stages of re-positioning. We’re highly focused on completing renovations as quickly as possible, popping NOI, and securing long-term fixed-rate financing as quickly as possible, returning significant investor equity in the short-term and locking in strong current yields over the long-term.
- We’re refining our brand. Growing so quickly over the past 5 years has been great, but our brand has become a bit dis-jointed as the company has evolved. We’re revisiting our investor documents, online presence, and marketing materials to ensure we convey a consistent brand message.
- We’re focused on technology and the investor experience. We pride ourselves on our investor experience. We’re putting the final touches on a proprietary investor dashboard which will move the investor reporting process online. We’re also making a concerted effort to meet investors face-to-face to learn more about their investment objectives and hear any feedback they have for us. We’re also cultivating our investor experience through events such as our upcoming bowling tournament.
By focusing our effort on understanding where we stand today instead of attempting to predict where we will be in the future, we may limit some upside in the near-term, but it also reduces our downside.
What are you doing to prepare for the future?