For those of us in the commercial real estate community, the news just seems to be getting worse and worse. Rates are rising. Banks are continuing to restrict lending (albeit not their fault!). Sales are slow and now fire sales have begun to show. Sounds terrible, doesn’t it?
HOWEVER, there is a very wise investor who said many years ago, “be fearful when others are greedy and to be greedy when others are fearful”. Of course that was Warren Buffet in his newsletter to the Berkshire shareholders in 1986. Those words, though, are absolutely appropriate for this time!
I have the link to the complete letter below, but Mr. Buffett makes a broader point that essentially boom and bust cycles involving greed and fear (both being diseases!) are equally dangerous and unpredictable. And you cannot tell how long and to what degree each will last. We are very much in a similar situation right now. Many in commercial real estate have lost their minds and are running for the hills!
From my experience, these are the ones who are younger and haven’t been through one of these cycles before. Fortunately, there are some of us who – for better or worse – have been through these cycles. And, we know they are just that – cycles. And this one will eventually end…
Great, Marc. How does knowing that help me. First, it gives hope that there will be an eventual end. Second, it lets you know that if you keep your head while others are losing theirs, you can find opportunity. Third, at the end of the cycle, the weak kneed investors, brokers, lenders, etc. will be gone leaving the field open for the professionals. The real challenge is how to ride this time out…
There again, Mr. Buffett helps provide an answer. When others fear, be greedy. To be fair, he wasn’t saying to take advantage of people. He was, however, saying to look for opportunity. When someone is fearful, they don’t tend to act rationally. As such, there is potential for solid properties to be acquired – using a long-term hold view. We have already seen this year several sales in which the asset was a disaster currently leading to a greatly reduced price that in the end will produce large gains over time. That gain is where cash flow and profit lay!
Note that Mr. Buffett wrote this piece for his shareholders at a time of euphoria in the stock market. He pointed out that there was little visible fear on Wall Street with only euphoria. Bull markets can be exhilarating he states, but stocks can never outperform businesses indefinitely. The same is true in CRE! Buying for long-term cash flow and appreciation makes more sense for the professional than the quick flip. That may work in residential, but it’s not working in CRE for the time being. And those are precisely the panicked sellers from whom great opportunities can be found. “Be greedy only when others are fearful”.
While this may well prove to be the most challenging time I have seen in over 30 years of CRE lending, it may also lay the foundation for the return of the historic norm – willing buyers, willing sellers, stable interest rates and cap rates. All is not lost!
Link to Mr. Buffett’s letter. Note that the relevant sections are roughly in the middle (it’s a long piece!): https://www.berkshirehathaway.com/letters/1986.html
