Yes, I know that those are the four most dangerous words in investing, but hear me out, please. 

The past two – or maybe three – go-rounds with market crashes and significant downturns, private equity funds and other investors were of the view that there would be significant opportunities.  They were taking their lumps with existing assets but hoped to recoup with bargains left by the market downturns.  Enormous capital was raised for this eventuality.
 
But I predicted each time that this would not occur.  My thesis was that since there was a ton of money raised, any opportunities would be fleeting and, for the same reason that there was so much money raised, pricing would quickly move to be fair market value, as opposed to bargains.
 
And that is exactly what happened.  There were few bargains and a large percentage of the money raised went unused and I think a good chunk was just returned to investors or went as un-drawn capital.
 
This time around, I think it is going to be different.  Sorry that was equivocating, I am hereby making an out-and-out prediction that this time it will indeed be different.
 
My reasoning is this: 

  • I don’t see much appetite for extend and pretend from lenders.  And even if there is, some level of appetite from the lenders, the borrowers often aren’t that nuts about it.
  • Borrowers don’t want to spend – waste – inordinate time rescuing assets that are under water.  So they have been giving them back to the lenders apace. 
  • Lenders often don’t want the assets, but after some wrangling either the lender takes the asset, there is some level of extending, but instead of pretending there is a plan to create upside (i.e. opportunities) or there is a short sale or other resolution.  Just extending and waiting things out is not the first choice all the time like it used to be.
  • Bank lenders are fearing insolvency and moving quickly to do whatever they can about it – usually by indirectly selling the upside in their stock prices in return for being bailed out by investors for loan loss reserves. 
  • I also see those with capital focusing – dare I say over-focusing – on debt and lending rather than equity, which is further squeezing those that seek or need capital.
  • The stock markets have been gyrating aka going down pretty aggressively at least the past few days and the VIX is up about 300% in the past week. 

In my view, all of this – for the first time in perhaps more than twenty-five years – is creating an opportunity for savvy investors.
 
I will stick my neck out to say this is not a time to sit on the sidelines.  This is a time to get busy.  I hopefully don’t need to tell anyone reading this article how to get busy, but here are some thoughts, most of which I have said before:
 
Don’t time the market.  It will lead to long-term under-performance.
 
Look throughout the capital stack and don’t focus on either debt or equity or preferred equity, etc.  Instead, be fluid throughout the capital stacks with a theme of being overpaid for the risks that you are taking.  As I have mentioned before, the smaller the deal, the greater the likelihood you will in fact be overpaid for the risk due, among other things, to the lack of competition.
 
As per prior articles, I continue to advocate as much diversification as possible.  This is due to the fact that no one really has a crystal ball regarding what will happen.  For example, multifamily might look just great if interest rates drop -- unless national rent control becomes enacted…
 
I know many are focusing on debt, but I argue against over-focusing on this strategy.  My thinking is that there is the most competition in the debt space – with both old entrants and new entrants – and accordingly debt players are increasingly less likely to be overpaid for their risk.  Also, for those not already long-term debt strategists you are at a competitive disadvantage to those who are.
 
To be clear about the foregoing comment, I by no means am saying do not put out debt.  I am saying (i) not to overdo it as a strategy and (ii) if you are not already a debt player, this is not an optimal time to enter the competitive fray.
 
I would ignore the Fed and predicting rate cuts and that kind of thing.  Warren Buffett has said that he doesn’t care what the Fed does and wouldn’t make any different decision on investing if he knew their next steps.  I espouse this and emphasize that it is antithetical to long-term outperformance as it is essentially a version of market timing.
 
I suggest that, overall, equity is more likely the best place to be investing right now.  Equity needs from those who need it are approaching desperation – due to so many equity players turning to debt and banks mostly sidelined.  My guess is that projected returns would probably make sense in the high twenties or the low thirties.  If the goal is long-term outperformance my view is that this is the place to be.
 
Finally, troubled times (almost) always have a better risk/reward profile than halcyon good times.  Those are when everything seems fine – like it did 18 months ago -- but the risks are very high.  Now risks appear high but they are likely a lot lower, and the upside is concomitantly greater.
 
So, to conclude, my view is that this is the best moment to put capital to work in quite some time and those with capital should take advantage of it.


Bruce Stachenfeld aka The Real Estate Philosopher®

Also, I am adding a poem.  An old real estate friend passed away recently.  I had written this poem for him -- I guess it was really about him --  years ago and I am sharing it with you all.  I have written quite a bit of poetry in the past few years; however, this is one of the first poems I ever wrote.