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2010/2011 Real Estate Strategies

I have spent the last 18 months making a living disposing of distressed properties for my clients. From what I can see, I'll be busy for the next 12 to 18 months. However, its time to change the business plan. The reason, every broker I know is becoming a disposition broker. When too many people start chasing the same cheese, its time to chase different cheese.

So where is the new cheese? I've been selling it for over a year now: distressed real estate. 2010 is the year to start buying distressed real estate. There are several reasons for the change in strategy. For the past two years, investors have been waiting for the bottom to fall out. It didn't. The market for commercial real estate consistently deteriorated throughout this period, but never capitulated. The commercial real estate market will continue to deteriorate through 2010, and bottom in 2010/2011.

Why will commercial real estate bottom in 2010/2011? First, the residential real estate market is nearing the end of its depreciation cycle. Once residential real estate begins to appreciate, the capital base will stabilize. Normally, this would lead to increased bank lending, and may do so this cycle also. What is unknown is the extent of toxic assets that the banks are still carrying, so lending will increase excruciatingly slow. Cash and liquidity will continue to rule through 2010 and into 2011.

Another important factor is that long term economic cycles follow demographic patterns. The baby boomer birth rate peaked in 1961. Statistically, 46 is the age at which the American Consumer spends the most money. That means the spend curve peaked in 2007, about the time the economy started its downward trend. This cycle was exacerbated by deregulation and greed, but would have happened anyway. Perhaps less drastically, but inevitable.

The domestic US Birth Rate steadily decreased from 1961 to 1975 and then increased from 1976 to 1992 (children of the baby boomers, echo boomers). Again, statistically, the peak spending years for the American Consumer are from the age of 35 to the age of 46, the children raising years. Consumers born in 1976 turn 35 in 2011 and will peak in spending in 2022. The birth rate increased from 1976 to 1992, so the US economy will experience increased spending and consumption through 2038, with the bubble occurring from 2022 to 2038.

The banking industry hasn't done any significant lending since 2008, and shadow banking has disappeared. As stated, this trend will probably continue into 2011. This means little to nothing has gone vertical in two years and won't start for another two years. Once the capital base has stabilized and the banks start lending again, asset values will increase. This coupled with previously discussed growth in consumption will spur commercial real estate development. Demand for commercially develop able land will increase rapidly.

Commercial land is currently the most depreciated of all asset classes. This is a classic buy low, sell high scenario. There are several caveats. By necessity, land purchases are cash purchases. Distinguish between good and bad markets. There are parts of the US that will experience more growth than others. The Southeast, the Southwest, the Rocky Mountains, and the Pacific Northwest can expect to see the most growth over the next bull economy.

Plan the next 25 years. Be prepared to hold for a minimum of three years. Plan exit strategies over time: selling unimproved land, selling improved land, develop and sell, and develop and hold. All these exits have different time frames and should be planned over the next 25 years to maximize exit value.

In short my buzzwords for 2010 and 2011 are syndication and acquisition. With an exit strategy planned prior to each acquisition.
 
 


Disclosure: No Positions