You do the research. You analyze the data. You know the market trends. As an investor, you want to think you are well prepared for just about anything.
But no matter how well or how often you did your homework, you certainly could not have predicted the onset of a global pandemic, a shutdown that impacted every industry, and a market that went to a standstill overnight.
But if you are like us, you probably learned some major lessons and have earmarked them for the future. We wanted to share a few key takeaways that we plan to bring with us into the next chapter.
1. Financial models can’t always tell the whole story.
Companies and investors often look to financial modeling as they make their investment decisions. However, even the best financial models won’t be perfect because they are a snapshot of assumptions at a very specific point in time. So many seemingly unrelated variables can collide and shift reality away from even the most thorough model.
While those variables don’t generally involve a global pandemic, the lesson gained is the same.
Review your properties and income statements thoroughly to determine what your margins will look like and how much runway you might have if something unexpected occurs. And always take your underwriting with a grain of salt. Leave some room in the budget so that when things don’t go exactly as planned, you have some buffer to protect you from disaster.
2. Communication is critical.
Whichever side of the equation you’re on—the real estate professional or the investor—you want reassurance during times of deep stress. Transparent, timely communication is a critical part of ensuring you can weather the storm together. When people are uninformed, they start getting scared. They lose the ability to make choices with a long-term perspective. Instead, they may start scrambling, making rash decisions, and negatively impacting their financial wellbeing.
If you are a sponsor, keeping investors and other parties informed is critical. Reach out proactively, even if you don’t have much new information—just let them know you’re there, gathering and analyzing information, and ready to address their concerns. If you are a passive investor, look for a sponsor who does all of the above.
3. Recession-resistance isn’t what it used to be.
Real estate has always been considered a recession-resistant investment. After all, everyone needs a place to live. Businesses need a place to operate. Professionals need somewhere to work. However, when the economy is jolted as unexpectedly as it was in early 2020, not even those previously “safe” investments are entirely foolproof.
For example, workforce housing has always been a strong segment of the real estate market. It is also one that would generally be considered almost recession-proof. With the way that COVID hit working-class families—layoffs, furloughs, cut salaries, etc.—this segment was put in jeopardy. It would have been completely underwater had it not been for its saving grace: the federal government’s commitment to providing unemployment benefits, preventing massive foreclosures from becoming the norm during the pandemic’s onset. This brings us to lesson #3.
4. The government is playing this game too.
People don’t always think of the government as a main player in the real estate investment arena. However, Federal-level intervention played a tremendous role in keeping people in their homes throughout the pandemic.
Their intervention also prevented a massive influx of properties into the market. While this lessened the amount of property available for sale (to the chagrin of private equity firms raising capital for potential fire sales), it also had a stabilizing effect on the economy.
Ultimately, we need to understand that the public and private sectors influence the overall market, so we should start giving equal attention to both.
In real estate, you might have heard the term “surviving is thriving.” That is certainly the case when keeping your investments secure during unexpected downturns. So make modest financial assumptions, continue to diversify among recession-resistant asset classes, and find a team you can trust even in the most trying times.
And while we learned some valuable lessons—here’s to hoping that we never encounter another year like 2020 again.
Interested in learning more about Cira Capital Group and the real estate investment services we provide?
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