Understanding Real Estate
Had a question for all the pure real estate people out there.
I come from a pure finance background and have only been in real estate for a short period.
For those of you that have been in CRE for a number of years and now "get it", how did you expedite your learning process?
I find that I can absolutely tear it up on the finance side (understanding leverage, DSCRs, IRRs, Cash on Cash etc.). I'm quite good on the legal side too of PSAs and understanding why we need certain clauses in the PSA.
But how does one go about really picking the markets and locations they like?
Everyone says you can't beat experience in Real Estate which I agree - some of the guys just have a "sense" for Real Estate (i.e. this market is missing X product, Building A is way better than Building B because of X, Y and Z).
People around me say you have to touch, feel and smell real estate and it's not just numbers. Is there anything you can do to help develop a "sense" for Real Estate or is it something people inherently have?
That's a great comment. I am in the same boat. I have noticed a few things that help me with getting that intangible skill (note - I am in development):
1) site visits - helps me actually see what is going on and gives colour to the numbers I am working with
2) time - I've been doing for 5 years now and I've seen projects that do well and ones that have failed. One critical aspect I learned is you really need to understand civil.
3) working with other teams - we have a small team therefore I talk to the construction folks, trades, marketing, banks, etc. Helps me get a more balanced perspective on the market, project and general sentiment.
4) out of anyone hands - in looking back at the last 5 years, it does kinda of feel as though most of the critical outcomes in the project were due to luck in timing. For instance, when you locked in your constructions costs, when you completed the project and your exit price in the current economic conditions, etc. In the markets we operate in, a lot of the deals are priced very sharply and therefore it's tough to even buy the land well.
Hope that helps but I might be out to lunch here.
4) Always feels like development is about not losing your shirt while giving yourself a chance to hit lucky timing
There are certainly things that take years to understand in terms of nuances in real estate, but a lot can be simply be attributed to the macro-economic level view. For example, you might realize that land is very scarce in states like CA and so to account for a growing population in a landlocked area, you need to invest in vertical farming. Then you work backwards and figure out where vertical farmers like to set up shop, what kind of buildings they need, and start going down that avenue. BTR is becoming a much bigger niche in MF developments since people foresaw housing becoming unaffordable but people still want the benefits of living in a home with institutional quality amenities. One last example would be cold storage and last mile industrial. People saw that shipping is going to be a much bigger part of the economy and that we would have distributers like Amazon needing last mile warehouse space and cold storage for food as people migrate away from densely populated areas.
Picking the markets and locations stem from whatever product type you think is going to be your specialty. If I'm investing in logistics I want to be by major highways in cities that are centrally located/ near major markets that need it. If I'm building BTR housing I need lots of land, near highways because you'll be outside of the city and people want a convenient commute, and near where major employers are planning to move so there is constant demand for your units.
The experience aspect of real estate is just knowing building conditions/ how much cap ex it would need to upkeep and stay relevant, quality of building to know if you'll be able to get top of market rents or hoping to be workforce housing, etc.. The parts that would be needed for assumptions in models basically.
Good points here so far. I'll add that It sounds like you have the numbers down but that you need to remember (or at least revisit) the idea that real estate revolves around people and the numbers (money) follow the people.
For example, thinking about where they are moving (where they aren't moving), where they are living in cities/suburbs/rural areas, what they are living in (apt/condo/house/etc) why they moved/settled in those places, how they get around those places, why they need to get around those places, challenges they face in living in those places, the employment/food/childcare/entertainment/shopping/dining/etc available in those places...I could go on forever...
BUT the point is that you need to talk and learn about people and people's lives to learn about real estate. In that vein I'd recommend watching YouTube videos or creators who live in cities/places of interest to you. They talk about life in that city/place and what it is like to live there...a local's take on it. Many cities/counties/places have subreddits that talk about news or issues in that area. Also, go to open houses/condos/home showcases and other events in your area and you can start to get a feel for what differences homes. You can chat up the agent or other people touring.
Focus on reading about people's lives in whatever market you are looking at and, if you have a good business/numbers sense, you should be able to start connecting the dots.
IMO it's a bit of both - having a sense for good real estate is definitely something you do or don't have but you can learn it well enough to get by. You'll quickly pick up on which analysts just "get it" and which don't when they go on site tours and comment/ask on the right things (i.e. ingress/egress, visibility of the property, condition, surrounding node, tenant mix, etc.).
Seeing a lot of comments in here on macro understanding but I don't think that's what OP is asking about, and this question is more geared to understanding the true real estate - i.e. what defines exceptional real estate. That's something that's hard to teach.
So what defines exceptional real estate
It's a building that anticipates your needs before you can even articulate them. An office building with column bays that will easily align with perimeter offices, and industrial building which offers truck access without any difficult maneuvers, a mall that is well-signed and makes navigation intuitive, a hotel that optimizes BOH space for efficient operations, etc. Obviously you will run into issues developing real estate that will cause some trickiness, and not every building can be great, but the best are those that understand the use and are well designed with the end user in mind.
A lot of Real Estate is just Sales.Just like in Sales, you need to hear the way properties or deals are pitched over and over to see what attributes are often repeated and you can pick up on what's important and what sells well.
But just like in Sales - a lot of it is pure bullshit."Location, location, location" - but what makes for prime location? Not all, but a lot of it is sales-y bullshit.
At OP, I'm in real estate and came from the banking side as well. I'd say RE works in the same vein; meaning, you could post that you understanding DCF and cash flow models, but you're having trouble figuring out which stocks to pick.
First, I'd say, if there was an elevator to take you to the top and understand everything everyone would be doing it and you'd have an answer. Second, really its more mosaic theory, just reading, talking to others and understanding topics, eventually you will get it and start to understand patterns. For example, take stocks, when Peloton was popping it lined up very well with a stock from about a decade ago called GoPro. Similar in the sense they were selling hardware, both didn't really have a technology that they could keep improving (like an iPhone), which resulted in a pop and drop of the stock. So knowing that, you could see where it was somewhat headed. Now, its not exactly one to one because Peloton could flip into a subscription service, but its a lesson from the past.
Same with real estate, you start to see something happen in one market, then down the road, somewhat similar with happen in another market.
I would argue that beyond figuring out markets and locations, you need to understand people and motivations. Most ground up projects require some buy-in from local elected officials, from communities, from bureaucrats in charge of zoning or planning.
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