Best class of real estate in a post Covid world?

[Jonathan Levi]

Hi all,

When I first came to BiggerPockets I was interested in multi family. Over time, I became convinced that I needed to go to triple net properties since I live Abroad and loved the idea of mailbox money with zero work required. I even moved on a deal, but it fell through in due diligence

Now, with COVID-19 upon us, I am wondering what the best investment class is for commercial-sized investors. Obviously, retail has suffered a lot. But then again, many people are also not paying rent right now! And is there really that much opportunity in buying up warehouses that are not Amazon sized?

How have you changed your strategy since COVID-19? Are you still hot on retail? What do you feel is the safest investment right now?

Thanks for sharing

[Joel Owens]

I love retail. Give it to me all day long. I have been busier than I have ever been. People are buying a ton of it.

NOW the key is if you are buying sub-standard tenants than you better make sure the rents are below market and you have some LIFT (upside) on re-purposing.

The bad deals now in my opinion are small operators at market lease rates where the long term risk of default is HIGH and UPSIDE is low. Developers love to sell off that trash for a premium and new commercial brokers love to push that trash because they need a paycheck and sale to survive. The buyer is left scratching their head years later saying ( What happened? Why did they sell this to me?) 

Just like any other asset class retail is not immune to buying the wrong lease structures, wrong location, wrong tenant type, etc. You have to know what you are doing in underwriting these properties. 

The discount is going to be the mom and pop to more regional type tenants. A Mcdonald's in GA just traded for about a 3.7 cap rate. Ultra high net worth investor that couldn't take anymore stock fluctuations. Just wanted to own investment grade and have certainty.

When buyers are worth 20,50, 75 million dollars they tend to make decisions differently than those at the 3,4 million level. Most of the higher net worth have already made their money so more in wealth preservation mode rather than wealth creation to wealth stabilization mode. This isn't always the case but lots of investors hit ages and inflection points where the desire to push yield goes down as they have way more than enough to live comfortably and value time and no headaches as worth more value.

I have clients in hospitality but they own A assets and they are still doing well. The distressed properties will usually be more from certain loan structures that do not allow hardly any workouts, weak net worth operators, sub-standard class of property within the asset class, etc.

Most of the NNN my clients are buying right now are investment grade ( ESSENTIAL BUSINESSES). Lenders are still giving pretty much the same exact loans or better for them than pre-covid. The reason is lenders want high quality tenant NNN properties on the books and stronger borrowers. They want to clean up their books so not stuck with too much dead weight properties with losses.

We often go into multiple offer situation with my clients and have to write the offer within a few days to market or even internally listed showing to a small group.

I laugh when I hear from others not an expert in the space. Knowledge level is different for those that have been evaluating tens of thousands or more of these properties over the years versus the casual lookie loo that has viewed a few properties online and read some random articles about what the retail market is going to become or do next.

Risk profile tends to be higher in cold belt states where overall growth regardless of the asset class is taking a hit with net migration and retirees moving away to warm belt states. There are pockets still performing well.

My clients are not really buying anything on the coast lines. Sea levels are expected rise and inter canal waterways can cause lots of flooding issues especially for areas at or below sea level. In those areas if buying it's good to check what is their long term plan to protect the the shores and how are they funding it to prevent loss of areas potentially reclaimed by the sea.   

There is talk of an even greater push into NNN if certain political parties get in. More pressure could be put on residential landlord/tenant laws. The additional headaches could cause some long term multifamily owners to say they no longer want to deal with it and sell to younger investors willing to wait out changes going back in their favor again. It's all perspective on the individual investor.

Jonathan I would be interested to hear more about the specifics of the property you offered on, what was discovered, and why you passed on it?