The "When" is Important
With commercial real estate, it’s never about price. It’s always been about the timing, as I’m often quoted as saying. The argument can still be made that KSL Partners paid too much ($115 million) for the Omni Scottsdale Resort & Spa at Montelucia. But as we all know, the deal worked quite well when KSL sold the property for a 21% premium at $138.75 million.
The London Canary Wharf and even the Empire State Building were expensive propositions originally, too. But they both turned into big moneymakers for smart, patient investors with good timing.
Timing is key to success.
Even billionaire real estate investor, Jay Paul would probably agree. The tycoon who’s created some of the most sought-after properties occupied by Microsoft and Amazon “has made a killing anticipating where the market would go,” says Garrick Brown, director at Cassidy Turley, as quoted by Bloomberg Businessweek. “He always seems to be two steps ahead. Timing is everything in commercial real estate.”
Even Warren Buffett, as he noted in his 2014 shareholder letter, will tell you, “The when is also important.”
As he noted, “In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling. Again, a bubble had popped — this one involving commercial real estate — and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.”
“Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant — who occupied around 20% of the project’s space — was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.”
“As old leases expired, earnings tripled. Annual distributions now exceed 35% of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.”
Again, timing here is key.