September 2024 - We Have Been Here Before. It’s time again to use history’s lesson.
We may soon enter a window of opportunity that occurs only once in each full 18-year real estate cycle.
How many times have you looked back and said to yourself “if I had only bought then”?
Read on if you want to understand what signals a “once-in-a-generation” buying opportunity is about to occur.
NOTE: This is a condensed overview. We feel the subject is so important, we created a comprehensive Special Report. Simply drop us a message and we will send it across.
We Have Been Here Before – it’s time again to use history’s lesson.
Part 1 – Understanding the Opportunity
This issue is about knowing the signals and patterns of the full real estate cycle so you can use market timing to greatly increase your chances of accumulating generational wealth from multifamily investing.
Broadly speaking, real estate, business and economic cycles all play out in three simple phases; recovery, expansion, and recession.
What is not very well known is that the real estate cycle typically precedes the business cycle.
As the real estate cycle enters a downturn, interest rates begin to be lowered. Soon after, a recession follows.
This makes perfect sense if you think about it – a slump in construction leads to a reduction in durable good sales (carpet, refrigerators, building materials, etc.) and finally employment.
Each phase of the cycle has distinct stages: a beginning, middle and end. In real estate, research has indicated these phases and stages play out roughly over an 18-year period.
This is known as the full real estate cycle. At the end of the cycle, is the recessionary phase that has historically proven to be the absolute best buying period ( and where the saying a “once-in-a-generation buying opportunity” came from).
How accurate is the 18-year cycle? In short – very. This predictive model called the generational buying windows of the S&L Downturn in 1992 and the GFC in 2010.
How does this fit into today’s market? Almost perfectly. It predicted real estate’s next downturn to be 2023 – just around its recent peak.
The beginning stage of the downturn is a measure of time required for market participants to reluctantly acknowledge the market has shifted. It leads to the middle stage of the downturn where the best buying opportunities emerge.
How can we determine that we are about to enter the middle stage of the downturn? When unsustainable positions begin to accumulate to the point where they must be resolved.
We are there. The market is just now starting to see the first trickles of foreclosures, while lenders are struggling with maturities that cannot be refinanced. The statistics tell the story.
What is the best signal indicating we have entered the middle stage? When forced property sales become commonplace.
It is now obvious we are about to enter the middle or buying stage soon, and simply put, this will be the best buying opportunity most of us will see in our lifetime.
Part 2 – GP Stakes, a Unique Way to Seize the Opportunity
Knowing the opportunity exists is only half the battle – the other half is picking an investment vehicle that allows you to capture the outsized return potential available.
Experience tells us, investors need three things to succeed during this full cycle downturn: 1) the required knowledge and expertise, 2) lots of dry powder, and 3) the systems and platform necessary to source the best deals and support a rapid portfolio build.
Absent these requirements, most investors are left with options of investing as an LP in a sponsored fund or shares of a REIT. Unfortunately, these options leave the lion’s share of the upside with the sponsors or general partners (GPs) of these vehicles.
The good news is that there is another unique option known as a GP stake.
A GP stake is a minority investment in a sponsor’s or general partner’s (GP) parent operating company, instead of one of its funds. Think about this as owning shares in Blackstone instead of one of its funds or REITs.
From a strategic perspective, a GP stake can leverage your investment to a specific sector (in our case, large-scale multifamily investments). Even though a GP stake is not a direct investment in real estate, it does provide significant indirect benefits such as: an interest in every fund the GP sponsors, strategic and geographic diversification, and the potential to achieve scale in a particular investment sector.
Since most GP stake investments are made into the private equity business model, they also offer asymmetrical return potential not typically found in a fund or REIT.
We will wrap up this Special Edition of the CEO update by inviting interested readers to explore our newly launched Series A GP Stake Offering.
We hope you have found this Special Edition enlightening and invite you to drop us a message to get a copy of the full Special Report.
As always, please feel free to contact us with any questions or thoughts you may have. We are always happy to help.
Shaping a Brighter Future for Generations to Come
As part of the board of The Family Office Real Estate Institute, we work alongside families, family offices, and renowned professors from the top real estate programs in the country to help direct the institute's programming, education, and direction.