Viewpoints

Why Real Estate Matters

Posted on September 13, 2013 in Viewpoints by admin

Real estate matters…quite a bit more than many people assume.  Not only does real estate account for a full fifth of the gross domestic product, it is the infrastructure, ecosystem, and structure for a fully functioning economy.  The boxes we define as offices, stores, warehouses, and homes are only the physical manifestation of a broad range of activities that tie every aspect of our society and economy together into a broad and deep network of trust.  The pursuit of real estate investing is a valuable and essential part of building and maintaining civilization.

…and it requires quite a bit of thoughtfulness.

There is an assumption that real estate is simply about the deals; that is, whoever gets the best deal, either the purchaser or the seller, wins.  And though the ability to negotiate better than the counterparty of a deal is a key part of success in this business, it is not everything.  Real estate professionals also have to understand, anticipate, and help to shape economic activity throughout the term of an investment.  Purchasing that investment at a low price and selling it at a higher price is absolutely necessary, but there’s a lot more to it than negotiating terms.

According to the tired old cliché of real estate, the three most important elements of successful real estate are “location, location, location”. In some ways, the cliché – like most clichés – is too facile to explain the intricacies and importance of this business and it implies a somewhat defeatist or passive view of investing.  In other words, it is difficult to swallow the notion that “location is destiny” – especially when real estate investors have had quite a bit of influence in the discovery, building, improvement, and creation of new locations around the world.

In 2009, the New York Times published William Safire’s analysis of where ‘location, location, location” came from.  According to his research, the earliest recorded mention of the phrase he could find was in a 1926 Chicago Tribune real estate classified ad that said: “Attention salesmen, sales managers: location, location, location, close to Rogers Park.”  This is especially ironic to anyone who invests in Chicago real estate since property values in Roger’s Park are typically half of the average Chicago property.

But if the rules of real estate aren’t “location, location, location” what are they?

Here are three new rules to consider: Density, Diversity, and Shared Ownership.

Density

What makes for a successful location?  It has quite a bit to do with how many people want to spend time there.  If your building is where the most people want to be, it has the highest potential for revenue.  The denser people are, the more opportunity there is, the more value there is.  In some ways the real estate profession creates the infrastructure for density.  Real estate makes density possible.

Diversity

Diversity of people, of cultures, of uses, and of economic activity is essential for thriving places, cities, and communities.  In farming, it may be possible to improve crop yields if one devotes a large area to a single crop, but the moment conditions change, perhaps due to difficult weather, an invasion of parasites, or a shortage of water and nutrition in the soil, that monoculture is less likely to survive than farmland planted with a variety of crops.  Cities and communities behave much the same way. Less diverse economies like Detroit enjoyed tremendous growth at first – built around one very successful industry – but are particularly vulnerable to economic shocks.  More diverse economies are able to handle changes in the economy better and return to full productivity sooner. As Ecclesiastes said, “divide your investments among many places for you might not know what risks might be ahead.”

At the same time, a diversity of businesses, cultures, and people promotes faster formation of new businesses, new technologies, and new ideas.  A successful real estate investment depends on the economic success of the people and businesses that occupy the asset as well as the surrounding area.  Diversity creates new growth and mitigates the natural volatility of a business cycle.

Shared Ownership

Every tool at the real estate professional’s disposal is essentially a device to promote shared ownership – whether it’s the JV agreement, the limited partnership, the GP-LP relationship, the mortgage or the lease. Every agreement and contract is designed to bind all the parties as much as possible in a shared responsibility for the success of every asset.  The tenant needs to feel that they share in the ownership of a building as much as the lender or equity partner; the property management team needs to own its success as much as the developer or owner.  Everyone should be able to come together and work out the problems when the asset falls and share in the rewards of its success when it prospers.

At its best, the commercial real estate industry is all about sharing a sense of ownership.  And the most successful markets are passionately “owned” by all the participants.

For the best real estate investors, destiny is not just something in the stars, or in some pre-ordained quality of location, but rather in ourselves and in our ability to solve the challenges presented by a swiftly changing world.

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