the big four is the focus of this guide for passive real estate investors. First, it highlights the main idea behind the topic. It also outlines the risks and questions worth reviewing. As a result, you can approach the discussion with a clearer framework.
What to know about the big four
I recently read an article with the above title. It contained some interesting information and validated a part of our strategy, but more importantly, it underscored the absolute necessity of critical thinking… and reading.
This article laid out the top four commercial real estate asset classes (Can you guess what they are? In order?) and made some factual, but incomplete, assertions about the potential performance of those asset classes moving forward.
I won’t keep you in suspense any longer, they are:
1. Multifamily
2. Industrial
3. Retail
4. Office
The performance of these asset classes was measured using repeat-sale analysis, which is based on properties that have traded more than once during a period with no significant change in building characteristics between sales.
When reading these types of summary articles, it’s crucial to know where the data came from (CoStar in this case–a solid source), what is being measured, and what conclusions are being drawn.
If you’ve ever read an investment offering or advertisement, you’re probably familiar with the disclaimer, “Past performance is not indicative of future results.” Can I get an amen?! While the past performance of retail assets may have been strong, I’m guessing you’re not lining up to invest in shopping malls or retail strip centers.
What this means for investors
When you delve further into this article, the authors confess, “Malls, strip malls, and shopping plazas were hit especially hard, and real estate services company CBRE predicts a 20% reduction in U.S. retail real estate inventory by 2025.”
The weaknesses in retail were already apparent pre-COVID-19, but the pandemic put the proverbial nail in the coffin for many struggling retailers.
What about office?
Office is interesting. Prior to COVID-19, there was a massive expansion of office space over the previous decade, to the tune of one billion square feet. However, much of that was concentrated in Silicon Valley, and, as we all know well by this point, COVID-19 has dramatically changed how many of us work, and this very well may be permanent. Several of the country’s largest employers now have permanent policies in place, allowing employees to work from home anywhere from 50 to 100% of the time, indefinitely.
Industrial, as you may imagine, has a similar story.
While the high-level performance of the asset class has been strong, there has been a massive consolidation of ownership in the sector, as much of retail has moved, and is moving online. The percentage of investors benefiting from the performance of the asset class relative to massive corporations like Amazon, Walmart, and Target is very low.
Questions to ask before acting
As good stewards of your capital, we’re committed critically to the past, as well as the future. We always “read between the lines” and take the time to evaluate the sources and the accuracy of our information.
We’re all constantly bombarded with information, and it’s often tempting to do a quick scan of an article or headline, and move on, especially if that initial information confirms our bias. But, as the old saying goes, the devil is in the details, and taking the time to read and think critically will have a material impact on your life, your future, and your finances.
Key takeaways for the big four
- Start with the goal and timeline that fit your wider financial plan.
- Next, review the assumptions, risks, fees, and possible outcomes.
- Finally, compare the opportunity with other ways to use your capital.
Put the big four in context
Core ideas for the big four
Every investment decision depends on the investor, the deal, and the market. Therefore, use the ideas above as a starting point for deeper due diligence. Review source documents, ask direct questions, and seek qualified advice when needed. For more guidance, explore our passive real estate investing education.
A clear review of the big four
the big four deserves a clear and practical review. These short checks can support a more informed decision.
- Start with a clear goal.
- Next, define the time horizon.
- Review each key assumption.
- Compare the likely outcomes.
- Test a less favorable case.
- Ask who controls each decision.
- Confirm the fees and incentives.
- Study the market and the deal.
- Check the supporting documents.
- Look for clear communication.
- Compare other choices.
- Keep the full plan in view.
- Write down the main risks.
- Review the source of returns.
- Check the exit assumptions.
- Understand the tax questions.
- Consider the need for liquidity.
- Match the choice to your goals.
- Ask direct follow-up questions.
- Confirm the reporting process.
- Review the operating plan.
- Check the team’s experience.
- Compare the best and worst cases.
- Keep expectations realistic.
- Use qualified advice when needed.
- Document the final decision.
- Review the decision over time.
- Watch for changing conditions.
- Stay focused on the long term.
- Finally, act with a clear reason.
A practical review of The Big Four
First, define the goal for this decision. Next, write down the result you expect. Then, identify the facts that support that result. Finally, note any facts that could change your view.
For example, compare the likely return with the main risks. In addition, check the timeline and the amount of control you will have. However, do not rely on one attractive number. Instead, review the assumptions behind every estimate.
Before you act, ask who will manage the work. Also, confirm how that team will report progress. If conditions change, decide how the plan can adapt. As a result, you can judge the opportunity with more confidence.
Moreover, compare this choice with realistic alternatives. For instance, consider liquidity, taxes, fees, and timing. Likewise, review the downside as closely as the upside. Therefore, your final decision can reflect both your goals and your limits.
In short, use a clear process. First, gather the facts. Next, test the plan. Then, ask direct questions. Finally, choose only when the answers support your strategy.