From a small northwestern observatory…

Finance and economics generally focused on real estate

Real estate risk audit

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Sixty percent or more of American households own some kind of real estate, even limited to the home they live in.  Perhaps even more Americans may indirectly own real estate thru a pension plan or 401-K.  Wealthy families nearly always have significant real estate holdings, both for the portfolio diversification aspects and as a hedge against economic bad-times.

The recession of 2007-09 left a lot of investors gun-shy.  Historically in the U.S., real estate has been a solid investment in both good-times and bad, and since WW-2, single family homes have increased in value about 2% above inflation, year-in and year-out.  However, before, during, and after the recent recession, real estate prices roiled in much of the country, although admittedly prices seem to be back on an even keel.  Nonetheless, investors continue to be nervous, and rightfully so.

House Price Index versus Recessions

Of course, for investors, developers, and managers with more complex portfolios, these questions require a bit more of a portfolio audit.  For the securities investment portfolio, significant resources are available to manage and evaluate investment choices in the face of changing circumstances.  For real estate investors, tools are somewhat more granular and heuristic.  Nonetheless, the stakes are high, and a solid real estate portfolio audit is a must-do on a periodic basis.

What should an investor expect out of such an audit?  For a securities portfolio, the answer is simple — some stocks get sold, others bought, and some resources get shifted to other asset classes.  For real estate, the key may be simply be one of management or financial emphasis.  If a recession is coming, and vacancy rates rise, then operational and financial leverages change.  These may necessitate financing shifts or evaluation of current and prospective leases.  Development plans may need to be put on hold, or conversely perhaps accelerated.   Some properties may need to be re-aligned or even positioned for redevelopment after the trough of the recession.  Shrewd investors keep a lot of dry powder going into a recession, as buying opportunities will abound.

If you have questions, drop me a line.  I look forward to the opportunity to chat with you about these things.



Written by johnkilpatrick

October 23, 2019 at 9:17 am

Posted in Uncategorized

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