Henry S. Miller Cos. will celebrate its 100th anniversary in 2014. Among its many commercial real estate activities, the company has been successfully representing investors in various capacities for many of those years as brokers, general partners, and consultants. Despite rumors to the contrary, I have not been involved for that entire period, nor in most of the transactions. But I have been in a position to observe these activities for more than years.
What I find interesting is that history, which will always repeat itself, provides a very clear path to successful investing. Yet, most investors rarely stay in the proper lane or abide by the speed limit. Many bright, well-educated entrepreneurs perceive their possession of a better program to be the key to increasing profits and shortening the investment cycle. Many, not all, have eventually failed.
Timing is critical, as is some luck. But applying basic principles can eliminate most of the risk and provide almost assured success, albeit possibly limited by the time value of money. Although it is not entirely universal, almost any piece of property bought at prudent current market price—in virtually any DFW location and if held long enough—will sell for more than the original purchase price.
If average long-term inflation and dollar devaluation come into play, prices will eventually increase in some future cycle, and maybe many cycles, to recover initial cost. Positive leverage is the investor’s best friend in an inflating market and his worst enemy when the market is deflating. One’s tolerance for risk is frequently dictated by his cash reserve. If the buyer is prepared to deal with the most adverse, long-term circumstances of ownership at the time of acquisition, he is well positioned to eventually produce favorable results.
Let’s return to the historical performance of our investment market. Many efforts have gone awry because price per unit (per square foot, per acre, per door, ceiling height, etc.) has given cause to ignore basic principles of location and growth patterns. “Cheap” has overshadowed quality and the basis for which quality is determined. Old timers scoffed when a local family bought arguably the most prominent shopping center in Texas for $175 million—the highest recorded price paid for such an asset known in our market. Quality has prevailed and soon, this event will have been promoted to one of the shrewdest purchases in recent history. The center is full and rents have escalated to record highs through exceptional management and patience.
The same dynamics were at work six years ago when a Class A apartment complex sold in Uptown for $150,000 per door on a five percent cap rate based on $1.50 projected rents. We pseudo-sophisticates perceived doom. Today, $2.50 rents, 98 percent occupancies, and $300,000 per door sales prices on the same five caps testify to our lack of foresight, as do the 28,000 new units under construction to meet demand. Eight years ago, $25-per-square-foot high-rise sites were plentiful, but the numbers didn’t work. One just sold for $300.00 per square foot and is now attractive, according to the standards set by arguably one of the most successful developers in our market.
Perhaps the best advice is to address what not to do:
• Don’t buy industrial with low ceilings, poor access to major roads, limited parking, and no truck court.
• Don’t buy retail with “elbows,” limited exposure to traffic (poor depth-to-frontage ratio), vulnerability to cheap new construction, historically low occupancy in an overbuilt market, or anything that has a church as its anchor.
• Avoid multifamily that has its exterior walls covered with graffiti or razor wire anywhere, particularly around the manager’s office; is a “weekend fixer upper;” has historically low occupancy; has a flat roof; or is not sub-metered.
• Try not to consider office buildings that have exterior signs showing “Full Floors Available” or “Abundant Free Rent,” have limited parking, have no exposure to traffic, have depreciated mechanical equipment, razor wire, or graffiti.
These are just some suggestions, and as obvious as they may be, my personal experience unfortunately supports them. Their submission is directed to those contemplating a future in moguldom (a new word, but applicable) in investment real estate—not the experienced mogul who has learned from experience as I have.
If I were a young, aggressive investor today (neither of which I am), the first thing I would do would be to find 50 to 100 acres of land within the “fairway,” priced at market; purchase it either for cash or no more than 50 percent leverage; be sure to get an agricultural exemption; and then forget I own it for 10 or more years. I would resist the urge to take a small profit, because this investment could provide college tuitions or a house in Carmel at some point in the future.
Investment land (land not purchased for immediate use) is always the last to show activity in a recovering economy. Vertical assets will always attract early attention because they will provide instant gratification. An improving economy, job and population growth, and tenant availability will fill the existing vacancy to healthy levels first. But as the economy strengthens, new product is necessary and land is absorbed. Developers who are ready to build will always exist, as will lenders ready to lend on exciting new construction until the cycle declines.
With extremely low yields on virtually all competitive investments in and out of real estate, the movement to land is inevitable and prudent. Of all the real estate products available, it remains the one true value today. Get into your BMW 750 or Prius and drive north on I-35, the tollway, US-75, or US-78. Go north of US-380 or even US-82, but stop before the casinos. Find that 50 to 100 acres, negotiate, close, and forget it again for two full cycles. I personally guarantee your success. If I’m wrong, sue my estate before the kids blow it.
As Claude McClenahan once profoundly said, “Under all lies the land.” About the same time some astute philosopher said, “Buy land; they ain’t making no more of it.” No whiny tenants, no roof leaks, no midnight move-outs, no termites—just tranquility. As long as DFW continues to grow, an average of 11,000 acres of land will change use annually for either private or public consumption—and they ain’t making no more of it.