Please allow me to make a huge understatement: The real estate market is hot, and Texas is outpacing most of the country. Austin is seeing record-high sale prices and a huge demand for acquisitions. While Houston has had a bit of a setback in large part because of a drop in oil prices, it still remains ripe with opportunity.
And Dallas? Demand is high, and the city is expanding. Thanks in large part to recent and announced business relocations, Dallas is establishing hubs outside of the traditional economic centers. And there is no reason to believe it should slow down any time soon.
So what does this growth mean for investors looking to add a real estate allocation to an investment portfolio? Two of the most popular options that we frequently see are investing in a REIT and a private equity real estate fund.
The investment vehicle chosen is very much driven by each investor’s personal investment strategy, risk tolerances, and sophistication, but if you are allocating to a private equity real estate fund, there are a few specific things to look for in a manager:
• Access to product. It is key to pick a manager that has access and relationships to acquire product, no matter the state of the market. A seasoned real estate manager utilizes their market intelligence and long-term relationships to source under-the-radar assets and off-market opportunities.
• Detail-oriented. Opportunities are available in every cycle; a manager just needs the know-how to identify and capture them. Each product type has unique intricacies that could make or break a deal. When deciding whom to invest with, pick a manager who has a long history of success in the product type they target and who approaches each potential deal with an experienced eye and a focus on the details. By identifying opportunities to reposition and asset, an adept manager can increase occupancy and/or raise rental rates, unlocking an asset’s hidden value.
(Velocis used this strategy with 3131 McKinney in Dallas. We purchased the property in May 2013 as the Uptown office market was catching fire and repositioned the building by adding a state-of-the-art tenant lounge and locker rooms to allow tenants to take advantage of the building’s proximity to the Katy Trail. We also strove to create a work-friendly environment with events such as food-truck Fridays. These upgrades helped attract more high-profile tenants and allowed us to increase rental rates, lease the building to 100 percent occupancy, and ultimately successfully exit the investment in December 2014.)
• Proven track record. There are a lot of managers who claim to be experts. This is particularly true in a good market. However, investors should look for managers with a proven track record of active management and who are fully aligned with the investor. Capital raised, deployment, and investor returns should speak for themselves.
Bottom line: In a market like today’s, commercial real estate can be a great addition to an investment portfolio, but only with the right manager at the helm.
Jim Yoder is a co-founder and principal at Velocis. Contact him at [email protected].
