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As the country deals with high inflation in food, energy, and housing, many real estate investors are pivoting to keep up with changing market dynamics. Smart investors can thrive in challenging times, if they know where to look.

Hi, I\'m Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review.

I recently interviewed John Chang on my other podcast, The Real Wealth Show. John is the National Director of Research at Marcus & Millichap, and he offered some very good insights that I wanted to summarize here on Real Estate News for Investors.

Marcus & Millichap\\u2019s John Chang

Just to give you some background on John, he leads a team of real estate research professionals and is responsible for the production of the firm\\u2019s vast array of commercial real estate publications, tools and services. Under his leadership, Marcus & Millichap has become a leading source of market analysis, insight and forecasting, and the firm\\u2019s research is regularly quoted throughout the industry and in mainstream business media. To summarize, John is well-respected in his field.

During his recent interview, he explained how good investors had it last year, and what they will be up against this year. He says last year was off the charts for commercial real estate. Transaction volume was up about 30% higher than the previous peak, and the dollar volume was up 45%. He says there were more deals, and many of them were also bigger deals, which is why there was a surge in dollar volume.

Changing Real Estate Environment

But as prices and interest rates rise, what are we starting to see now? At the time of this podcast, the overnight lending rate was up 75 basis points. That\\u2019s triggering the beginning of a slowdown, but John says we haven\\u2019t really felt the impact yet, because many of the transactions that are closing today were locked in 30, 60, or 90 days ago. He doesn\\u2019t think we\\u2019ll see much of a change during the first half of 2022, and in the second half, he expects a little bit of a slowdown, but nothing dramatic.

He says, even with a few more rate hikes, there won\\u2019t be a huge impact on most real estate investors., because there\\u2019s a lot of capital out there. After all, the Federal Reserve increasing the amount of that\'s circulating by nearly 50% in just two years time. This is unprecedented. As those dollars circulate, investors are looking for places to put that money as a hedge against this inflation. There are also tax benefits that investors will be trying to capitalize on. So he expects investors to keep moving forward with their plans, but hopefully with more caution.

The \\u201cValue Add Mentality\\u201d

John told us a little story about his Dad during the interview. He said that his Dad bought his first rental property in 1971. He took out a loan at 6.5% which is higher than what we are facing right now. John\\u2019s Dad still owns that property today, and John says the reason it has worked out so well is because of something called \\u201cvalue add.\\u201d His Dad continued to add value to that property so that the high interest rate didn\\u2019t matter that much. And over time, it\\u2019s been a worthwhile investment.

John says that smart investors have a \\u201cvalue add mentality.\\u201d They will research and analyze a property, and figure out a way to improve it with better management or upgrades or conversions. This mentality is something that new investors may not have developed yet because it\\u2019s been so easy in recent years. Analysis hasn\\u2019t really been necessary.

As John put it: \\u201cInvestors have gotten lazy\\u2026 because interest rates have been so low you can just buy into a deal and it cash flows right away. You don\\u2019t have to work as hard.\\u201d But he says that we are now coming to a time when \\u201cinvestors have to roll up their sleeves, understand the intrinsic value of the property\\u2026 what they can do differently than the previous owner, and then buy those properties.\\u201d

Sophisticated investors don\\u2019t see high interest rates as a game changer. Instead, they look for ways to add value to the property to eliminate that expense. Even properties with a negative cap rate can be good for investors, so long as there\\u2019s a way to add value.

John points out that the U.S. economy is the strongest in the world. People are working and spending money. Real estate is doing well. There are still supply chain issues to deal with, but when it comes to construction, the winners will be the builders with more experience and connections. This is important for investors also, to work with people who are connected. Successful investors will need to choose their properties and their partners carefully.

Where Are the Deals Now?

As for where investors will find deals in the commercial real estate space, John had several ideas. He mentioned multi-family buildings in smaller cities as a possibility, along with certain types of hotels, although hotel ownership also needs a special skill set. Also, he likes suburban office space in areas where people are moving, and self-storage, to name a few.

If you\\u2019d like to hear more about commercial real estate from John, please check out his interview on The Real Wealth Show. You can also find out more about owning single-family rentals at newsforinvestors.com. It\\u2019s free to join our network. As a member, you get access to the Investor Portal where you\\u2019ll find information on rental markets and sample property pro-formas. You can also connect with our experienced investment counselors, property teams, lenders, 1031 exchange facilitators, attorneys, CPAs and more.

Also, please remember to hit the subscribe button, and leave a review!

Thanks for listening. I\'m Kathy Fettke.

Links:

On Our Website:

Navigating New Real Estate Challenges w/Marcus & Millichap Analyst, John Chang

On YouTube:

Sage Advice from Top Real Estate Analyst