The sky is not falling

Every time there is a shift in the market, there is a rush to be the first to proclaim that the “sky is falling.” In the real estate business, one only needs to look at the investors running around screaming about the “death of retail” to see that it’s happening again.

Right now, online business accounts for 2.5 percent of the United States GDP. That sounds like a significant number until you look at the mail order business, which accounted for more than 5 percent of the GDP just a century ago.

Every new startup in Silicon Valley talks about how it will disrupt the market as though disruptions were only invented in the past decade. They weren’t. Although Sears and Montgomery Ward began as mail order companies in the late 1800s, by 1930 they had stores across the country. Despite the massive success of their mail order sales business, people still love the customer experience.

According to Chaim Katzman, every big trend initially seems to change the world, and we often call it a disruption. Eventually, it slows down or disappears altogether. It becomes a part of the human experience, but things tend to return to equilibrium. A catalog can no more replace the shopping experience than a webpage. There is something that we love about going out of our homes and into a social environment to shop.

When VHS was developed it allowed consumers to enjoy the quality of a movie in their own homes. The naysayers screamed that it was the end of cinema. They were proven wrong; movies are more successful than ever. Even in the era of digital downloads and 4K video, people enjoy the experience of leaving home to enjoy a movie.

Disruption has always existed and while it may kill a single retailer, such as Blockbuster, it is rarely enough to destroy an entire market. Airbnb hasn’t caused the end of the hotel industry any more than Uber has ended personal car ownership and taxis.

There is no reason to believe that retail will suddenly disappear.

Starting Out

I began my career as a real estate attorney, and as I worked with clients I became fascinated with the idea of owning an asset and the ability to create something from scratch when you do ground-up development.

My foray into real estate began in Israel, where I focused on doing a land assemblage. I purchased several connected pieces of real estate from different families and created a larger property. That initial project taught me that sometimes in real estate, 1 plus 1 can add up to 3. One of the ways to succeed in real estate is through land assemblages and creating a large irreplaceable plot of land.

The success of my first project led me to focus on assembling land for more of my initial deals. Creating larger properties allows you to enjoy some interesting arbitrage as well. The larger single property is worth more than the individual properties were, even before you begin a development.

When looking on my career, it’s hard to pick out a single deal as my favorite. Each deal and property is special in its own way, but there are some properties that contain wonderful memories. I have fond memories of the property where I taught my younger brother how to drive. I love every asset we have acquired or developed, whether it was in Israel, Europe, the United States, Brazil, or Canada. When it comes to real estate you should like all your assets.

With any potential deal or project it’s easy to become distracted by the glamour of the potential upside. It’s far more enjoyable to focus on what you could make than on what you could lose. I had some tough experiences along the way when I attempted to venture outside my core business of real estate. I purchased a construction company, which I mistakenly thought was close enough to real estate to be manageable. The two businesses are quite different, and I failed.

I learned a valuable lesson: Stick to what you know. When you think you are smart enough to do everything, you start failing. I have never lost money in a real estate investment.

As a lawyer, I knew how to perform thorough due diligence, and this is important. You must review all legal documents, find the correct fiscal structure, and get title insurance for the property. If you are looking to do ground-up development, check the environmental and soil issues; find out if your neighbors will be a major barrier or supporter of your project.

Whenever a new opportunity is presented to me, I begin by looking at the location and the potential for what I could build there. I ask myself several critical questions; here are a few.

1. What is the state of the market that surrounds the property?
2. Does it sit on a main avenue where I can have good entry and exit points?
3. How complicated is the zoning?
4. Are the neighbors friendly or problematic?
5. Are you getting in the way of an ecosystem of that submarket?
6. What are the main risks and how can I mitigate them?
7. Do the financials make sense?
8. Do I think a financial institution will lend me money?

Trends in the Marketplace

The market is shifting with new changes in technology. If I were starting over right now, I would take a hard look at the possibilities with blockchain. There have been a few recent ICOs that focused on real estate, but this space is wide open right now. I expect great things to happen in this space in the near future, but my lack of knowledge holds me back.

Governments may step in and regulate the space while introducing their own currencies. We may be using cryptodollars, cryptoeuros, and cryptoshekels in the near future. The major risk with blockchain is that someone else could come up with a better idea. I think that is the biggest risk. But it is definitely a space that will grow exponentially.

If I were starting out and focused on physical real estate, I would get a real estate brokers license or become a real estate property manager to learn the real estate business from the inside.

There are so many interesting pockets and niches all over. The residential space in general is always interesting, especially in rapidly growing markets where demand outweighs supply.

The public securities market is very efficient, so while it’s a good investment for some people, I would not pursue that niche. I would go to where the opportunities are inefficient and where there is a lot of potential upside.

If the market is efficient the upside is going to be smaller. Financing can seem complicated when you first enter the world of real estate, but according to the rule of thumb, when most financial entities are not willing to lend you money, it’s a good time to use leverage. In real estate it’s good to be a contrarian. Banks will want to lend you money when the market is at the peak, but, ideally, you can get financing when the market is going through a softening or a recession because you should be able to buy or develop an asset at a better price or similar to replacement cost.

I would recommend using 50 percent leverage, although this percentage can vary depending on the asset class and geography.

Disruption

I’m constantly asked about disruption in the real estate market and it’s not something that I worry about. Disruption has been around for the last 5000 years. Of course some real estate will suffer more than others. I am mostly in the retail space market, and it is likely that my Class C shopping centers in the suburbs and small towers will suffer. However, the Class A malls, like Aventura near Miami or King of Prussia near Philadelphia, will be around for decades to come.

It’s all about omni channeling, which is about providing your customers with a seamless shopping and customer service experience. The shopping journey might start in the home, whether through a catalog or a website, but it will finish in a physical location.

Fifty years ago, 80 percent of the needs of the family was found and bought inside the supermarket. Today, only 50 percent of those needs are inside the supermarket. Times have changed and companies need to evolve.

If we look at the hotel space, Airbnb has been a major disruptor, but we will always have hotels. These disruptors are something positive for the different real estate industries to evolve and improve. Real estate is about adapting to disruptions, not running away from them.

Words of Wisdom

To succeed in the world of real estate requires patience, good common sense, and the ability to understand where things are going (because sometimes it is not obvious). You must have the stomach and the hunger to get you through the tough times, because they always come. This business requires hard work, but it is a long-term business.

One thing that worries me about new investors is that they often follow the flavor of the day. They want to be the first one to jump on board a new trend. They throw money into that specific hot thing that everyone is pursuing, and then they suffer. Unfortunately, it is hard for the average investor to not follow the trend. There are always compelling reasons to invest. But if you follow what is very popular, the odds will not be in your favor. You need to think long-term, and you need to think differently.

Technical skills and knowledge are not enough to rise to the top. Believing in yourself is absolutely essential. You need to have conviction. Technical skills you can hire or outsource, and while these are important, mindset is the one thing that cannot be purchased. You must have great faith in yourself if you want to be successful in real estate.

Find mentors and guides to help you on your journey. When I began my career there were two developers in Israel that I worked for, and I learned so much from them. It was many years ago but they provided really good guidelines. The most important thing I learned from them is that patience is a big virtue in this business. The unexpected will happen and when it does, you must be patient.

My favorite book is the Bible. I don’t have too many strict routines, the only guarantee every day is that I go to work. Other than that, it’s hard for me to maintain a specific routine.

My final three pieces of advice are to (1) gain as much knowledge in your area of expertise as possible to achieve a competitive advantage, (2) trust in yourself and don’t let other trends convince you to do otherwise, and (3) be patient. Success in real estate requires patience.