The Siren Call of Real Estate
As the third quarter ended pretty much every US equity market hit all time highs. There is plenty of debate as to the reasons, but maybe it is simply a result of where we are in the economic/business cycle. The media continues to speculate about how much higher the markets will go before a sell off. This is a time when some are looking for investment opportunities outside the public markets. Here are a couple of examples in the broad category of private real estate.
On Friday the Wall Street Journal had an article about Amazon’s founder Jeff Bezos, who is now worth about $80 billion. Bezos plans to build a second Amazon headquarters somewhere in the US, complete with a purported 50,000 jobs making Bezos a figure to be courted. He likes to own real estate. One of his holdings is a 300,000 acre ranch in West Texas. If you follow Jeff Bezos’ lead maybe raw land is a place to park money? West Texas might not be your cup of tea but there are many other options. For example, property in the panhandle of Florida can be purchased for “only” $40,000 a front Gulf foot. These two examples, the vastness of desert space in Texas or sugar white sand (at a price) in the South, represent extremes of raw land that can be bought by stock weary investors.
Another possible real estate investment opportunity is the purchase of severely distressed property. I grew up on the coast of Mississippi and had no choice but to develop expertise in preparing for hurricane. I have never, however, acted on the temptation to invest in the post hurricanes recovery. Over the last thirty years there have been several opportunities for capital deployment in hurricane damaged property, including New Orleans post Katrina, Biloxi after Camille, and Charleston following the damage wrought by Hugo. Of course, at the time each situation was highly speculative, but each situation offered a unique opportunity for investors.
It was probably inevitable that we received a call this week from an opportunistic real estate investor looking to do something in Puerto Rico. What’s not to like about an island with 320 miles of beautiful coast line and soaring mountains rising to 4,400 feet? Some may raise the moral question of whether this is taking advantage of the locals during this time of deep crisis. However history shows that capital is needed in these situations to generate jobs and rebuild. That would seem to be the view of Elon Musk and Tesla, who could potentially help get the country’s power grid back online. With an island that has $80 billion in defaulting debt, an unemployment rate of 12%, and an estimated 45% of the population living below the poverty line, new capital in a post hurricane world should be welcomed.
Our caution though is to be very careful when considering alternative investments. The ideas mentioned above are highly speculative, and illiquid. If you want to diversify outside of the public markets, we should definitely talk about developing a clear strategy which matches your financial objectives, your liquidity needs, and your risk tolerance.
Carl Gambrell
