April 19, 2024

Anybody who’s been investing for a while has probably noticed that the economy is highly cyclical. Interest rates rise and fall. Booms alternate with recessions.

Successful real estate investors pay close attention to these cycles.

An old friend once asked me, what’s the difference between making the right call at the wrong time and making the wrong call? The answer is nothing.

The “right” moves are only correct if they’re also at the right time.

Lately, the economy has been in a relatively unusual place. High inflation led to high interest rates, but we haven’t had a recession. So far, it appears that the Fed has achieved its soft landing.

High interest rates made it expensive to borrow, while also raising the hurdle rates that investors demand for the use of their capital. Meanwhile, asset prices have taken a while to come down.

Because debt financing is so important, real estate is particularly sensitive to interest rates. Higher rates mean lower prices, but sellers are only now accepting this reality.

Many sellers have been holding out, hoping that quick interest rate cuts would restore their properties to their highest value.

But the Fed recently declined to cut rates. Loans are coming due that will need to be refinanced at higher rates, which pushes owners to sell. Also, buildings need maintenance, management, taxes, and insurance. Waiting for a better price on a building you want to sell can get expensive.

Because Alliance has so much experience with these cycles, we’re ready for these unusual market conditions. Last year, we didn’t do very many deals, but we did raise capital. We’re sitting on dry powder, ready to pounce on great deals.

Our foresight in stockpiling capital calls from investors who are ready to invest when we find the right deals means that now we can make offers in cash. Sellers love these offers, because they know we’re serious and we can close as soon as we’re satisfied with the diligence phase.

And our deal pipeline is full of opportunity now. We have several great properties in the diligence phase and quite a few more good prospects earlier in our vetting process.

When interest rates eventually come down, we can take out debt. Asset prices will rise, but we will already have bought some great properties at great prices.

This is a transitional period in the economic cycle, and times like these are full of opportunity. It’s a matter of knowing what the right move is for the current conditions.

The great returns Alliance delivers for our investors come from careful attention to economic cycles and disciplined capital allocation. We’re conservative with leverage and liquidity management. We always do meticulous due diligence. And we never close a deal unless the numbers truly work.

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