COMMENT OF THE DAY RUNNER-UP: HOW TO POSITION YOUR INNER LOOP INVESTMENT BUSINESS FOR THE COMING DOWNTURN 
“Cody, yeah I agree with you. If this isn’t the top of a market cycle, it’s damn close. If you bought low, now is the time to sell high. And do it without regret because you’ll never go broke by profit-taking. But even more than your Montrose assets, sell the stuff that you’ve got that is further east. In a downturn, there will be a flight to asset quality both on the part of capital markets and tenants. Montrose values will go down, but Greater Third Ward be much more volatile.
Use some of the proceeds to short high-yield bonds, use the remainder to reposition your outfit as an apartment management company. No matter how bad things get, there will always be a need for management companies, and this gives you a way to maintain the continuity of your career and to keep your ear to the ground. Then, in the worst of the down-cycle, while most everybody else is paralyzed and some are distressed sellers, you’ll have cash (hopefully a LOT of cash if that short position plays out for you the way I think that it might), a company, and a resume.
And when my prediction pans out and you’re fantastically successful, don’t forget whose crystal ball made it possible. I might need a job by then.” [TheNiche, commenting on Gibbs Boats on West Gray and Montrose Is Selling Everything Now] Illustration: Lulu
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Nice to be addressed in a CotD.
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I’ve sold most of our Montrsoe stuff. Down to maybe 150 units. Used the cash to buy just to the east. I figure if I wouldn’t buy at the prices people are paying today, I shouldn’t hold at those prices. If people want to pay $100k/unit to get a $900/month rental, feel free. I’ll buy a $30k/unit building that gets $600/month rents.
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Since the $30k/unit building would already support a purchase price of 2x with existing financials, I’m lead to believe the $30k/unit building has a much better chance of doubling in the next few years than the $100k/unit Montrose stock that is already pushing it in terms of being operationally profitable.
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Yeah. It’s east for me. Montrose investing is a vanity play for people that wnt to own in Montrose vs being concerned with operational profit (same with buying apts in San diego. No return, “but.. It’s in San Diego!”
If you’re generally optimistic about the resiliency of the regional economy, then that’s a valid perspective. But I wouldn’t be so quick to dismiss Montrose as a vanity play, either. In a risky business environment, capital pays a higher premium for quality assets. Its important to understand where the money is coming from. Although I can think of a few exceptions, most people reserve vanity for their own home rather than their investment portfolio.
TheNiche: the only reason I see Montrose as a vanity play is the returns are so low vs stuff just outside of Montrose. but people want to own “in Montrose”. Nothing wrong with that. My house, office, and several invest,nets are in Montrose. However, at the prices people are paying, they’re not buying for the return.
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Apartment prices have doubled. Rents haven’t. The CAP rates in some deals I’ve seen, optimisticly, just exceed cost of debt. Old class C stock is at $100k+ door. On 1-4 family it’s even higher. So if rents and return don’t justify those prices, what does?
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Hope for appreciation I guess. But for the price to appreciate, rents would have to go WAY up. And soon you’re running into class B PPSF levels.
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But what the hell do I kmow (seriously). I could be way wrong and maybe selling some Montrose stuff to buy east will blow up in my face.
In addition to vanity, consider safety/fear and ambition as powerful motivators; and ignorance as the spoiler.
Somebody that’s looking at one of your Montrose assets (if its on a decent bit of land) is probably looking at it as land; and in that case, its value is a function not of Class C rents but rather as a function of expected future Class A+ rents for whatever might be the highest and best use; but its also a function of every other input toward that project, including the availability and cost of debt. Beware those that extrapolate and project very recent trends forward into the long-term; those people are cursed high bidders, and sadly, more reasonable investors learn quickly to emulate those behaviors just in order to get any deal done at all. It’s a dangerous behavior, and its not terribly difficult to draw comparisons between a fee developer and a crackhead. Give them money and they’ll build; it doesn’t matter whether its wise. They don’t care. Their incentives lay askew from economic reality.
The other side of the same coin is a fickle consumer. Basically, it’s Shannon. We know about Shannon, so I don’t think there’s any need to bother with more than a summary description. They’re sheltered, boxed-in, and believe certain neighborhoods to be bulletproof regardless of price or circumstance; but they’re also in the position that they have something that is worse losing (whether its money or kids or something else), and so they let their possessions own them rather than the other way around.
Even though the fickle consumer and the shrewd developer rationalize their decisions very differently, on different time horizons and with very different considerations, they all meet in the middle. They’re partners, in an often grotesque sort of way.