Preparing for the Value Correction: Why it May Make Sense for Some Investors to Invest in the Current Climate

Market Corrections and their Potential Impact on Private Equity Real Estate Investors

The private equity market can be a tricky place to be right now. Valuations are down, exit opportunities are evolving or limited, lenders are more cautious, and as investors look to the future of the real estate market in 2023 and beyond, it is increasingly clear that there is likely to be a value correction on the horizon. Every economic cycle brings both highs and lows, and there is always the potential for a correction in any investment market. While it is nearly impossible to predict the timing or magnitude of a correction, it remains important for investors to maintain awareness of their existing investments while considering the possibility of being opportunistic as new distressed opportunities may arise.

When preparing for value correction, there are typically opportunities to be had that may be appropriate for some investors. For example, an imbalance in market supply and demand for private real estate may cause a reduction in real estate values, leading to sellers that are more willing to negotiate pricing reductions. Concurrently, many buyers may elect to wait on the sidelines for market prices to normalize, resulting in less competition and more opportunities for those who are ready and able to invest in today’s market. Investing in real estate is inherently risky, and this is especially true in the face of uncertain market conditions. It is important that anyone considering investing in real estate understand that the risks include a complete loss of capital on any investment, and consult with their own investment, legal, and tax professionals to understand all the potential risks, rewards, and implications of investing in real estate.

Overall, it is important to have a long-term perspective on real estate investing. Many opportunities take time to come to fruition, so it is important not to get discouraged if things don’t go as planned in the short term. There is still potential for positive results in the private real estate market with a little patience and perseverance.

In this blog post we’ll look at some potential benefits of participation in the current real estate market that may result in a successful outcome for some investors on the other side of the anticipated value correction.

Steps Investors May Consider to Prepare for a Market Correction in the Private Equity Real Estate Space

The below is a non-exhaustive list of factors investors may consider to protect their investments in a market correction. Proactive steps and management can take many different forms and flavors. Here is a short list of some examples of possible investor considerations in anticipation of a market correction:

• Geographic Distribution: To balance geographic exposure, some investors may choose to invest in assets across a number of markets. Varied geographic exposure may reduce the impact of any one particular investment underperforming.
• Capitalization: When reviewing new opportunities, investors may want to ask the sponsor how they are capitalizing their operating and interest reserves to cover carrying costs and any unforeseen changes in the business plan or interest rates.
• Debt: With interest rates having increased over the past several months and lenders tightening up their underwriting requirements, investors may want to ask sponsors about their relationships with lenders and strategies for seeking debt. A sponsor’s relationships with their lenders may allow them to obtain favorable financing terms for a given opportunity.
• Flexible Business Plans: Opportunities with flexible business plans that are adaptable to moving market conditions may enable investors to mitigate potential losses by giving sponsors the ability to quickly adjust business plans to achieve their highest and best uses, even as market conditions change.
• Sponsor Experience: Investors may want to ask sponsors about their track record and take into consideration whether a sponsor has executed across a number of business cycles.
• Liquidity: As market conditions change, there is always a risk that an opportunity may require investors to contribute additional equity to meet any unexpected cash shortfalls. Investors may decide to inquire with potential sponsors about their liquidity to better understand exposure to this type of risk.
• New Opportunities: Private real estate sellers may be required to sell at less-than-desirable prices which could create unique opportunities to purchase properties at an attractive purchase basis. Some investors may be in a position to take advantage of the potential for opportunistic acquisitions that may come up based on market conditions.
• Keep Informed: Staying informed on economic and industry trends helps investors make informed decisions.

Potential Benefits of Being Proactive Rather Than Reactive

Proactively managing one’s portfolio during a market correction and investing in unique distressed opportunities as they arise could allow some investors to reduce risk and volatility. It is important to remember that market corrections are a natural part of the market cycle, and that real estate ownership is a long-term investment. It is human nature to be fearful during a market correction, but investors that display an ability and aptitude for proactivity could be in a better position to weather the storm. It is important for investors to carefully weigh their options and make decisions based on what will be the best for their portfolio based on their individual circumstances in the long term. Investors should consult with their own investment, legal, and tax professionals to determine the best strategy to navigate market conditions based on each investor’s unique circumstances.

If you have concerns about your investments or would like to discuss how we at Fairway America are navigating these volatile markets, please do not hesitate to reach out. We are always happy to share our insights and perspective into navigating choppy waters with investors.

Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include, but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions. All Securities are offered through North Capital Private Securities, Member FINRA/SIPC.