Refocus On What We Can Control
As we count down the last few hours of 2022, there is a desire to focus on what is to come for real estate in 2023. In the last couple of years we have experienced inflation, constant FED rate increases, mortgage rate uncertainty, and reduced housing inventory. Let’s not forget to mention a global pandemic. It is worthwhile to slow down that forward thinking and reflect on what we already know about our businesses and have learned as real estate entrepreneurs.
I’m a consistent observer of but not much of a participant in RETwit. If one scrolled through the feeds from 2019 to now, one would surmise that most small-scale real estate investors and developers have been on one big winning streak. Realistically, I would argue that most of us have been trying to stand upright in what has felt like a gigantic bounce house that comes with a wet slide and randomly placed air blowers that shoot 50 mph winds directly at our faces.
When we experience this turbulence, which has become a constant state of being for a lot of us, there are truths we have to come to accept. These truths are that there are factors we can control and factors we cannot. To distinguish the two is to figure out the most straightforward way to succeed, and sometimes the most risk-adjusted ways even to fail. I’ve put together a short list for you.
Below I’ve put together a small list of factors we can and cannot control that you might be able to relate to or learn from.
A note: As you read this list, keep in mind that my experience has been as an acquisitions and redevelopment professional mostly in tertiary real estate markets where the availability of resources is more scarce than in primary and secondary markets. Okay, here goes.
Factors Outside of Our Control
Labor: There is a massive labor shortage in this country for every single trade, especially carpenters, electricians, and plumbers. It is the bleakest in the Rust Belt regions. Any architectural design planning that does not consider the local labor market is pure practice. The design process has to include these pertinent questions: Does the available and affordable labor have the ability to adequately digest the construction drawings as they have been drawn? Can the available and affordable labor understand the architect’s and structural engineer’s requirements and build it to spec? Can the available and affordable labor hire the necessary crew to build on schedule and to spec? And simply, is there even available and affordable labor in your local market at all?
Cost & Availability of Materials: In 2020 our supply chain was devastated and is now just recovering. If you weren’t in a position to warehouse materials when costs were down and availability plentiful, then you paid more and waited longer for materials to arrive. We quickly learned that we had to plan better for material costs overages of double and sometimes triple digit increases in a matter of months. And from personal experience, I learned the hard way that you have to include a clause for excessive material cost increases IN YOUR CONSTRUCTION CONTRACTS.
Legislative Risks: It is important to consistently take the pulse of your City Council and your State legislative body. Changes in zoning laws, rent laws and building codes can instantly affect how you underwrite your acquisitions and can upend your construction plan.
Inflation Rate: We have absolutely no control over the inflation rate but we can underwrite our deals to include a wide range of interest rate variables. If it’s time for you to refinance and Jerome Powell continues to close the monetary spigot, brace yourself for the best and hopefully you have a long-standing and deep relationship with a mortgage broker.
Factors Within Our Control
Execution: Are you thinking about the execution risks thoroughly? Based on those factors outside of your control, is the project completion even possible? Or will the scope of work require adjustments? How much will those adjustments affect your construction schedule and costs?
Business Financials: Do you have a strong financial foundation to shoulder risk? Can you financially back the delays and material cost increases while covering your internal overhead costs? You may need access to a healthy line of credit you can pull from quickly. Are you able to secure that line of credit?
Practical Experience: Beyond college degrees and reading real estate books, do you have the on the ground learned experience to navigate the uneven terrain of executing your business plans? Are you effective at managing people? Are you able to identify your weaknesses and hire the right person who will bridge that skill gap?
Communication: How are your communication skills when it comes to sharing difficult but important information with your clients, vendors, investors, subcontractors and community stakeholders? Having a good rapport with your employees and subcontractors is essential.
I’m a highly ambitious 39-year-old real estate professional and it has taken me some time to slow down and get a better hand on the factors that are in my control. The analytical part of me has always had a firm grasp of the factors that are outside of my control. Analyst are trained to reduce the risk of those factors by using financial modeling and analysis to visualize the micro and macro economic factors that could play out over the course of 2, 3, 7, 10 years. We are taught to think very far into the future. Even with all of that planning, there is no way to control most outcomes just because a financial model tells you what the outcomes should be.
I started in commercial real estate when I was 28 years old. I shifted from commercial investment sales and analysis into real estate redevelopment when I was 30. It is more typical to make that shift when you have a background in corporate finance, architecture or engineering. I was a young African-American woman in an industry that suffers greatly from a lack of diverse talent. I was missing many of the factors I needed to have a chance in the industry therefore I had to just throw myself into opportunities and wish for the best. The most important part I had limited knowledge of at the time was that the stakes increase drastically the more successful you become and the more people rely on your “expertise.” Mistakes begin to cost you much more. Therefore controlling what you can becomes imperative. So at some point, as you scale your business you have to also ask, “How could I, as a business owner, be a risk to others?” How can I be a risk to my employees, to my clients, to my investors and to the community I work in? This kind of self-assessment has to be ongoing. Making these adjustments helps us become more seasoned and professional entreprenuers who have the war scars to show for it.
We will be faced with many unknowns in 2023, but if we stay committed to improving the factors we can control we’ll be better prepared for whatever comes our way.
I wish you all a fruitful 2023! Let’s get it!