CRE Investment Yields: What’s in Your Wallet?

CRE investment yields.  The ephemeral dragon every investor loves to chase, so much so that investment loss severity risks that come with higher-yielding CRE investments get lost in the greed calculation until later when the investment yields sometimes become investment losses.  Investment requires risk-taking and some of the risks we used to take for granted like bankruptcy risk, foreclosure risk, maturity risk, investment fraud, execution risk and technology risk are no longer in the “baked into the pie” status.

If you want the higher-yielding investments in CRE income-producing properties you have to be proactive about investment loss severity risk management.  Whether you are exposed to future claims of investment fraud due to a lack of disclosure, maturity risk because you invested in a mandatory long-term holding period (like DST and other 1031 exchange investments), bankruptcy risk due to a future liquidity crisis that was unforeseeable, or any of the other risks that can create future losses, proactive management is now the approach you have to be willing to take.

Commercial Real Estate (CRE) bankruptcy risk reduction and management has been largely a reactive exercise to control loan and investment loss exposure using Big-Data and various analytics tools.  At a fundamental level, however; CRE bankruptcy risk reduction and foreclosure event management systems require a proactive approach to the task, as the chief causal element seems to almost always be tied back to forecasting local property market conditions where market disruptions serve to reduce revenues that lead to the liquidity crisis that ends in a bankruptcy petition.

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Typical 2-Year Life Cycle of Commercial Real Estate Market Disruption Event Impact

The opportunity comes in the form of market analysis and forecasting with a focus on market disruption events that play out in the form of changes in consumer purchasing preferences.  In the end, the consumer’s purchasing preference is the deciding factor on whether or not a given innovation or advancement offers a value proposition that is sustainable.  As the innovation or advancement gains market share it eliminates existing competitors’ market share in most cases.  This is a natural process that is the hallmark of a healthy market economy.


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