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“The other thing that can happen in the next 12 to 18 months is that you’re going to see commercial real estate operators that basically can’t hold their properties. They’re running out of money, they’re crushed under the cost of the debt, and they are forced to sell.”
If it’s just a few properties succumbing in that way, some investor will swoop in and take it up, he said.
“But if you’re talking dozens, maybe 100s, every year, then that starts to change the economics a little bit and people might start selling at a lower price to avoid this kind of crash,” Holzmann said. “So eventually, I think the market will find equilibrium. But how is that going to come about? Through a change in the interest rate? Or a change in the supply and demand of vendors having to offload those assets? That I don’t know. But I do know that history teaches us that the market has to go back to some kind of equilibrium.”
Too big to want to fail
Given today’s economic scenarios, there are strategies companies can adopt to mitigate risks and/or capitalize on opportunities. Holzmann outlined the way RREAF approaches things: “RREAF is a large, institutional kind of operation,” Holzmann began. “We’re not like one of these younger entrepreneurs that can take crazy risks and make a killing. That’s not us. We’re a large business with a lot of investors and pension fund money, so we have to be very, very methodical about how we approach things.”
So what is RREAF’s approach? “The way we approach it is by hedging the risk,” Holzmann said. “We prefer to be in a situation where we paid for a rate cap and regretted spending the money, as opposed to being in a situation where we took on the risk without a rate cap and now, in so many words, we’re screwed because we have to pay so much money in debt and this whole thing doesn’t make sense. Companies like RREAF don’t take that kind of risk.”
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