Q3 Commentary by Derek Waltchack

Why are men born with the need to test and to prove ourselves? Women may very well have similar tendencies, but since I am not one, I can’t speak to that. If you’ve raised boys, you know they can sometimes (always) be impulsive.  A thought pops in their heads, and boom! They are off with little thought of the consequences.  As boys grow into men we learn how to control those urges, but they never completely go away.

Case in point, over Columbus Day weekend we rented a house in Kowaliga at Lake Martin.  As I was sitting on the dock, I looked across the channel and saw another dock.

Hmm, I wonder how far that is? I wonder if I could swim there and back? You’re damn right I can swim there and back! Then, boom, “Honey, I’m going to swim over to that dock and back.”

“All the way over there?”

”Yes, all the way over there!”

My oldest exclaims, ‘you’ll drown! Don’t do it daddy’

Undaunted, I plunge into what I thought was ten-foot-deep water. Wrong.  My knees quickly meet my chest, as the water is in actuality four feet deep.  Not a great start.

I start swimming and tell myself to stay calm and just find a comfortable pace.    Halfway across the channel, I start to make out a couple of figures on the other dock—undoubtedly thinking, “Who the heck is swimming in the middle of the lake and why is he coming towards us?”

I start to feel really stupid. So as I reach the other side, I quickly stand up and say “howdy!”

Then I hear familiar voices behind me and discover my wife—who previously didn’t know how to drive the rental boat—was behind me.  The kids reportedly had a full-on meltdown and all started crying that I was going to sink.

As the “small world” of Alabama would have it, my wife knew the people on the dock, which made the whole situation somehow even more embarrassing.  Really . . . a grown man without life jacket swimming across a quarter of a mile channel with a bunch of sobbing kids following behind him on a pontoon.

But hey, sometimes a man’s gotta do what a man’s gotta do, right?

Now on to the news:

Being a real estate nerd, I like to scour the web for sources of market data.  During a recent internet-rabbit-hole-coma, I came across the following market summary (pay close attention):

PAY UP OR SIT ON THE SIDELINES:  “You can’t be an acquisitions guy without being optimistic. If you don’t meet the market, you’ll sit on the sidelines.”

Much of the “frothy” purchasing has been justified by availability of low-cost debt and spread investing. “ (If) buyers lock in long fixed-rate debt, net operating income just has to stay even, and they have a positive spread. In 20 years there can be three real estate cycles. At worst they break even.” Buyers also try to rationalize that higher construction costs have increased property replacement cost hurdles. “It makes them more comfortable,” says a smiling broker, who revels in recent purchasers’ frenzied bidding.

“Don’t put a price on whatever you’re selling, or you’ll leave something on the table.”

At best, (current) pricing offers no bargains and ignores the risk in market fundamentals, which just don’t jibe. Some buyers are visiting Vegas. What people are paying incorporates recovery and then some, leaving you tomorrow with a disappointing, very mediocre return, says an interviewee. “You’ll probably get what you paid for and the income you can collect in between.” In other words, investors may not court catastrophe with their acquisition strategies, but they can forget about realizing much appreciation. [TM3]

Sounds about right, doesn’t it?  Yes, but this was written in 2005!  Let that sink in.

History doesn’t repeat itself, but it does rhyme.

-Mark Twain

There’s not a single word in this article that doesn’t perfectly describe today.  So what does this tell us? For one, we’ve been here before!

Those unable to catalog the past are doomed to repeat it.

-Lemony Snicket

Since real estate is cyclical, you can use patterns to your advantage. One economist we pay close attention to is Dr. Glenn R. Mueller with Dividend Capital (  He publishes a quarterly cycle monitor which tracks fifty US MSA’s.  Unfortunately, Birmingham isn’t on his list, yet.  So coupling local knowledge and benchmarking some sister or bigger brother markets, I’ve come up with a chart of where I see the Birmingham market and the four major food groups:



As you can see, apartments have been and continue to lead the pack, followed by retail, industrial and office.   There is still some room for the latter three to run up.  But I’d be very dubious of the new apartment projects currently in the planning stages for the CBD/Southside area.  I think the demand to live in the core is almost limitless, but there is a finite number of renters who can afford new, urban construction rental rates. Tread carefully!

Below are our current best bets on how to play this market:

1. Great time to  reposition B’s to A’s.
Since the juice has been squeezed out of ‘A’ property acquisitions, consider buying a ‘B’ asset and spend the money to move it into the ‘A’ category.

2. Consider tertiary markets with resilient employment bases.
The major metros attract the most buyers.  So as pricing starts to exceed comfort levels, look to other markets where the yield is still attractive.  But do so with caution and look for markets, which have a durable and growing employment base.  We like markets that have a College or a University as the primary employer.  Think Auburn and Tuscaloosa.  But even a market like Athens makes a bunch of sense when you consider its size and proximity to the employment growth of western Huntsville/Madison.

3. Refinance now for the longest term possible.
Rates may never move up again, but they probably will.  Why not take that risk off the table and lock in low historic rates?

4. Develop industrial.
Last year over 150M SF of industrial space was absorbed in the US, the 2nd highest ever.   Amazon currently has 73M SF of distribution space in the US and by next year that number will grow by 20M.  The goal of E-commerce is to deliver goods and services the same or next day to all their customers.  So when Alibaba, Nordstrom, Macy’s & Wal-Mart build distribution centers, they aren’t building one massive facility.  Instead, they are building multiple centers close to their customers.  The effect of this trend will be monumental.

 5. Sit on some dry powder and wait.
This is prudent advice anytime, but the current cycle is aging.  This year capital flows are projected to reach or exceed 2007.  Nationally the NOI growth rate is well above its long-term average and underwriting standards continue to loosen.

Living through a complete real estate cycle for the first time is similar to my maiden swim across the channel.  You just don’t know what you don’t know. With time you learn to watch out for breaking waves as you breathe. You experience how it feels when exhaustion kicks in after the adrenaline stops.  And you learn when you get tired that floating on your back is an easy way to regain your strength.

When you invest in real estate it is vital to have a partner who’s been through a few cycles and understands how to play them.

My partner, Len Shannon, keeps reminding our team, “don’t do anything to mess up the good things we’ve worked 20 years to create”. To that end we are focused on selecting only the best assets in vibrant trade areas at or below replacement costs that will survive the next downturn.

I hope you allhave a wonderful fall and holiday season!


Derek Waltchack




Miller, J. (2005). Emerging Trends in Real Estate, 16. Retrieved from content/uploads/ULI-Documents/EmergingTrendsUS2005.pdf

I think the demand to live in the core is almost limitless, but there is a finite number of renters who can afford new, urban construction rental rates.

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by Derek Waltchack