For many people seeking to put their money to work on their own behalf, investment interest may be limited to traditional commodities such as stocks or bonds. However, according to financial professional Christopher Linkas, those who ignore the lucrative field of commercial real estate are doing themselves a disservice for a variety of reasons. Commercial real estate typically concerns itself with refers to buildings or land intended to generate a profit, either from capital gain or rental income. To get a better idea of how these types of investments may benefit your portfolio, read Linkas’ tips below.
Christopher Linkas began his investment career immediately after graduating from Bowdoin College in 1991. Although he found post-college opportunities limited by a recession caused by the savings and loan crisis, he was still able to start on a path that would lead him to investment expertise. In fact, he actually credits that recession with helping to sharpen his investment prowess. During that time, loans were being offered at heavily reduced rates to help stimulate the economy. There was therefore ample experience to be gained for enterprising young professionals interested in learning the ropes of the investment world.
In Linkas’ case, he wasted no time in finding work at a consulting firm that dealt in repackaged loans. From 1997-8, Linkas worked as a senior deal team leader for RER Financial Group, where he was responsible for opportunistic real estate debt and equity investments. In this position, he also managed the third party due diligence and the underwriting associated with distressed assets (totaling more than $4 billion of book balance for groups such as RTC, FDIC, and other opportunity funds.)
For the next five years, Linkas served as a vice president at one of the largest and most respected financial institutions in the world, Goldman Sachs. In this position, Linkas used his previous experience underwriting and securitizing to facilitate the commercial mortgage joint venture between Fixed Income Group and Investment Banking Group – this position allowed Linkas to perfect the art of syndicating and securitizing large commercial mortgage loans.
In his current position as Managing Director of the Fortress Investment Group, Linkas has further shown his ability to manage complex monetary and real estate systems. Since 2012, he has served as the European Head of Credit – based in London, Linkas is responsible for opportunistic principal investments in the United Kingdom and European regions including the UK, France, Germany, Spain, Italy, Greece, Switzerland, Benelux, Scandinavia, and Ireland. Linkas’ previous experience from Goldman Sachs and RER continue to be of use in his current position, as his investment areas include commercial real estate, shipping, renewables, secondary LP interests, non-performing loans, leases, performing asset-backed investments, servicer/platform investments, and corporate loans and securities. Prior to his position in the UK, he was based in New York and chaired the commercial real estate area of Fortress. In this position, he focused on opportunistic debt and equity real estate investments in North America.
Why Commercial Real Estate
Christopher Linkas’ experiences in the field have shown him that commercial real estate offers some attractive benefits over other forms of investment. One problem for those who contain their investment ventures to the stock market is that they are wholly dependent on the market for their gains. If an event occurs to affect world markets, investors will be forced to ride that wave along with everyone else. Conversely, the investment professional who diversifies their holdings into commercial real estate along with stocks and bonds will find themselves better insulated from market fluctuations (Register.FCA.Org.UK). This investment technique, therefore, reduces risk because it allocates investments in several categories which react differently to events and helps reduce significant fluctuations as a result.
It is, however, impossible to eliminate value fluctuations altogether, even when diversifying into real estate. In order to work toward this end, Linkas recommends understanding the factors that can also affect how severely values can fluctuate. An example of these factors includes the type of property one is purchasing, for instance, properties that experience demand seasonally versus those that have year-round demand. Additionally, properties that are found in densely populated areas, such as urban centers, tend to fluctuate less with market forces.
When investors are looking into commercial real estate options, there are many to choose from: hotels, multifamily apartment communities, retail shopping centers, office buildings, or even storage facilities (to name a few.) Many people look for investments outside of or in addition to traditional equities such as stocks and bonds in order to increase financial gain, expand their portfolios, or diversify their holdings. While navigating these offerings, investors may notice the unique stories associated with each deal – often, people say ‘if these walls could talk,’ and this is true of commercial properties. Even though each property has its own unique story, it is also important for investors to keep in mind the amount of risk associated with these deals. Understanding these differences is a crucial factor in deciding whether or not to proceed with a deal – factors such as property type, location, and the profile of tenants are important. Investors also must choose a project based on their investment timeline and love (or lack thereof) of risk.
Every property may have its own story, but different types of commercial real estate deals have different attributes as well. The multitude of properties investors can choose from, including retail shopping centers, business/office buildings, apartment communities, single/multi-family units, and so on, each has a varying degree of risk associated with them. These risk levels also show themselves in different ways and at different times, so it is essential for investors to get a clear picture of any potential deal before moving forward with it. Workforce apartment communities, for example, are generally considered less volatile than hospitality properties and are not as subject to changing market conditions. Another important area for the consideration of a deal is the type of market that is desired, both in terms of property type and location. Primary markets usually have lower risk than secondary and tertiary markets – these markets are often more susceptible to market cycles and demand fluctuations.
Imagine for a moment you are an investor looking into commercial real estate and multiple deals are presented to you in a variety of locations. When comparing an apartment building in downtown Manhattan or on the Upper West Side, the figures (or capital) and risk involved would be much different from an apartment building located in the suburbs of Chicago. Core, highly desirable markets will tend to have smaller vacancy rates due to their competitiveness, and will also tend to have smaller market fluctuations. When evaluating a potential real estate deal, it is also important to consider the business plan or proposed business plan for the property, as this may determine the timeline associated with the project and what sort of capital is required. The business plan could be relatively straightforward (such as a simple purchase of property) or as complex as building a property from the ground up. Business plans should be approached with a certain amount of trepidation in order to ascertain the amount of risk, capital, and time associated with any given project. Once the plan is sorted through and discussed with investors, the project can successfully move forward. When evaluating risk and other factors, however, Christopher advises that commercial properties can be broken down into three types that vary by risk and are suitable for different types of investors.
The first property type identified, core investments, are generally considered to carry the least amount of risk – this is because they often target stabilized, secure, and fully leased investments in major core markets. Properties included in this designation tend to have long-term leases to high-credit tenants. These properties are also Class A buildings and are located in very desirable locations. As the adage goes, “location, location, location” – this is certainly true for core investments. Core properties are often well kept and require little to no attention or improvement from new owners, so these properties do not experience much turbulence in terms of price – rather than falling or experiencing appreciation, they provide stable, predictable cash flow with relatively low levels of risk. Investors who show interest in core properties usually seek capital preservation and long hold periods (which also warrant low leverage acquisitions often.) When comparing these investments to the other two identified types, they may seem less attractive. This is not the case, however, because investors value their longevity and relatively consistent cash flow. These investments also hold less risk when compared to corporate bonds and publically traded equities.
The second property type highlighted by Linkas is called value add. These commercial real estate investments usually target properties that have in-place cash flow but differ from core investments because they seek to increase the property’s cash flow over time. This can be done by making aesthetic or structural improvements, or repositioning the investment in the marketplace – once these improvements are made, the property owner can seek to sell the asset(s) in order to capture the resulting appreciation in value. Operators of these properties often employ the use of medium or high leverage to finance projects and increase the return to either themselves or their investors. Typically, successful value-add projects will add a higher financial return to investors than core investments because of the improvements added to these properties – these projects do have a higher risk, though, because at the time of acquisition these properties are not operating at their full potential, whether it be because of physical or structural improvements. Sometimes these properties are also not fully leased or have below-market rents, which can hinder a higher cash flow return. Despite these pitfalls, value-add projects can boast a perfect balance of in-place cash flow and potential monetary gain.
The final category Linkas mentions is opportunistic real estate investments, which follow the value-add approach but take it a step further. The main difference associated with opportunistic versus value-add is the amount of risk – opportunistic properties usually need significant rehabilitation – either physically or structurally – in order to gain an increased cash flow or higher selling price. Many instances of opportunistic properties involve fully vacant buildings, or more difficult, raw land the investor will need to build from the ground up. If investors are successful, these opportunities can be the most lucrative – on the flipside, however, these properties can also be disastrous from a financial perspective. The people involved in these projects often employ the use of high leverage and are privy to high-interest rates and less favorable debt terms. Even if an investor has the financial means to acquire a property, debt terms and interest rates can be worse than they would be for more stabilized properties.
Though the above advice from Christopher Linkas is born out of his early work in the field of investment, it is perhaps helpful to see where that expertise has led him in his advanced career stages. Currently, he is the European head of credit for a twenty-person group based in London. His group, responsible for opportunistic investments in the UK-Euro regions, has focused on a variety of investment categories throughout the area. Some of these specialties include secondary LP interests, non-performing loans, shipping, leases, and renewables. He and his team hold numerous investments in the world of commercial real estate and his previous advice stems from his first-hand experiences in the field.
Though it is tempting for investors to stick only in the areas in which they have experience, there is a great deal of value to be gained from pushing the boundaries of their areas of operations. This practice will not only open new opportunities but will also help to diversify holdings and protect against variance. If you have an interest in the field of commercial real estate investment, the above tips from investor Christopher Linkas can serve as a jumping off point to getting started. With that knowledge in hand, investors can proceed with further exploration into the potential benefits of this investment vehicle.
According to the ninth annual Akerman US Real Estate Sector Report, there are a number of trends currently occurring in the commercial real estate (CRE) field – the report has been tracking CRE trends for nearly a decade, and identifies six trends amongst top executives in the field.
- Technology and taxes play an important role in the trajectory of CRE over the next three years. 48 percent of executives surveyed said the advent of technology and technological advances are one of the most important factors that influence CRE developments and investments. The survey also says 42 percent of executives say the re-writing of the US tax code plays a crucial role in real estate developments, as the US is in the process of the most comprehensive tax code rewrite in 30 years.
- Job creation in 2018 is up, which shows executives that strong job growth signals opportunities in real estate. Two-thirds of those surveyed said that job creation under the Trump administration will either marginally or significantly increase in 2018. While this may be the case, these executives seem much more confident than skeptical, with only 5 percent of executives stating they think job creation will be lower in 2018 than in 2017.
- Akerman’s data shows that foreign investors are continuing to aggressively peruse US assets in real estate, and executives say overseas investment levels are at a record high. In addition to an increase in international interest in US-based properties, the largest increase from the Latin American sector will come from Mexico and Brazil. This data shows confidence in foreign capital.
- Global economic worries, especially in the Middle East, make 29 percent of executives worried, and 46 percent of respondents say they are bullish but not care-free about the rising interest rates in the US, and the impact they will have on American consumers and investors alike.
- Multi-family units are king– On a sector-by-sector analysis, the most active real estate market segment according to survey respondents are multi-family units, with 63 percent of executives making this distinction – this is a stark contrast from last year when 43 percent of commercial real estate leaders said single-family units would outperform multi-family developments.
- When comparing the sources of equity and debt for real estate deals, private equity and banks remain at the top. More than half of the people surveyed said private equity remains crucial, and 48 percent said banks are the leading vehicle for real estate-related equity and debt.
Overall, 70 percent of the executives and investors who were surveyed say 2018 will be an optimistic year for the CRE market, which is a staggering 25 percent jump from previous years. Professionals like Christopher Linkas are deeply steeped in the traditions of the commercial real estate market and understand the fluctuations and nuances of the market. With years of experience, Linkas continues to navigate the complicated – yet lucrative – waters of the commercial real estate market.
More about Christopher Linkas at https://www.crunchbase.com/person/chris-linkas