In today’s uncertain economy, many investors have turned to real estate as a stable alternative to the sometimes turbulent stock market. Unlike stocks, real estate is a tangible asset that investors can touch.

The current state of the stock market, combined with low interest rates and good internal rates of return, has made the commercial real estate market very attractive to investors. Retail real estate, in particular, has become a popular sector among investors of all types, from private investor groups to large public companies, making acquisitions competitive.

Given the condition of the market, with high demand causing prices to skyrocket, a real estate operating company (REOC) needs to adopt a degree of creative thinking and become more flexible to find opportunities. Some real estate companies have found it beneficial to refine their investment models, but it is important to achieve flexibility without sacrificing the business’ core strategy and criteria for investment.

For example, some REOCs are looking at non-traditional properties to add value to their portfolio without deviating from core investment standards. As always, these “out of the box” investments involve slight risks, and it is crucial to look at the big picture before making a final decision.

Some real estate firms are also buying properties in alternate markets or overlooked urban infill locations. In a major market such as Chicago, for instance, there are many underserved neighborhoods that are overflowing with opportunity. While the risk factor is certainly higher than investing in traditional properties, the potential to make a profit from a smaller-than-usual or an unorthodox acquisition may be much greater.

REOCs also may need to work harder than usual to get in the front lines of opportunity. It is not uncommon to spend more on advertising, or do more networking or cold calling than in the past to uncover investment opportunities that are off the market’s radar screen.

Furthermore, some REOCs are recognizing the need to restructure themselves and their services to fit today’s market conditions. For instance, some firms are expanding into other markets to see more investment opportunities.

Lastly, and perhaps most importantly, REOCs are remiss not to focus on and improve what they already own. Focusing on tenant-lease renewals, attracting high-paying tenants through redevelopment and/or effective leasing, and maximizing cash flow by refinancing at today’s low rates can keep a company busy while preserving or increasing profits. Regular improvement of current properties allows a better chance of retaining tenants, adjusting the tenant mix and attracting additional tenants.

The successful REOCs will be those whose standards and goals are never compromised, no matter how many investors raise the ante on attractive properties. Keeping a safe distance from transactions that lack strong fundamentals is a reliable rule of thumb. The instant gratification of buying now does not always translate into a sound investment. Property investors need to ask themselves what a prospective property will look like in 5 or 10 years. Will the location have become a developer’s nightmare? Will the community have changed so much that the property’s tenants are no longer appropriate? After all, no deal is better than a bad deal.

What we all want is the right deal. In today’s market, smart real estate companies are becoming adept at identifying the right investment and development opportunities at the right price, with an appropriate level of potential upside. Retail real estate investment opportunities are out there but, for now, they are not necessarily in the same types of locations as they used to be.

Andrew Hochberg is managing principal of Chicago-based Next Realty.


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