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Wrapping Up Our Updates to “The Wealth Cycle”

In the past few posts, we’ve focused on interest rates and the upcoming election’s effect on market velocity. We will probably get back to that again soon, but first, we turn attention back on our expanded 2024 update of our Wealth Cycle Series.

Our Wealth Cycle model was developed to synthesize our understanding of the investment decision making process as our clients move through life. As commercial real estate advisors, it is important for us to understand how real world market conditions impact investors based on where they are in life, both chronologically and situationally. 

By way of quick review the three-phase model starts with Wealth Creation, moves into Wealth Preservation and concludes with Wealth Distribution. 

The Wealth Creation phase is that time in our lives when we focus tremendous energy into making money by building our businesses and taking risks to accumulate capital for further investment. It’s that time in life when we keep the pedal to the metal and risk a speeding ticket or two.

In the Wealth Preservation phase we throttle back, take on less debt, think longer term and consider accepting lower returns to minimize risk. We may roll a stop sign or two, but we keep a closer eye on the speedometer. In this phase, we are getting older and may not have enough time to recoup big losses that can occur with riskier ventures or market down-cycles. 

In the Wealth Distribution phase we turn our attention to a future that will not include us. We create a plan for the distribution of what remains of our wealth when our days orbiting the Sun are over. The making of that plan often involves estate lawyers, tax lawyers, financial planners, accountants, insurance specialists and real estate professionals like us. We also have to make decisions about who gets what and who can competently handle our assets in our absence. This can be a very complex process that you, the investor, are wise to plan for and execute before the inevitable, as the resolving of an estate without a plan can be a messy and sometimes divisive exercise for your heirs. 

It is important to note that the three phases of the cycle are not completely separated in a way that you cross a threshold from one into the other. In reality, the Wealth Cycle is a continuum that you slowly move through over time. Thus, you can still be accumulating wealth as you are preserving what you already have, and you can be planning to distribute what’s left while you protect what you have accumulated, balanced against what you spend to pursue your desired lifestyle in retirement. 

It is also critical that you always know exactly what you have in all asset categories at all times, as the value of your assets are at varying degrees of risk depending on constantly changing economic conditions. In our decades of experience, we’ve seen too many real estate investors caught out by shifting market trends because they lost track of the market and where their properties fit into the competitive set. Once forced to take action, they suffered unnecessary losses that a solid strategic plan could have helped them avert. 

Also of importance is having the knowledge of exactly where you are in the cycle. Everyone’s situation is unique. You are no exception. Your net worth, asset allocation, level of liquidity, age, health and other quality of life considerations all figure into developing and executing a sound wealth strategy. For example, if you own a single industrial property that figures heavily into your upcoming retirement income, you should be keenly aware that after an 11-year run-up that ended in 2022, market pricing peaked, but a valuation correction is yet to occur. This could be your signal to sell at that peak to prevent a potential erosion of equity in such a critical asset. On the other hand, if your retirement funding is not dependent on real estate income and you own several buildings debt-free that you purchased 20 or more years ago, you can think longer term and decide to ride out another cycle. After all, you own irreplaceable assets that either you or your heirs can build even more equity in down the road. 

We estimate that more than 70% of non-institutional industrial building owners in Southern California own just one building. Most of those owners have seen a three-to-fourfold increase in their property’s value just since 2011. From late 2007 through 2010, those same buildings lost 40% or more of their value after the so-called Great Recession. 

Are we saying that is sure to happen again soon? No, but it could. Real estate values have always run in cycles, and we have been at the top of the longest real estate up-cycle in history since late 2022. That run-up, which has now lost momentum, was fueled by historically low interest rates, which for now, have gone away. Though, the Fed is signaling an easing of its monetary restrictions, and we could see rates tick lower soon. The 504 SBA mortgage rate has already fallen by a full percentage point to 6.04% in anticipation of Fed action. That could provide further pricing support. The point is: we just don’t know. So, if you are in the middle of the wealth preservation phase of your investment life and your building is integral to your retirement plan, then a move sooner rather than later might be prudent. This is when looking at your situation through the Wealth Cycle lens can be helpful.

Congratulations to all of you who have invested in yourselves, built successful businesses and acquired substantial assets along the way. When it comes to your industrial real estate, you can already declare victory. Many of you own properties that are worth eight to ten times what you paid for them. Good for you. You deserve every penny. But, at the same time, be keenly aware of where you are in the Wealth Cycle so that your portfolio is optimized to maximize wealth with appropriate levels of risk.

We are ready, willing and able to help you with your real estate assets and we work closely with those who advise investors in other aspects of strategic investment and estate planning. If your existing plan could use a fresh look or you need help getting started, we are just a phone call away.

Read the Full “Wealth Cycle” Series:

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