Did you catch the “Woodstock for Capitalists” event this year? I’m talking about the Berkshire Hathaway annual meeting in Omaha. I tuned in for the whole event. With Warren Buffett aged 93 and Charlie Munger approaching 100, any year could be the last year.
What Munger said about commercial real estate was troubling—but not surprising.
Munger had previously warned of a brewing storm in the U.S. commercial property market, with American banks full of bad loans as property prices fall. At that meeting, he reiterated his fear, and Buffett reinforced it.
For years, during real estate’s rising tide, investors clambered for higher and higher returns. They asked, “How much can I make?”
But the trend always reverses in time. Now investors are asking, “How much could I lose?”
It’s times like this when investors stop discussing returns and revert to discussing risk-adjusted returns.
Calling All Recovering Speculators
I’m a recovered speculator. A few decades ago, I focused solely on returns and ignored the risks. Now, my firm is obsessed with risk-adjusted returns, which is honestly an altogether different metric.
While risk-adjusted returns have always been the focus for great investors, there are certain seasons when unusual opportunities surface—deals that don’t present themselves when cash and profits are flowing like green Chicago rivers on St. Patrick’s Day.
We are in one of those rare moments right now.
Preferred equity provides numerous benefits, including greater safety from a higher position in the capital stack, immediate cash flow, management rights in case of delinquency, and a common equity cushion behind investors in first loss position as a shield against decreasing asset values.
To be clear, this is not the “preferred return” investors receive as part of their payout structure from syndicators. That’s great, but that’s not what I’m talking about.
These…