Andy shares his knowledge on trending industry topics.
Q: What do you think people misunderstand about risk and return?
Andy: Risk and return are inherently linked. A successful outcome doesn’t always mean it was a good investment decision at the outset.
Many investors focus solely on returns without considering the risks taken to achieve them.
For example, if you bought a struggling company’s stock and it rose 5%, was it truly a sound investment? Perhaps you should have made 20%. Evaluating the risk-reward ratio is critical to assessing the quality of an investment decision.
Too often, people get excited about returns, but overlook the level of risk involved. Even if an investment performs well, excessive risk may mean it wasn’t a good risk-adjusted decision. Conversely, an investment that didn’t pan out might still have started off with a solid risk-reward profile.
Take Walgreens, for example. Investors who acquired a Walgreens property 4 or 5 years ago are likely losing value today because the company’s credit rating has declined, and coupled with the increase of interest rates, property values have been impacted. At the time, purchasing Walgreens at a 6% return was a reasonable decision, especially when alternatives were yielding 2%-3%. However, due to the company’s sales downturn and increased leverage requirements, the 6% return may no longer be attractive. Investors didn’t anticipate these changes at the time of purchase. A track record looks at past performance, but it doesn’t always reveal the full picture. Just because an investment worked out, doesn’t mean it was a good investment decision – understanding the risks taken and the external factors that contributed to the return is just as important.
There will always be an element of ambiguity in investing. The key is making informed decisions based on a thoughtful risk-reward analysis rather than simply chasing returns.
Q: Where do you see interest rates going?
Andy: The long-term fiscal sustainability of our economy and trade policy are key drivers. With national debt exceeding $36 trillion dollars and interest payments surpassing defense spending, it’s hard to see rates declining significantly without addressing budgetary issues.
Interest rates are closely tied to inflation. If inflation drops to 2%, 10-year Treasury yield could decline from 4.5% to 3.9%, leading to more favorable conditions.
However, factors like tariffs and global events add uncertainty to future rate movements.
Unforeseen events, like the pandemic, significantly impact the economy and financial markets. No one anticipated COVID-19, yet in just one month (from mid-February to mid-March 2020), it fundamentally altered the world. These types of disruptions are rare, but when they happen, their fiscal consequences are unpredictable and far-reaching. While another major event might not occur for another 15 years, the challenge lies in timing. Even if you anticipate the right issue, getting the timing wrong could deliver an unsatisfactory result.
Q: How would you summarize 2024?
Andy: 2024 was a year of patience. There was a lot of uncertainty in the market, but our portfolio maintained on average 90% occupancy, and we continued evaluating potential investment opportunities. Fortunately, a significant portion of our debt remains fixed, limiting our exposure to interest rate hikes.
Q: What property types will be in demand for 2025?
Andy: We anticipate strong demand for:
- Neighborhood shopping centers: With little new retail development over the past decade, neighborhood shopping centers deliver products and services to their areas that are not negatively impacted by internet sales and continue to draw foot traffic and drive tenant demand.
- Multifamily: Housing affordability challenges and limited supply will drive apartment demand.
- Small warehouse facilities: Large speculative developments remain unfilled, while smaller, well-located warehouses remain highly desirable.
