RISING RATES, NEW OPPORTUNITIES

We’ve now seen a full decade of very low interest rates, thanks to the financial crisis and the great recession that followed. That inexpensive money has fueled a boom across asset types — stocks, bonds, and real estate have all risen together, buoyed by a flood of cheap cash. But now the tide is coming in, and it looks like interest rates are on the rise.

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Higher interest rates can bring new investment opportunities, for those who know where to look. Several years ago, we closed many of our best deals during a period when rates rose. Rising rates created a class of determined sellers looking to sell quickly before rates rose further. Many of the most determine sellers are developers with other ongoing projects they need capital for. For these deals, Alliance moved quickly and negotiated fantastic deal terms.

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Over the last decade, a large percentage of investments, regardless of class or quality, appreciated in value. But in a higher interest rate environment,  it’s increasingly important that every new investment have strong fundamentals. With more expensive capital, only truly productive assets are appealing.

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Fortunately, Alliance has worked hard to stay disciplined during this era of low rates. We’ve made many deals, but we never jumped in just to have a piece of the action. Every property we buy has great fundamentals, and we believe we’re well positioned for the coming period of higher rates.

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Unlike some false alarms from the financial media in recent years, more and more signals are pointing to a higher interest rate future. Unemployment and economic growth have maintained a solid trajectory, and the fed is signaling more rate increases at the same time that the US Treasury is borrowing a lot of money. With all the indicators increasingly pointing at higher, rates, I see more of those determined sellers coming out of the woodwork.

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Interest rates are still substantially lower than they were before the financial crisis, so they have plenty of room to run. While this new environment will be hard on highly leveraged investors, those others, like Alliance, will see great opportunities. With great access to capital, and the patience and discipline to wait on motivated sellers, I’m feeling very optimistic. As Warren Buffett said, only when the tide goes out do you discover who has been swimming naked.