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Published April 2022. Updated October 26, 2023. 

What would you do if you made an investment that lost $11,000,000,000? Yes— that's not a typo. A BILLION dollars.

Or how would you respond after pursuing a new tenant only to learn they decided to lease from your competitor? How would you determine why your offer to purchase an investment property wasn't accepted by the seller?

Blowing an investment, being outbid, or losing an opportunity to your competitor isn't easy or fun. However, losing allows every investor to step back, reflect, be humble, analyze, assess, and ask the hard questions: What led to this outcome? What could have been done differently? What improvements can be implemented to ensure success next time?

Today, we'll talk about what Baltimore commercial real estate investors can do when an investment strategy doesn't go as planned. Our strategies for profitability give us a unique perspective on overcoming and avoiding losses.

An Example of (Significant) Investment Loss

In early 2021, at Berkshire Hathaway's annual meeting, CEO Warren Buffett announced that the company earned $42.5 billion in 2020. Nearly 100% of all investors would love to earn that much in one year.

However, Buffett also acknowledged that the results included an $11 billion write-down of its investment in Precision Castparts Company (PCC), an aerospace parts supplier that Berkshire purchased in 2016 for $32 billion.

Buffett said, "I paid too much for the company. No one misled me in any way. I was simply too optimistic about PCC's normalized profit potential." He added, "I was wrong… in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it's a big one."

Now, to you or me, an 11 billion dollar loss is unfathomable. It would ruin even some of the most wealthy people in the world to lose that kind of money. However, we know that Warren Buffet hasn't been suffering in poverty since this loss.

While we don't know the details of what happened next in this specific experience for him, we can assume that as an experienced investor and very wealthy man, he did a few things to figure out what went wrong and take steps to avoid it again.

Even if you aren't investing billions of dollars in multi-tenant properties, we can move forward from an unexpected investment income loss for a better outcome next time.

Close-up of hand holding magnifying glass, Kenwood Management insights into an investment loss autopsy concept.

The Investment Autopsy

So, what was Buffett actually doing here? He acknowledged the outcome, took responsibility, was humble, reflected on what led to the loss, and recognized how to prevent repeating the mistake.

Determining the causes of a loss should be a process, much like a medical examiner performing an autopsy on a cadaver. It should be without emotion, non-accusatory, clinical, harsh, but also honest and eye-opening; it can provide an investor with valuable insights to help ensure future successes and long-term portfolio profits. 

There's no need to wear latex gloves, but let's examine the process of performing an autopsy on a blown investment as well as methods of prevention. 

Blown Investment Dissection Points

To start, ask (and answer) some questions about the investment and outcome. Here are a few questions and points to consider.

1. What was the basis of your investment thesis?

When investing in a publicly traded stock, your decision is generally based on a belief that the stock price is undervalued or that a catalyst will increase the company's earnings.

Occasionally, a good company's stock price can be depressed due to overall negative investor sentiment in the sector (i.e., industry) or overall economic issues, such as a forecasted recession. Alternatively, you may believe that a company's earnings will increase due to innovation, adding a new market (such as international), or buying a competitor.

These types of catalysts typically increase stock prices, but what if that catalyst doesn't occur as expected? Investors should regularly review their investment hypothesis, consider more recent events and market conditions, and reevaluate if their beliefs are still valid.

Investor sentiment in various real estate property types can shift, as it does with the stock market. For example, between 2000 and 2010, investor interest was much stronger for office buildings than it was for warehouses. As a result, Kenwood Management focused on acquiring warehouses during this time.

However, after 2010, investor sentiment flipped from office buildings in favor of warehouses, leading to warehouse pricing reaching historic high levels. Kenwood's investment focus has tended to be contrarian but also founded on specific criteria and metrics. Historically, this has produced high returns for our investors.

2. Reconsider your underlying assumptions.

Every investment decision is based on certain underlying assumptions, such as corporate sales growth for stocks or improving occupancy or Net Operating Income in real estate. Many publicly traded companies inform investors of forecasted sales projections during their quarterly conference calls.

At Kenwood, we regularly compare current lease assumptions and operating costs against our original underwriting model to ensure we remain on plan.

3. Did you have realistic expectations on timing and returns?

Although investors hear stories of explosive returns over a very short time period, this rarely occurs.

Recognize that your investment return goals may take longer to realize than initially thought. It doesn't mean your investment thesis is wrong, but it may take longer to materialize fully.

Kenwood's real estate investments are generally long-term focused. By not selling into an unfavorable market, we have been able to enhance investors' returns, especially when compared to the S&P 500.

4. Did external circumstances change?

An investment theory is always based on certain external assumptions, such as interest rates and GDP growth. However, as external circumstances change, they will impact your investment.

All investments carry some level of risk that is outside an investor's control. The overall economy is the prime example.

In our real estate business, Kenwood Management has developed many investment criteria metrics. Being disciplined and focusing on market fundamentals reduces the likelihood of investment mistakes, even as interest rates increase.

What Are Some Types of Commercial Real Estate Investment Losses?

What do we mean by losses when thinking about commercial real estate? Here are a few ways investors can lose money in real estate with some insights to overcome these losses.

Lost Real Estate Acquisitions

When commercial real estate properties are being sold in a widely marketed format, brokers utilize a "blind bid" as opposed to an open auction where every bidder knows the highest bid. Since blind bids are made without knowing the high bid, it can result in an investor's offer being significantly higher than other offers.

To avoid this, be conservative but realistic, in addition to being prepared to lose often. At Kenwood, our experience has been that we are outbid at a 10:1 ratio. These are certainly not "hall of fame" statistics, but winning blind bids too often means continually overpaying, and that is not a long-term successful strategy.

Inflated offers can result from many factors, including utilizing overly optimistic underwriting assumptions, such as higher market rent or larger rental rate growth. This was Buffett's error with Precision Castparts Company.

Some real estate investment companies partner with foreign investors who frequently have lower costs of capital and are willing to accept lower returns. Section 1031 exchange buyers can also be more aggressive because the tax consequences related to not reinvesting their funds can outweigh the need for a normally desired return level.

When Kenwood Management is not the high bidder, we look to perform an investment autopsy by contacting various sources. Investment sales brokers will generally share some information with us, but we often seek information from multiple sources to fully understand where our analysis fell short.

Missed Leasing Opportunity

When we lose a prospective tenant to a competing property, understanding what led to that decision is similarly valuable. Rent can be the prime differentiator, but more often, other factors impact the tenant's decision.

Sometimes, it is simply which property is the shortest distance from the owner's home. Sometimes, it's a prospective tenant's ability to visualize themselves in the space. This highlights our strategy to create spec suites with staged furniture, which we have found to be very effective.

Sometimes, business owners want to know their landlord and value the ability to easily contact them. Local ownership benefits from this because institutional owners are frequently in other cities, making the landlord-tenant relationship more difficult to establish. So, at Kenwood, we promote the value of local ownership, frequently meet face-to-face with every tenant, and provide them with our principals' cell phone numbers to facilitate a readily accessible relationship and a better collaboration between landlord and tenant.

This helps us reduce the potential of investment loss for our commercial properties through missing new lease or lease renewal opportunities.

Avoid Significant Losses Through Baltimore Commercial Real Estate Investing With Kenwood

While loss is not entirely preventable when investing in real estate, our experts work hard to reduce the potential (and significance) of losses for our investors. Our proven strategies and ability to learn from a long history in this market with multi-tenant properties help us deliver a better (and more profitable) experience for real estate investors!

Kenwood Management is always looking for new investors to join the Kenwood Community. Learn more about our investment services and how you can generate steady and secure commercial real estate gains with our team of experts.