J Darrin Gross
I'd like to ask you Anna Kelley, what is the Biggest Risk?
Anna Kelley
I think the biggest Risk right now is not knowing how high inflation might get for how long and how that might impact both the interest rates over the next decade and cap rates over the next decade. And so with that risk comes a few things that we really have to look at. One, as we talked about is what kind of debt are you putting on your properties? So the question is, when you when you're trying to create value for a commercial asset, you're really focused on noi, and you're focused on on the cap rate. And so these things that that we can't control are these factors that impact interest rate and cap rate? And so we have to look at what can we control? What risks can we control? Since we can't transfer that risk? It's going to be what it is, what can we do to mitigate some of that risk, one of the things is investing in really strong, resilient markets, right? If you're investing in a class C property and a Class C town with not a whole lot of good jobs, industry, diversity and not population growth, you know, more demand than there is supply, you're going to really struggle. So if you want to mitigate risk, you need to be in areas that still need way more product than what there is demand for towns that have lots and lots of jobs so that if some businesses or industries get really hit hard, they're still resilient, and there's elevated wages and affordable, affordable living in those areas. So the market in which you invest is critical. And then the other thing is, you need to be able to control your expenses, what other expenses can you cut, or make sure that they're fixed for some period of time, so that they're not an additional variable that could impact your noi, and bring your value down as a nature of that? And so, you know, an insurance answer is basically, where do you invest? So I'll give an example. I'm from Texas, and I'm from from Houston, and Houston has had a significant flood risk over the last couple of years because of hurricanes in certain areas of the city. Now, it's a 10,000 square mile major metro. So Houston is extremely large. And there's pockets that do not have flooding, and that are much less risky. Well, I want to buy assets there, because if I buy in an area that has had some flooding, I wouldn't be surprised if my insurance goes up another 30 or 40%, like it has over the last couple of years. So you've got to get really good at where are my expenses? And where can I invest and what assets are going to give me the best outcomes, given all of the uncertainty to increase my noi to bank on where I can increase my noi by increasing income and cutting expenses. While I can't mitigate, you know, the interest rates and the cap rates that we ultimately have.