Dutch Bros Coffee

Genevieve Cason

Investors face a spectrum of liquidity risks due to the current market fluctuations and diverse asset types.

The term liquidity is often used to describe the sale of equities such as stocks, bonds, or other hard assets for cash. Liquidity refers to the ability of an asset to turn into cash at the current market price or rate. "Illiquid" investments cannot be sold relatively quickly by industry standards for their current market value.

Since market values are subject to numerous forces and conditions, liquidity is an important metric. The volatility of the stock market and crashes from time to time can lead to a loss of value on equity assets. Market conditions affect the value of properties and their liquidity, or market price value. Liquidity has become an essential factor in determining the true value of real estate assets over the last two years.

What is the impact on portfolio owners?

Post-pandemic, commercial real estate markets have been shaken up around the globe as remote work models, and other pandemic-related factors drove tenants away. Increasingly, companies opt for remote and hybrid work models, which have significantly reduced occupancy rates. Many buildings, once considered more demanding tenants, now occupy trophy properties.

The uncertainty associated with 'back to the office's initiatives and changing market conditions' pose an increasing threat to the liquidity of buildings. Increasingly, office properties are no longer attractive to tenants, investors, creditors, or even private debt brokerage firms that come in to provide capital when all else fails. Amidst great uncertainty, portfolio managers are scrambling and facing difficult decisions. The recent geopolitical tensions have only obscured matters further as the energy crisis threatens all countries across the continent and worldwide.

Without pandemics or other treacherous conditions, real estate investments are considered illiquid, where property assets have varying levels of liquidity risk. Liquidity assessment is critical in maximizing property investment portfolios and own income.

Liquidity Risks Exist Across a Spectrum With Frequent Market Changes

The liquidity risk spectrum is broad because liquidity depends on various factors. For example, a building with a high market value that attracts long-term tenants due to its location may lose its status if the demographics or other external factors change. The location of a large skyscraper that has hosted some of the most prestigious businesses in a region may be re-zoned, making it undesirable as a business hub over time. Potential investors should be aware of the changing intrinsic value and liquidity status of this building.

The building and surrounding properties may also face less demand, becoming more illiquid and selling for less than the market price at that point in time. A more illiquid lending environment can also magnify problems as creditors react to central bank policy changes and are less willing to provide capital. A property owner unable to meet obligations in worst-case scenarios may also introduce Non-Performing Loans onto its balance sheet, which makes the property even riskier as an investment for investors unwilling to assume the debt if the building becomes a liquidity risk.

The Key to Profitable Real Estate Portfolios is Understanding Liquidity Risk

Successful real estate investing involves a wide range of investment options, which is why it is highly diversified. Assessing and understanding liquidity risk across a wide range of assets is essential for real estate investors and property owners. An investor may have to sell a property for a much lower price than expected if a seller wants to dispose of it quickly, which is a liquidity risk. Investors lack transparency when making informed decisions that facilitate diversification in the absence of credible data sources. The portfolio consists of properties that are liquid enough to generate cash upon sale, meet obligations, and retain capital for future investment.

Understanding the risk associated with illiquid assets, such as real estate, can be helpful to investors in constructing their portfolios. For instance, an investor with a short-term obligation in three years will likely have enough liquid assets to cover it. This can help ensure a sufficient allocation of assets ready for monetization ahead of time.

The real estate market is illiquid, but long-term value appreciation creates a strong liquidity position for those who understand the market

Investors buy properties for two primary reasons: to generate income and cash flow and make money from the sale of their purchases. Liquid real estate properties are easier to buy and sell without having to trade at a discount, although real estate is generally considered illiquid.

Investors today face a broad spectrum of liquidity risks due to market fluctuations and varying asset types. Today's perfect storm favors investors who assess their risk with credible data most accurately. In the aftermath of the pandemic and a volatile economy, portfolio managers require access to accurate and timely data to create portfolios that will provide an ongoing source of investable cash for future portfolio expansion. The use of legacy systems and public records cannot substitute for the benefit of vetted data technologies that provide the analysis needed to determine liquidity risk in modern markets.