A Buyer’s Guide – May 13, 2024
The May meeting of the Federal Reserve’s Federal Open Market Committee came and went without any change in the central bank’s benchmark lending rate. By now, few in commercial real estate were surprised; however, as Bloomberg News pointed out recently, “This was supposed to be the year that real estate got some relief from higher interest rates, which have roiled the industry for the better part of two years.”
Naturally, as Bloomberg’s Charlie Wells wrote, higher rates are just one of the obstacles confronting the industry. The office sector in particular continues to face long-term questions about the demand for space, while at the same time valuations continue to ebb (to varying degrees) in all the major property types.
But Wells didn’t bring all these factors up to warn readers that sitting it out may be the best strategy. “For savvy investors, crises present opportunities,” he wrote, and then presented investment advice from a quartet of experts.
“We’re in a ‘perfect storm’ of macro trends making investing in multifamily ideal right now,” Brian Degner, CEO and co-founder of DB Capital Management, told Bloomberg. Those macro trends include the high cost of homeownership and the large supply of apartment units being delivered, the latter of which will lower prices until the supply begins tightening in a year or two.
The sweet spot as far as DB Capital is concerned is buying older buildings—i.e., 1980s- to early 2000s-vintage—”that draft off the growth of new supply. With the high cost of construction, it is very difficult, if not impossible, to build new apartments that cater to the median-income renter.”
Speaking of development, Walton Global COO Kate Kaminski favors investment in land. “Some of the new funds we’ve put out are all equity and backed by land assets that sell residential property to developers over time,” she told Bloomberg. “These days, you see developers looking to buy land inventory ‘just in time,’ right when they are ready to begin development.”
From a pricing-advantage standpoint, it’s pretty hard to beat the office sector right now. But direct acquisition of downtown or suburban properties isn’t what Greg Kuhl, portfolio manager at Janus Henderson Investors, would recommend.
Instead, Kuhl advocates acquiring shares, especially in publicly traded REITs, which tend to trade at a steep discount compared to their private counterparts. “If you can buy high-quality REITs that own the best buildings at a discount, that’s the way to play office,” he told Bloomberg. “There’s a very clear trend in offices — the newest and the best buildings perform best. You see a huge difference in occupancy between the best and the rest.”
At the height of the pandemic four years ago, both office and student housing looked uncertain from the standpoint of long-term demand. Would remote work take the place of onsite collaboration, and would students decide that seeing and hearing their professors via Zoom was a more convenient and lower-cost alternative to in-person learning?
The jury is still out as far as office use is concerned, but student housing demand has rebounded to the point where Blue Vista Capital Management CEO and co-founder Peter Stelian gives it a thumbs-up. However, Stelian would advise investors to pick their spots carefully.
“With student housing, there is basically a bullseye, and that’s the university campus,” he told Bloomberg. “You want to get as close as possible to that school. But you have to be careful. Some public schools have enormous campuses, which can create the false perception of being close to campus but really the place is so big students have to take shuttles or ride bikes to get around.”
There you have four sectors and four recommendations on how to make the most of the opportunities they present. Notice that none of these investment theses is a blanket endorsement that assures success no matter how haphazardly you buy. Call it a reflection of the current market.