California CRE News In Your Inbox.

Sign up for Connect emails to stay informed with CRE stories that are 150 words or less.

Sub Markets

Property Sectors

Topics

California  + Los Angeles  + Finance  | 
Green Street's Dirk Aulabaugh will be a panelist at the in-person Connect Los Angeles on June 22

Green Street’s Dirk Aulabaugh: Inflation, Rising Rates Top of Mind for Investors 

Commercial real estate investment doesn’t exist in a vacuum, but some macroeconomic environments are more challenging than others. Over the past couple of months in particular, the environment has moved into “more challenging” territory, and investors have been seeking guidance from experts such as Dirk Aulabaugh, global head of advisory services at Green Street.  

You can avail yourself of Aulabaugh’s guidance, too, by attending Connect Los Angeles, being held in-person June 22 at Hotel Indigo DTLA. He’ll be a panelist for an economic update also featuring Richard K. Green, director and chair at USC Lusk Center for Real Estate, and moderated by Lew Horn, president, Greater LA, OC and Inland Empire at CBRE. 

Connect CRE asked Aulabaugh what he’s seeing on the investment front currently. Here’s what he told us. 

Q: What concerns are clients (e.g., investors and REITs) bringing to you this year that were less prevalent in 2021? 

A: One of the main concerns we’re seeing is the current environment of high inflation and rising interest rates. It’s been a decade since we last saw rates this high and inflation hasn’t hit this level since the 1980s, so many of today’s professionals have either forgotten what this was like last time or they may not have ever seen it in their professional careers. We’re getting specific questions about how certain property sectors have performed historically during periods of high inflation and/or rising interest rates and what we expect to happen in the future if inflation stays high. We’re providing custom advice using our proprietary data and analysis to help answer a variety of questions around this theme. 

Q: Expectations of a possible recession are increasing. Are you finding that investors are more likely to trim their sails with regard to allocating capital or are they maintaining the same level of investment but diverting capital to recession-resistant property types

A: We don’t expect a significant shift in capital allocation out of real estate in general. Equities have increased in value so much over the past few years that many investors have had a hard time keeping up their target real estate allocation. Within real estate, however, we will likely see more strategic allocation between sectors. Not all recessions are created equal and it’s important to consider the drivers and how they will impact different property sectors.  Inflation, rising interest rates, work from home, ongoing concerns around the supply chain, and a potential shift in the growth of e-commerce are a few things that are top of mind right now. 

Q: We’ve seen several examples this year of large real estate funds surpassing their fundraising targets. Does this speak more to investors’ confidence in the funds’ sponsors or their willingness/eagerness to invest in real estate per se? 

A: It would be interesting to see the exact timing of the fundraising because I expect fundraising to be slow given the current macro environment and the potential for a recession. Having said that, there are groups such as Blackstone and Brookfield, among other large capital allocators, that are able to raise a significant amount of capital in a variety of market conditions. What it boils down to is the confidence in the sponsor and their proven ability to navigate the challenges that show up at each point in the economic cycle. Operating efficiencies and economies of scale become even more important in a down market, so groups that have these characteristics and a history of success are better able to manage their assets and control costs – something particularly important in a period of high inflation. 

Q: You advise investors globally. What’s their consensus on investing in U.S. real estate–or do they vary widely in terms of their objectives and outlook? 

A: Investment mandates do vary from one company to the next, but many large investors have some level of allocation to U.S. real estate. The U.S. has a lower risk profile relative to most other markets and has been consistently considered one of the safest places to allocate real estate capital, which is of particular importance during periods of global uncertainty or destabilization. Additionally, the U.S. real estate market is larger, provides more liquidity and is widely understood due to the market-leading transparency compared to many other geographies.

Certain non-traditional sectors, which may not be institutionalized elsewhere, are also available in the U.S. These sectors, including self-storage, single-family rental, and healthcare, among others, have drawn the allure of many capital sources due to their higher relative yield and potential for growth through cycles. Green Street tracks 19 different property sectors in the U.S., a far cry from the traditional major sectors of old (retail, office, industrial, and apartment). 

Connect

Inside The Story

Green Street's Aulabaugh

About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

  • ◦People
New call-to-action
Chase-08-cube
Chase-08-cube