Institutional Investors Target Alternative Strategies
Earlier this month, the Federal Reserve increased its Effective Federal Funds Rate (EFFR) by one quarter of a percentage point, maintaining the rate in a target range of 5% to 5.25%. Continued rate hikes have impacted commercial real estate financing and by extension, CRE transactions.
But how will all of this impact institutional investor strategies in the area of commercial real estate investments? Experts talking with Connect CRE offered many points of view, with David Fletcher, Excelsa Properties’ Managing Director and Head of Acquisitions pointing out that “insurance volatility, and to a lesser degree, inflation uncertainty, remain overhangs” among institutional buyers.
The experts did indicate that institutional investors still involved in the CRE sector are adopting different approaches to financing their acquisitions. Grant Jenkins explained that the current interest rate environment means institutional investors are adopting a more proactive approach for their 2023 strategies.
“Many are opting for shorter-term fixed-rate financing options, rather than the traditional 10-year fixed-rate money,” said Jenkins, who is Managing Director of Staghorn Capital.
Oak Real Estate Partners Managing Partner – Capital Markets & Investments Brook Scardina added that the institutional investors are also directing more capital to alternative assets, such as private debt and private equity funds. “This enhances diversification while optimizing the performance of the portfolio in support of longer-tern return objectives,” he explained.
“Alternative investments offer the benefits of a differentiated return stream, with low correlation to broader financial markets.” Fletcher added that institutional investors are also eyeing what he called “evergreen markets” like Atlanta and Dallas.
But Jonathan Needell, president and chief investment officer with Kairos Investment Management Co. has another perspective on the situation. “Most of the investors I’ve talked to are waiting to see what will happen,” he said. “They don’t know if interest rates will remain steady for the next 12 to 18 months or will start to decrease by the end of the year.” He added that many of the investors believe they won’t miss out on much if they wait to act.
Staghorn’s Jenkins said that while interest rates could gradually decline over the remainder of 2023, institutional investors might still find themselves challenged when it comes to financing deals. “Higher interest rates may make it difficult to meet the desired lending leverage,” he pointed out. “This could require investors to provide more equity than in previous years.” Added Needell: “I think that the next two to three years, actually, will be a pretty interesting time.”