As 2017 comes to a close, RealInsight hosted a summit to touch on major issues in real estate private equity. Topics included the disruption in the retail real estate sector, fears surrounding the current long economic expansion and when—or if—it might end and top markets and asset classes to look to for the future. Here are five takeaways from the event, held Dec. 1 in New York City.
- Investors are fearful. Investor fear is at an all-time high, said Robert Morse, chairman of the Bridge Investment Group, a real estate investment and property management firm, who gave the summit’s keynote address, referencing a Credit Suisse report as evidence. This expansion cycle has been very long, and investors are concerned about a downturn heading into 2018, he noted. Still, there appear to be strong macroeconomic fundamentals to support continued growth, including declining unemployment and continued corporate growth, for example. Morse also added that geopolitical events could have an impact on the real estate industry, but so far they haven’t. “I think the market vulnerability to geopolitical events, at least today, is relatively low. That can change through different behavioral economic impacts, but right now, that’s pretty benign,” he noted.
- Alternative investment strategies may be helpful, but it depends. There appears to be increasing interest in alternative property types, such as student and seniors housing and storage facilities. Marc Davidson, managing director at real estate investment firm AEW, said that his firm has been active in seniors housing since 1996, for example, and remains bullish on the sector. But some alternative strategies may be hard to execute. In the medical office sector, for example, it can be hard to build scale and property portfolios can be inefficient to manage, Davidson said. “It’s a small industry and it’s hard to accumulate critical mass in any one area,” he noted. Alisa Mall, director of investments at the Carnegie Corporation of New York, said the corporation has found success in manufactured housing, particularly in age-restricted communities, as well as in gas station and convenience stores, which appear Amazon-proof. However, with only a $3.5 billion endowment, the corporation can take on such smaller, niche strategies, she says. For bigger institutions, this may be harder to do as smaller assets are more difficult to aggregate, though large student housing portfolios may be an exception, she noted.
- Under-the-radar cities may provide creative opportunities. Over the past 15 years or so, popular markets to invest in have been those where there have been population shifts driven by people who want to live there, such as Brooklyn, Austin, Texas and cities in the Northwest, said Will Silverman, managing director/group head of investment sales at Hodges Ward Elliott, a hotel brokerage and investment banking firm. However, interesting pockets of opportunities may lie in the next wave of such cities to attract young people, such as perhaps Pittsburgh, Louisville, Ky. or Rust Belt cities. “Those are still ongoing phenomena,” Silverman said. Amazon could accelerate this process, as it goes through a public RFP process to seek the next location for its second headquarters, said James Nelson, vice chairman in the capital markets group at real estate services firm Cushman & Wakefield. “I think Amazon is making to look a statement,” Nelson said, adding he would not be surprised if Amazon picks either Detroit or Newark.
- The growth in the industrial sector isn’t going anywhere soon. “The music just hasn’t stopped,” said Matthew Jordan, managing director at real estate investment management firm LaSalle Investment Management. While returns for the asset class, which has seen success for the past five or six years, have decreased a little and it has been harder to find properties for sale, the returns are still there, he noted.
- Retailers are seeing success in private labels. In a presentation about the disruption in the retail sector, Dean Adler, of real estate investment firm Lubert-Adler, said private label brands are increasingly important to help generate revenue for retailers, particularly supermarkets. For example, he noted the success of Costco with its private Kirkland Signature-branded products. However, supermarkets cannot go completely private label as many big-name brands pay big slotting fees for shelf space, so Adler said that balance is key.