The coronavirus pandemic may have kept some commercial real estate investors largely on the sidelines, but real estate investment manager Black Creek Group LLC has unquestionably taken the field.
In the first half of 2020, the Denver-based firm raised $1.1 billion in capital, purchased 5.7 million sq. ft. of property—primarily industrial space—and rented out 3.6 million sq. ft. of space. Black Creek Group specializes in industrial, multifamily, office and retail. Industrial, of course, is riding the current e-commerce wave, while multifamily is exhibiting signs of weakness, and the office and retail sectors continue to grapple with pandemic-inflicted woes.
The unevenness of the performance of those four sectors appears not to rattle Black Creek Group, though.
“While COVID-19 has reshaped all of the commercial real estate sectors, we do not believe that any of the sectors we invest in are out of favor,” Black Creek Group CEO Raj Dhanda says.
In a Q&A with NREI, Dhanda shares his thoughts on a number of subjects, such as how retail has experienced a divide between essential and non-essential businesses, why the office sector is “far from dead” and why “boutique” suburban office properties are now attractive.
This Q&A has been edited for length, style and clarity.
NREI: Black Creek invests in industrial, multifamily, office and retail. Are you more focused on one sector than any other right now?
Raj Dhanda: This is a hard question for me, as we continue to believe in all the sectors we invest in—infill industrial, grocery-anchored retail centers, and suburban multifamily and office space. While we continue to see upside to all these sectors, we are focused on targeting new assets in the industrial and multifamily sectors.
I think we all can agree that industrial has seen many positive benefits throughout the pandemic, as consumers have rapidly increased their use of e-commerce. This growth has translated into businesses needing more industrial space to house goods, process orders and handle returns.
However, what I find interesting is the rapid response many retailers have had to rising e-commerce sales. With consumers not being able to shop in person for several months, retailers had to quickly adjust their strategies to be able to fulfill their customers’ orders no matter what. For example, we have seen our grocery tenants really step it up when it comes to their online presence. As an essential business, they quickly learned the importance of having an online presence and offering different delivery forms to address customers’ needs and comfort levels.
NREI: Because of the coronavirus pandemic, office and retail have been heavily impacted. What do you see in the future for these two sectors?
Raj Dhanda: This is a very common question that I am asked, and while both have been impacted during the pandemic, I don’t think it is as clear cut as many may think, since there are a variety of subsectors that have been impacted differently.
I think this subsector impact is more defined in retail than any other sector, as retail was separated into essential versus non-essential retailers. Essential retailers such as grocery stores and home improvement centers have actually seen upticks in sales. However, it’s no secret that non-essential retailers such as those in malls are struggling right now, as some consumers are still wary of large public areas and are looking for shopping options that fit their risk tolerance.
I think office is far from dead, despite what some may think. Rather, it is evolving as a result of the pandemic. Several emerging trends suggest that many employees want to return to the office, and employers continue to see value in an office setting, as it fosters collaboration and culture.
However, we expect to see changes related to both office location and layouts. Prior to the pandemic, many businesses wanted offices in central business districts. But as a result of the pandemic, we anticipate that some larger tenants may respond by moving to a hub-and-spoke model, where the headquarters serves as the hub of the business and the spokes are a geographically distributed network of offices that are located in more suburban areas.
NREI: How will that outlook affect your investment strategy?
Raj Dhanda: Given that we focus on suburban office and grocery-anchored neighborhood retail centers, we continue to believe these subsectors are poised for long-term viability and have no plans to alter our investment strategy.
NREI: Industrial is on a hot streak right now. How long do you think that can continue? What does the horizon look like?
Raj Dhanda: The industrial sector has been trending upward for several years now, and it is not showing signs of slowing down. We are seeing a number of drivers that are only boosting what were already strong fundamentals for the sector.
The faster adaption of e-commerce has been one of the biggest influencers. The rapid increase in e-commerce demand means that many businesses are quickly reworking their logistics networks and strategies. E-commerce retailers on average require up to three times as much warehouse space as bricks-and-mortar retailers. Additionally, as people return goods, they are often sent to another facility that is operated by a third-party logistics provider, which translates to a need for more industrial space.
Additionally, consumer behavior shifts mixed with COVID-19’s impact on importing goods have led to businesses focusing more on their supply chains to ensure there is limited long-term disruption to operations. As companies explore onshore and nearshore options such as Canada and Mexico, we can expect to see positive impacts on the industrial sector, especially given that the typical consumer product is stored in four or more distribution warehouses from point of manufacture to point of consumption.
NREI: What are your thoughts on the multifamily sector?
Raj Dhanda: What we are seeing is that many people are staying put during this time versus finding new housing options, and while we have seen multifamily be impacted, it really varies [based] on asset type and location. For instance, we have seen higher-end, class-A properties continue to post stable performance, as the bulk of job losses have been in lower income populations, impacting lower-class properties. Additionally, we have seen an increased focus on where people want to live right now, as those who may want to relocate are looking to do so to get out of high-density cities.
NREI: Geographically, where are you focusing now in terms of investment opportunities?
Raj Dhanda: This really depends on the particular sector we are looking to invest in. There isn’t a one-size-fits-all approach. For example, on the industrial front, we focus on opportunities that tend to be closer to the end consumer and usually in coastal markets. On the multifamily front, we focus on opportunities that are outside of high-density areas, but within growth markets where we are seeing individuals relocate to, such as Florida and Atlanta.
NREI: A lot has been made of the stories about the outflow of people and companies from the San Francisco Bay Area and New York City amid the pandemic. What do you make of this?
Raj Dhanda: Lower cost-of-living and lower-tax cities with significant concentrations of educated and creative workers—such as Denver, Charlotte, Atlanta, and many Texas and Florida metropolitan areas—will likely draw many businesses away from high-cost, high-tax cities like New York, Chicago and San Francisco. We believe this trend may accelerate.
Additionally, we believe remote-working policies providing more flexibility relative to where employees choose to live may increase the influx of people moving to these locations. In addition, larger office tenants may move toward a hub-and-spoke model. This would allow them to reduce their concentration of employees in one central location and, instead, spread employees out among multiple smaller office buildings, often without increasing costs. As a result, high quality suburban boutique properties should become increasingly appealing, given that they are closer to where most employees live, and would allow for easier work-from-home access and less reliance on crowded public transportation.
NREI: Across asset classes, what are you seeing in terms of pricing these days?
Raj Dhanda: Depending on the asset class, we are seeing pricing begin to return to pre-COVID rates. Particularly on the industrial front, we are seeing pricing for core opportunities at pre-COVID rates, if not above them, as it is one of the hottest real estate sectors right now.
NREI: Overall, how bearish or bullish are you on the commercial real estate market?
Raj Dhanda: As an owner, operator and developer—and a top five buyer of industrial real estate—we are bullish on commercial real estate. We continue to believe in the sectors we own, and more importantly believe there is an investor appetite, as more and more people are looking for income at a time of uncertainty. It is interesting to me that despite being the third largest asset class in the U.S., commercial real estate is generally underrepresented in individuals’ portfolios, leaving opportunity for continued investor allocation and strong demand for the market.