LOOKING BACK AND LOOKING FORWARD, PART 2 Reflecting on the Real Estate Crisis of 2009 and What to Expect Next
In the July newsletter, I covered several viewpoints related to opportunities within institutional real estate and how the current cycle might unfold. This month, I have a few more viewpoints I want to share. Read on ... So, you are saying to continue buying real estate today because inflation is around the corner? Well, I’m saying there’s a bit more inflation today than we actually measure; illiquid supply-constrained real assets provide investors with a unique portfolio benefit that offset the risks embedded in liquid paper assets. Inflation is already here, but we pretend it’s not. The best part is that real assets also win in low-inflationary environments because, by definition, if the increase in costs to construct new competitive supply exceeds the rate of core inflation, then you have a built-in arb
another definition of making money. And, of course, you are more supply constrained than you might otherwise think.
we will often warehouse whatever portion they have not syndicated, giving them 90 days to take us out after we close. We stand by as a resource at all stages of the deal, sometimes looking over their shoulder and making suggestions. But I bet on people and expect them to run the deal their way. In exchange, they give us a first look and a significant piece of the GP. The downside is that, sooner or later, a small operator becomes a big one and no longer needs us. But that’s okay. Same structure, but more selective on the buy. I’m not afraid of vacancy, especially in a well-located suburban office. We’ve seen success in turning traditional suburban offices into medical offices, and that can be a great play. I think the best office executions today are fairly capital-intensive. It’s similar in the retail sector, but I’ll only do it with an operating partner who has decades of retail relationships and understands the new realities of getting people to part with their money offline. Industrial and storage assets seem picked-over, and those are only opportunistically attractive. I’ve continued to stay away from ground- up development as I think there are myriad unacknowledged risks, like the impact of tariffs on the final construction cost. At this stage of the business cycle, I would rather redevelop than develop. Having said that, I am evaluating a number of interesting opportunity zone deals, especially in Hispanic neighborhoods, with operators I know and trust. What about other property types?
So, going back to apartments … What does this mean for execution?
Deal flow is everything. I look for structures that drive compelling deal flow from great managers into my inbox. I execute via operating partners who have defined expertise in specific markets. I’ve been an advocate of secondary and tertiary markets for 30 years because the growth dynamics are exciting and at least as predictable as large markets. I like multifamily operators who fly under the radar, especially in the middle market. I’m attracted to operators where our capital is strategic to their growth, and we can forge programmatic JVs that deliver expertise in a few select markets, sometimes only one market. The bigger you are, the tougher it is to source deals. In our industry, sometimes economies of scale work against you, and with deal flow, that is an unfortunate reality. If you are in 20 markets, you cannot know them as well as someone who is in two. Too often, the big guys have cost and incentive structures that force them to do deals that they might otherwise pass. My ideal
on rent versus buying power. That’s just
structure requires more work but is repeatable once we’ve underwritten the team, their operations, and track record. We pledge half of all GP and LP capital under well-defined
investment parameters, so our operating partners still must raise money for each deal, but they can count on us to cover at least half.
So, you are still bullish on real estate?
And they need the certainty of close, so
Yes, and for all the reasons mentioned. Deal flow is just as important as execution, and the big difference today is I think a lot more about JV structures that provide the right incentives to maximize deal flow.
I see a fair amount of opportunity today, but investors need to be flexible and nimble, looking at a
range of strategies, operating partners, and geographies to source the best opportunities.
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