BONEHAM: To follow up on that point, when we compare our
investments in real estate equity to the fixed-income market, we
don’t think real estate’s overpriced. It provides protection from
inflation whereas the fixed-income market does not.
We do expect that between now and year’s end, the fed funds rate
will move up to about 3%. But we’re not overly concerned because
we don’t expect the long end to move up that much globally. We’re
focused on making sure we’re investing in areas in which we’re comfortable in achieving our rental growth. Because if our rents grow, we
ought to be fine against those interest rate movements..
McANDREWS: I do think being active on both the debt and
equity sides provides a competitive advantage. It keeps us active in
all phases of the cycle and provides pricing arbitrage vis-a-vis interest rates. Another key is deal flow, or exposure. We’ve been fortunate to use our debt relationships to provide access to off-market
joint ventures. In addition, if we lose a bid on an acquisition, we’re
still in a position to provide a loan quote if it suites our loan portfolio, since we’ve already underwritten the deal.
PUMPER: For the most part, things seem pretty good
right now. But what concerns you going forward? Is
there anything out there you’re keeping an eye on?
HALLIWELL: I always worry about interest rates in the private
market quadrant. Clients don’t have to participate in private
real estate if they feel there is better risk adjusted returns in
other real estate sectors such as public real estate or private
debt. The 20-year average in private market cap rates to treasury rates is about 275 basis points, and right now we’re at
about 190. If interest rates continue to climb, the relative value
proposition in private real estate may be less compelling to
other real estate quadrants. This could lead to fewer private
market transactions , or a rise in private real estate cap rates.
SHAH: Interest rates are definitely something to keep an eye
on. The good news is if you look at the May FOMC minutes,
it seems like the Fed indicated it was comfortable letting
inflation track over 2%, temporarily. That helps ease concerns around the Fed raising rates too quickly.
CLARK: I echo those sentiments. The market is expecting a gradual rise and it would concern me if we get a spike. The other concern is in multifamily, where we’re selling class A projects. I think
65% of apartment sales were to large private investors. Values are
holding, but buyer pools are smaller and bidders number two and
three are farther behind the winner.
SHAW: We’ve transacted about $3 billion over the past two or three
years, and the majority of that’s been dispositions. And yes, there’s
been a dramatic shift and the gap between bidders one and two and
the rest of the pack seems to be wider than it was even two or
three years ago. Part of that is that there’s a little more caution
today. We’ve been selling the kind of product that doesn’t fit
anymore—it’s value add or more than core plus, which are
highly leveraged transactions.
It’s costing more for asset managers to line up their equity
sources, including private equity. So if you’re lucky enough
that your source of capital is still there and hasn’t moved its
pricing, you’re going to win the deal. If they’re right-sizing or
if they’re anticipatory on interest rates, I don’t think anything
dramatic is going to happen. But because some of them are
looking for slightly more in return for perceived higher risk,
we’re starting to see this wider dispersion of bids.
McANDREWS: Like my peers, we are concerned about
interest rates and it’s something we do watch very closely. In
an effort to offer a thought beyond interest rates, though, I
would suggest another topic to think about: the economic policies
of the new administration. Certainly what’s going on with trade, for
example, should be considered. Beyond the impact to farmers,
which cannot be understated, I’m particularly concerned about
what it’s going to do to the equity markets. If the stock market goes
into a period of volatility based on an unpredictable shift due to
tariffs, we’ll have trouble on our hands because our industry is
banking on job growth. If the market goes into a downward trajec-
tory, corporations will pull back growth plans. That would impact
us on the demand side.
BONEHAM: I’m wary of an exogenous factor, a black swan event.
Specifically, my concern is that we have so much technology in the
US that we rely on to be safe—the government sector, financial institutions, even utilities. And, the use of blockchain in the real estate
title and mortgage fields is being discussed, but what if the chain is
broken/de-coded? So, a breach in our tech security, a cyber-attack
on the government, financial institutions, utilities, or major corporations could impact our economy and therefore, our business.
EKEROTH: As an investor in the multifamily industry, I’m troubled by the amount of supply that’s in the pipeline. Almost every
market we cover has high levels of supply coming on line. How
long can historically high absorption rates last? I’m also a bit nervous about potential tariffs on aluminum and steel. They may ultimately impact construction costs for new product and either slow
down development or more likely drive returns even lower. The
tariffs, in my mind, would shrink the economy. It’s hard to have the
wind to your back in a shrinking economy. ◆
Debt’s providing less value,
but so is equity, and real
estate equity is still beating
the S&P. So maybe real
estate is not as overpriced as
it seems, because based on
the other options, it’s still
We’re focused on making sure
we’re investing in areas in
which we’re comfortable in
achieving our rental growth.
Because if our rents grow, we
ought to be fine against those
interest rate movements.
BARINGS REAL ESTATE