Navigating the real estate market heading into the ninth year of an economic expansion cycle, coupled with uncertainty surrounding President Trump’s policies, has created jitters among some market practitioners. These concerns were among the key risks discussed at IMN’s annual US Real Estate Opportunity and Private Fund Investing Forum held in Newport, Rhode Island this week.
The longest economic expansion cycle ever to occur in US history lasted about a decade. “We are at this inflection point, where we have uncertainty relative to liquidity, uncertainty relative to emerging technologies, and at the same time, political uncertainty and political change, all of which are coming together right now,” said Russell Appel, president of the Praedium Group, on a panel discussion.
Liquidity concerns and the impact of tightening monetary policy are challenging investors, Michael Acton, managing director at AEW Capital Management, agreed.
“The single-biggest difference between this [economic] cycle and any prior cycle in US history is that this recovery expansion took place within the context of an enormous experiment by central banks,” he said. As the Federal Reserve embarks on tightening monetary policy, nobody really knows what impact it’s going to have on asset prices.
“Values all around the world are at all-time highs, and investors are really worried. …Returns are low in almost everything,” Acton said. Further, changes at the Fed are expected as well, as Chairwoman Janet Yellen finishes her term early next year. It remains unclear as to whom President Trump will select as her successor.
“Fundraising for us seems to be better than it should be,” said Gary Jaye, senior managing director at CBRE Global Investors. “Because we’re selling a story of lower returns, a potential recession coming…yet inflows seems to be very strong.” In the past few months, capital inflows, particularly by US domestic pension plans, have been robust.
Currently, there are 554 real estate funds in the global market, targeting $189 billion of capital, the highest level since 2009, according to David Kessler a partner at CohnReznick. Nearly 52% of these fund strategies are targeting core real estate strategies, versus 41% the same time last year, so value-added and opportunistic strategies are falling out of favor as investors are seeking current income.
“Everyone is looking for a safer place to put money and RE looks safer than the stock market and certainly safer than the bond market if you think interest rates are going up,” said Glenn Mueller, a real estate investment strategist at Dividend Capital.
Despite being in the late stage of the recovery cycle, investors continue to favor differing types of real estate strategies, argued Sean Ruhmann, partner at TA Realty. “Some folks think it’s a better time to go higher in the risk spectrum, so more value add, opportunistic funds,” he said. “Others are more interested in debt and then core funds, so that’s mainly the result of being so far into a recovery and uncertainty about what’s is a good place to invest today. There’s nothing uniform that we’re seeing, other than people having interest.”
Further, US domestic real estate assets continue to attract foreign capital, particularly as sovereign bonds yield negative interest rates in Europe and Japan. “You lend money to your government and they charge you interest,” noted Tim Wang, director and head of investment research at Clarion Partners. “It just doesn’t make sense. We are seeing more interest from overseas [clients], Europe, Asia, and Australia as well, for yield play and for diversification. We believe there’s more capital to come.”
Wang cautioned, however, that there are leading indicators to watch out for when the economic expansion is coming to an end. For example, as the Fed raises short-term interest rates and as long-term bond yields fall, the flattening of the yield curve and the chance for it to turn negative is a sign of a possible recession on the horizon.
The potential success or failure President Trump’s pro-growth policies also serve as an indicator. “There’s a lot of expectation built in, especially from the stock market, business [and] consumer confidence about this tax reform,” Wang said. “I’m afraid if they don’t get their act together, the administration and Congress, [and] they don’t pass tax reform, the animal spirit will disappear and we will fall into a recession earlier than expected.”
Trump’s stance on immigration is disconcerting as well. “I am nervous about [Trump’s] comments on immigration,” Appel added. “We need strong immigration for strong real estate demand.”
Real estate opportunities are still strong as there is still some runway for real estate investments to generate good returns, according to Kessler. “Investors are exercising caution and fund managers are cautiously deploying capital this late in the cycle. While there’s uncertainty around Trump’s policies, there continues to be opportunities as a result of the strong RE fundamentals across the board.”