Investors are being a bit more disciplined at this point in the real estate cycle, according to speakers at the Rutgers Business School Center for Real Estate’s capital allocation conference in Short Hills, N.J.
Mark Wilsmann, managing director, MetLife Real Estate, is seeing more interest from overseas investors in US real estate, considering that their growth rate is slower than that of the US. And, as is typical for the later stage of a cycle, some domestic investors see core real estate as being “priced to perfection,” and more differentiation in the value-added opportunities.
Wilsmann is also seeing good opportunities in the retail space, especially in the necessity and experiential-based retail, as many investors back off, as well as in “creative office space,” often around universities. He expects real estate cap rates to slowly expand going forward, and for the bulk of real estate returns to come from current income, and less from property appreciation.
Todd Everett, senior managing director, Principal Real Estate, pointed to a lot of demand for quality industrial properties in urban centers, driven by e-commerce demand. He is also interested in grocery-anchored retail properties. He expects net operating incomes to move up from existing rent roll movements.
Investors are slanting more to safety, noted Kevin Smith, head of the Americas, PGIM Real Estate, and PGIM is being moderate with its use of debt to ensure that it is not “in over its skis.” And with lenders being more conservative on leverage, multiple debt funds have emerged to fill the void. Everett noted that Principal likes this space, considering that subordinated debt provides a return of about 6% to 9%, with an equity cushion.
What worries these investors? Smith observed that there hasn’t been overbuilding in this cycle, and a downturn will only result from a recession. And Wilsmann sees the risk to real estate as being exogenous, from “crazy political things” or developments in North Korea, for instance. One lesson he has learned is “how quickly market liquidity can dry up if something happens,” which is why it is important for real estate investors to “stay diversified and pick your spots.”