How investors, lenders are responding to the risk of a potential U.S. slowdown

Posted on Posted in Financial Trends, Investment & Financing, Investment Niches, Market Updates

With strong consumer confidence, ongoing economic growth, and low unemployment, there are few signs of an imminent recession in recent U.S. economic data—but real estate experts speaking at a recent industry event in New York City said they want to be prepared.

“I know in my heart that there will be a correction, though I can’t tell where it’s going to come,” said John Jacobsson, executive vice president of capital markets for the Related Companies.

Jacobsson was one of several speakers at the Schack Institute of Real Estate’s 51st Annual Conference on Capital Markets, held by New York University in November in New York City. Speakers discussed their plans to manage shrinking investment yields and the risk of investing late in the real estate cycle.

“It is increasingly difficult to deploy capital at the risk profile that we want,” said Gary Phillips, managing director and head of acquisitions for Allianz Real Estate of America, and a ULI product council member.

 Watching for a Downturn

“We are positioning as if there is going to be a recession,” said Alisa Mall, director of investments for the Carnegie Foundation. Her team is allocating its investments so that if prices fall rapidly on the Dow Jones Industrial Average, its funds will not suddenly be overallocated to real estate. That means trimming real estate in favor of keeping more cash on hand. “We want to have dry powder.”

Private-equity funds also have to work harder to make investments that provide a good return relative to the risk of the investment. Some investors are accepting lower yields to make deals. Others are taking more time to find deals that offer a solid return.

“You can toggle pace or toggle return,” says William (Billy) Rahm, partner and senior managing director of Centerbridge Partners. “We have been very choosy. . . . In the last 12 months, it’s taken much longer to make deals.”

When it does buy property, investors like Carnegie are focusing more on niche property types like student or senior housing. “What kinds of properties are likely to be recession resistant?” asked Mall. “We are looking for the kind of investments where we are likely to get that income.”

Alternative investments ranging from data centers to cellphone towers also are attracting capital, becoming almost mainstream as more investors become aware of their history of steady income. “Everyone keeps calling these properties niche, but everyone keeps talking about them,” said Phillips.

Even if the U.S. economy continues to grow, real estate investors can no longer count on rapid appreciation in property prices or quickly rising rents. Prices and rents are already very high, compared with those seen a few years ago. “Rents everywhere are now 20 percent to 30 percent above prior peaks,” said Khaled W. Kudsi, senior managing director of Northwood Investors.

At the same time, the cost of investing in real property continues to rise. “Anyone underwriting real estate has to assume the cost to operate and the cost to finance properties is going to accelerate,” said Rahm.



Read more on Urban Land Institute

Leave a Reply

Your email address will not be published. Required fields are marked *