Wondering how evolving CRE trends are shaping up for 2021 and beyond? Melissa Houston, Director of Business Development at Juniper Square, recently moderated a panel at the IMN Real Estate Private Equity Fund Virtual Forum, discussing everything from the rise of new “boomtowns” to how to attract and retain investors to the impact of the new Biden administration on the real estate industry. Find out what panelists Rick Hurd, chief investment officer at Waterton Associates; Rob Bollhoffer, managing principal at 29th Street Capital, and Susie Charendoff, head of investor relations at Antheus Capital, think might happen in the real estate industry and how you can adapt and thrive in 2021 and beyond.
2020 was a year of migration as people in cities like San Francisco, Los Angeles, and New York City left in search of more space and less population-dense environments to wait out the pandemic. This flight caused apartment vacancies to climb and sale prices and rents to fall. While these urban areas and new developments within them may be out of favor, and higher-leveraged developers may struggle, there was consensus that cities will eventually bounce back and well-capitalized developers will survive, leading some to think it’s a good time for contrarian bets in the urban core.
Charendoff thinks that, longer term, many people will continue to want to live in cities, “Although some made temporary moves, our sense is that many will come back for all the reasons they wanted to be there in the first place. According to Hurd, “With rents down 20% in some cities, cheaper rents will eventually draw people back to urban areas. But cities have some tough decisions to make. They have to figure out how to provide critical services without drastically raising taxes. They have to encourage businesses to stay, and that means focusing on safety, affordability, and improving people’s lifestyles with clean streets, better transportation systems, and reopened restaurants, bars, concert venues. In other words, all the things that draw younger people downtown will be important to bringing cities back.”
The panelists were mixed on the multifamily sector with some distress expected by all. That’s forcing managers like Hurd, who is not typically a class C buyer, to be more opportunistic.
We’re looking at Class C properties in markets that are out of favor, have been hit hard, or where there have been some new deals or 1980s-like value-add deals.
There are some bright spots. Managers—and investors—are taking a new look at secondary and tertiary markets as well as “meds and eds.” The panelists cited new opportunities in places like Salt Lake, Austin, Sacramento, Charlotte, Chattanooga, and Columbus and other markets where there are barriers to adding new supply, where supply is decreasing, or where demand is increasing, typically because of proximity to medical centers or universities. Another unique play is hotel-to-residential conversions and all-suite hotel portfolios.
Rob Bollhoffer characterised the current environment as either light value-add or heavy lifts, “We’re local in 14 markets and developing quite a bit right now. We continue to think there’s a big play there with everything stalled, particularly in some key markets. Anything typical value-add is, in our view, overpriced so we’ve been looking to either sell and 1031 exchange into newer properties or go heavy, heavy value-add, almost a redevelopment play.”
The panelists believed that Biden has the power to make changes that could both benefit and restrict the real estate industry. They thought his tax plan, which calls for taxing long-term gains as regular income, eliminating 1031 exchanges, and ending the 10% step-up basis, would have a largely negative effect on the real estate industry.
On the other hand, they agreed that planned investments in green infrastructure and an expansion of social safety net programs could prove to be beneficial for both the economy and parts of the real estate industry. Assuming the vaccine rollout is successful, there was consensus that the economy will likely come roaring back in 2021. Citing pent-up demand, the panelists expect consumer spending to recover, helping businesses to grow and hire, which is all great news for both retail and the multi-family market. In spite of shared concerns about the impact of taxes and the long-term impact of rent control, particularly in California, there was agreement that most economic stimulus efforts as well as moves to make affordable housing a stated priority for the country could all have a positive impact on the real estate industry.
All agreed that opportunity zone (OZ) funds will remain a good investment. Biden sees promise in and backs the program, and any proposed changes should not affect the program’s underlying economic or tax incentives. The consensus was that investors should remain confident about investing in OZ funds, and any Biden-proposed changes will only increase transparency and help aid in the recovery of distressed areas.
COVID-19’s Impact on Capital Raising and Financing
Rick reported that Waterton was in capital-raising mode in 2020 and, despite the pandemic, they were very successful and made some important changes to how they operate, “I think one positive has been that instead of traveling around the globe, we’ve done it all virtually. It’s just been a huge plus for costs and our time commitments. It’s been a positive for our investors, and I think the virtual meetings will continue to be a bigger part of fundraising going forward. Hurd was less positive about financing, however. He said, “If you have a deal that is unstabilized, it’s much tougher to finance. You have to go to the debt markets and leverage is lower and costs, fees, and spreads are up, making everything much more difficult.”
Antheus also had a successful fundraising year with Susie reporting that, “thankfully, we’ve had interest from new investors as well as tremendous interest and support from existing investors who are investing further. Our returns look more like value-add returns, and so I think in a market where a lot of people are having a very difficult time, people are very happy to do something and invest in something that appears to them to be safe and solid, and certainly has tremendous tax benefits.
Bollhoffer said that, while they were looking at raising a fund, they switched gears completely, “We didn’t want to be pressured to do a deal so we continued our one-off strategy, doing deals when we see them. We’ve increased our network of investors, but we steered away from a fund completely.
ESG Takes Hold
Environmental, Social and Governance (ESG) is no longer just an emerging trend. It’s quickly becoming a critical component of many managers’ decision-making as risk management, resiliency, transparency and social engagement—all key outputs of ESG—take center stage.
According to Susie Charendoff, “ESG is a huge part of the discussion with every investor we meet. I think a lot of investment managers are still behind the curve on it. We’re doing what we can to improve, but we certainly have a long way to go.” She went on to explain that Antheus is committing to ESG in a way that goes beyond fundraising and investor communications.
We’re very focused on ESG now and looking at what we can do to make our properties greener and, in many cases, these changes are not just good for the environment, they will help us save dollars. Some improvements will require upfront investment, but we are unearthing a lot of really great opportunities in our portfolio by incorporating sustainability.
Green upgrades are one of the fastest-growing trends in single-family homes, but demand for more smart home technology and touchless controls is starting to grow in the multi-family space, too. According to Hurd, “We’re not developers, but we are taking a hard look at our portfolio, especially in the urban areas. To keep residents in our buildings, we’re increasing our technology, including self-guided and virtual leasing tours. We’re installing smart technology to control elevators, doors, and intercom systems. We have to increase our internet and bandwidth speeds as the residents continue to work from home. It’s a must. If you don’t have it, they’re going to leave and leave very quickly.”
Susie thinks another reason for the increased demand is that people want to live in buildings where they feel safe, “Touchless entry from street to unit, with every part being touchless, including elevators, the whole thing.”
Back to the Office
One of the most talked-about real estate topics right now is what happens once we can all safely return to the office. The panelists agreed that much of the technology adopted during the pandemic has been a great improvement, and there’s every reason to keep it and continue to enhance it.
They also agreed that the Work from Anywhere (WFA) model is likely to continue, but most people will return to offices once it is safe, which will require changes to workspace design and how public working spaces are used.
Charendoff summed it up, “I think people will continue to work remotely, but many will want in-person interaction, whether that is at work or in their buildings. So many people live in small units so we think multifamily buildings with large, safe workspaces where folks can come out of their apartments, but still be in a place where they have everything they need and are able to work safely will be a draw. We’re focused on and taking advantage of technology to make it happen.”
There was also talk about the emergence of new types of real estate investors and whether that would lead to increased competition for buildings, new regulations, reframing what accreditation means, or the need to offer new investment vehicles or more granular reporting.
Bollhoffer is seeing new buyers, “We do see a lot of investors, particularly from New York or California coming into areas like Denver, Austin, or Salt Lake and bidding up properties. We’ve taken a back seat. It’s a lot of smaller retail money, and I’d argue that those people aren’t fiduciaries. We’re selling to those groups and, for us, that’s the better play right now.”
Hurd doesn’t typically raise money from high-net-worth investors, at least on the multi-family side, but he is seeing changes in the types of information that investors are looking for, “Our investors are really increasing the reporting requirements. It’s already such an effort today — no one wants the same information so we have to prepare different answers for each investor. On top of that, we are now an RIA, which has been great, but we’re still getting used to what we can say and do, which is the cost of raising bigger and bigger funds with bigger and bigger investors.”
Charendoff thinks that new investors will mean new regulations and an ever-increasing burden of keeping up with regulatory changes, but she’s pro-retail investors.
I think technology like Juniper Square is a great help in managing since it makes the incremental cost of adding a new investor much lower than it used to be so it becomes easier to have more customers, even if they are writing smaller checks.
Charendoff continued, “While it’s nice to secure large commitments from a handful of institutional investors, the truth is that we have many loyal family offices and high-net-worth individual investors and we’re still committed to serving those types of investors.”
To wrap up, each of the panelists was asked to predict what the future holds for the CRE industry.
Hurd believes the pandemic fast tracked technology adoption, “I think that the digitization trend is just going to continue to accelerate and reshape the real estate industry much faster than anyone expected—and it will change our business dramatically.”
Bollhoffer thinks single-family rentals or build-to-rent will become a very valid industry, “We’re building some in Phoenix right now and, to our surprise, the response has been strong and different than expected. Our customers have been 60% single females because of safety, which is a response that we weren’t ready for, but it’s worked out terrific.” On the flip side he’s bearish on the micro unit trend, “I think that’s a disaster. People want room. I think that’s a fool’s game.”
And Charendoff thinks there’s a new relationship between humans and the environments in which they live and work, “People want more out of their spaces – they want their living spaces to have co-working spaces as well as a gym and a cafe. It’s experiential as much as it is functional, and I think that they are going to be looking for that.”