In complicated conditions, organizing principles matter. When a disparate array of circumstances present themselves, the advice frequently comes, “Connect the dots.” Many of us will recall puzzle books from childhood where “connect the dots” brought us to a solution that showed a line drawing that revealed the puzzle’s theme, the unifying concept that makes sense of an otherwise confusing array of facts.
Real estate as an asset class has matured. Market participants need to realize this and make the appropriate adjustments.
The diversity of investor goals and choices is healthy—far healthier than the herd behavior that has sometimes characterized markets. As an international investment fund executive told us, “The differentiation of opportunities has—to a degree— expanded; niche product types like senior housing and selfstorage are being viewed as ways to ‘round out’ real estate holdings, taking advantage of specialized uses that are not ‘averaged out’ in major trends.” Many interviewees pointed to the
The world as presented in Economics 101 is clear and distinct, an ideal (and, indeed, idealized) construct. The world in which we live—including the capital markets—not so much. In the world of our daily activity, numbers count but, on their own power, do not determine decisions. That is a matter where judgment can—and should—influence action. Behavioral economists including pioneers Daniel Kahneman, Amos Tverski, and Richard Thaler have famously distinguished between “econs” (the wholly rational decision-makers and actors posited by classical economic theory) and “humans” (the rest of us).
The volume of capital is not constrained. The key is finding projects that can be executed using that capital.
The long and gradual return of the real estate industry to a degree of vigor beyond the expectations at the start of this decade has come in large measure through lending discipline and prudence. This, it must be candidly acknowledged, is the fruit of the painful lessons of overly ebullient behavior in the early 2000s, behavior that mispriced risk in lenders’ spreads, the rigor of borrower credit analysis, and, most particularly, unachievable projections on the part of underwriters. Remember the push to “get the money out the door” and the term “the Niagara of Capital”?
Although we seem to be in little danger of a repeat of the global financial crisis, one of our Emerging Trends interviewees spoke for many when he ironically commented, “I seem to have heard once that real estate was a cyclical industry.
Growth appears to be in vogue for 2019. Emerging Trends in Real Estate® survey respondents favored markets with potential for more growth over the traditional gateway markets. An investment adviser mused, “At this point, I don’t expect any potential correction to be significant, so I’d rather be in markets that bounce back quickly.” As the economy and real estate expansion prepare to stretch into another year, the market does not feel the need to get overly defensive and move into markets that are often perceived as safe havens in a down market. In fact, the opposite is true to a certain extent. An institutional portfolio manager offered, “At this point in the cycle, I am willing to go out a little ways on the risk spectrum, but the turnaround needs to be relatively quick. My thought is these faster-growing markets may be the best place to find those opportunities.”
Maybe it is time to reevaluate how we think about markets. It may be time to move away from the old stereotypes. In this cycle, we have seen so-called supply-constrained markets overbuild and ‘boom/bust’ markets show great restraint.
2019 Market Rankings Survey respondents continued the theme toward more 18-hour markets in the top 20:
Given the differences in demand drivers among property types, and the variation in the supply cycle for each, the degree of agreement, or common perspectives among developers, investors, and managers, on the outlook for the coming year or two is extraordinary.
For the short term, the theme appears to be “happy days are here again.” At 2020 or beyond, the sense of an ebullient future rapidly evaporates. Perhaps this is not such a surprise, since our interviews and surveys were executed just as the nation’s gross domestic product (GDP) spurted to an annualized 4.1 percent growth rate and the unemployment rate dipped to 3.9 percent. The propensity to expect those measures to strengthen, however, was sharply arrested by the awareness of a long cycle nearing its end and by the awareness of structural shifts not only in the economy, but also in the real estate industry itself.
The pace of change in all property types makes investing more complicated today. There is more investment committee discussion about the future viability and/or adaptability of properties
Logistics real estate remains the consensus overweight among investors thanks to a compelling story of cyclical and structural factors that have united to deliver superior returns.
A long and broad-based economic expansion has generated demand from the makers, movers, and sellers of goods who need to get product to ever-discerning consumers around the world. The rapid growth of e-commerce, accompanied by technological advancements such as predictive analytics, has forged a mind-set shift among consumers and businesses for unprecedented levels of service. The gold standard is the trifecta of faster delivery, greater product variety, and consistently in-stock inventory. The result of this shift is a spike in demand for logistics space, especially at the consumption end of the supply chain.
There has been change before. But now the pace of change is too fast to comprehend.
Rebalance: Redevelopment and Partnership Trends
"We’ll be more prudent with our acquisitions and our allocations for real estate because the valuations have reached their peak.”
Reassess, rebalance, and redevelop. For real estate investors, finding good deals has become a challenge. Capital is plentiful and pushing up prices on the best opportunities, so survey respondents plan to focus on improving, redeveloping, or selling assets rather than buying. Across the industry, investors are seeking to optimize portfolios to produce stronger yields. In this environment, success will come from being able to make decisions, pivot toward new opportunities, and act quickly. At this later stage in the cycle, investors want to “be more creative.” One interviewee said that a competitive market requires “agility