What’s on Real Estate Investors' Minds?
Market Topics from Miami US Real Estate Conference for Latin American Investors
Last week Simon O'Shea (Ballast Rock CIO), Ian Garcia (Ballast Rock COO & Treasurer) and I were asked to present at a US Real Estate conference in Miami for Latin American Investors. Below are some of the topics on investors' minds at the conference:
Capital continues to flow into real estate from both domestic as well as overseas investors. The swing to the far left in a number of South American nations has left local investors spooked and they are looking to move capital overseas and out of local currencies. Some large local corporates have cleared out their cash holdings (examples in Chile), preferring to make sizable dividend payments to investors and allow those investors to move money offshore, rather than reinvest locally in the medium term. A lot of this LatAm capital is looking for a home in US real estate.
As cap rates have compressed nationally, people are getting more and more creative in their hunt for yield. One developer was buying distressed/abandoned standalone golf courses and trying to develop new communities. A potentially lucrative strategy, but also highly risky given the level of permitting risk involved. Another developer was buying landfill to fill with asbestos and cement. Not scalable (and questionable for the environment), but highly profitable.
At the same time, investors are increasingly conscious of risk and looking for downside protection e.g. one sponsor is buying Midwest single family residential ("SFR") then converting to Section 8 housing - low upside, but protected downside trade (although they were scaling what appeared to be too quickly).
Net lease investments are also increasingly in demand as the economy rebounds and life returns to “sort of normal” – stable cashflows from high quality tenants on long term upwards only leases provides a downside limited investment with good protection against inflation in the future.
Prime Urban Office still remains relatively unloved. It doesn’t feel like there’s a catalyst for forced/distressed sellers, but multiple owners discussed reducing their office footprint, not to zero, but by 1/3-2/3 as they move to hybrid office model. Some discussion of "hub and spoke" office model, smaller central office, more suburban offices for staff/client meet-ups etc.
Logistics was relatively popular topic, although consensus was that last mile was now too rich with a lot of capital deployed to new construction, meaning the pricing/supply dynamic doesn’t look favorable near term. Also concerns about tenant concentration risk (“everybody seems to be chasing Amazon”)
Workforce multifamily was by far the most popular topic of conversation, and specifically value-add strategies in the Southeast - there is a lot of capital looking for deals here (it was a SE conference, so naturally some geographical bias). But we expect cap rate compression to continue as there is so much capital looking for not enough product.
Inflation on Everyone's Minds
There were a variety of views on inflation and lots of discussion about high appliance prices, difficulty in getting windows/trusses for construction etc. and Insurance costs have also gone up across the board. Whether inflation is/will be transitory is debatable, but the consensus was that most property classes should perform well in an inflationary environment.
In particular, workforce multifamily should perform well in periods of higher than normal inflation as the short- term nature of our leases allows us to react quickly to inflationary pressures, and the relatively low price points for the average rental rates on our portfolio mean that wage inflation should more than adequately offsets any rent increases for our communities.
Concerns over Cap Rate Movement
Given the current absolute levels of cap rates, there was a lot of discussion about the possibility of cap rates increasing. Again, there were a variety of views, but we believe that our strategy of workforce multifamily value-add provides an effective hedge against any reasonable future cap rate increases. We only purchase assets where we believe we’ve identified significant net operating income upside from our capacity to add value and can look to push cap rates 100-150bps higher through operational efficiencies and CapEx deployment.
At Ballast Rock we help originate and distribute countercyclical and recession resilient real estate funds. Please feel free to connect to learn more about how we work with experienced real estate professionals to offer investors the opportunity to invest in income producing assets with a positive social impact.
