PARTNERS, Thought leadership

Bear or bull: CRE’s investment prospects

The commercial real estate (CRE) reporter Konrad Putzier recently published a fascinating article in the Wall Street Journal (WSJ) about the sector’s resilience, and specifically investors’ confidence in that resilience. Published in May 2020, the article unpacks the factors that have worked into the sentiment analysis, showing that despite the hard knocks of the pandemic, there is a lot of positivity about the future of CRE.

No small troubles

In many ways, CRE was a prime candidate to be severely impacted by shelter-at-home orders and the migration of workers to their homes. High-rise office buildings, the report starts, stood largely empty, and around a half of hotel rooms went unoccupied. Retail was also under severe pressure. Despite these layered burdens, the CRE market in the US remained relatively strong and is looking up in 2021.

“Prices fell far less than after the 2008 financial crisis and are already rising again,” he writes. “The number of foreclosures barely increased. Pension funds and private-equity firms are once again spending record sums on buildings.” This is, the article argues, partly due to the federal government taking bold measures to support landlords and protect them from “suffering steep losses”.

According to Green Street analytics quoted in the piece, CRE prices did fall some 11% in the March to May 2020 period (compared to 37% after the 2008 crash), but have rebounded by 7% – “erasing more than half their pandemic declines”.

Investor confidence

The sector’s other saving grace is that it remains a darling of investors. The WSJ points to “big global pension funds… raising their allocations to commercial real estate”. Private investment funds with a real estate focus had $356 billion in cash reserves in April, and a study from Cornell University and Hodes Weill & Associations found that 29% of large institutions said they planned to increase their CRE exposure.

Inflation haven

Analysis from Globe St underlines some of the same findings as the WSJ report, specifically in that real estate is profiting from its perception as an inflation hedge, and despite a high vacancy rate for offices, it describes analysts as “still bullish on the sector”. In fact, real estate investment trusts (REITs) have been the best performing asset class in 2021 so far.

Moody’s however takes a more cautious view. Also speaking to Globe St, they say, “while industrial will remain steady and multifamily family rents and vacancies will turn around in the short term, the future of office, retail, and some hotel subtypes is uncertain”.

Part of the package

The contemporary CRE investor can however bet on both outcomes through diversification. Writing for the Forbes Real Estate Council, Andrew Lanoie of The Impatient Investor has penned an even-handed explanation of the divergence of real estate and CRE prospects in tough economic times, and how CRE in the investment portfolio – diversified by type and region – can still carry its weight in your wealth strategy.

In fact, he concludes “investing in commercial real estate the right way can shield your portfolio from the next downturn.”

Social: Are you bullish or bearish on the CRE investment prospects? Tell us what’s driving your investment choices in this volatile time…

Piece of the Pie

Alex Pacella, for Properties Magazine April 2021

The youngest of my family is an interesting sort. While all of my children are different, this one is an outlier. A few years ago, when he came home to proudly announce he had gotten a job at a local pizza shop, I wasn’t surprised.

For the full article, click here.http://digital.propertiesmag.com/publication/?m=15890&i=702819&p=32&ver=html5

Thought leadership: How CRE fits into corporate strategy

The cliché of “Location, location, location” applies in commercial real estate (CRE) as much as residential, but what factors you bundle into that assessment are, naturally, vastly different and should be explicitly tied to corporate strategy. That’s the realm of corporate real estate management (CREM).

Corporate decisionmakers

A savvy corporate client on the hunt for premises will be asking whether a proposed site will support their corporate goals.

When considering a potential position for offices or logistics, for example, an assessor might ask about the transport links, the nearby shops and facilities. They may consider perception and whether the location is in keeping with brand identity.

They will need to understand the current and future demands the company will make of a location, and how the lease or sale terms will be perceived by a board or management team.

Access to (human) resources

There is another oft-overlooked location factor that NAI argues should form part of a CRE strategy: talent and access to the right people.

This is the nature of cities or areas that become hubs for specific industries and sectors: they have a rich pool of workers with the right mix of skills to draw from. If you’re looking for the top geologists in the world, you probably want to focus on an area associated with mining. Want people who are passionate and knowledgeable about the ocean? Try Hawaii. Silicon Valley, and increasingly Texas, are meccas for the technically minded.

There’s remote work and transferable skills to consider, of course, but generally speaking a talent pool linked to an area is self-sustaining, in the way that Silicon Valley and Stanford will always be linked in their mutual development paths.

What type of staff you envision filling your hallways and boardrooms will also inform other location considerations: like access to good schools, parks, or public transport.

Property as an asset

Last but definitely not least, the right property is an asset and an investment with future dividends. This is why a smart broker, or their corporate client isn’t just looking at what is now, but what could be, what’s on the horizon, and any prevailing trends that need to be considered.

A client with explicit return on investment (ROI) expectations or a particular appetite for risk – as just two examples – should place that information on the table from the get-go, as premises can be (and often are) serving the dual purposes of functional and financial.

Remember: business strategy should drive a real estate decision, not the other way round.

Prop trends: Sustainability is the new black

The Covid-19 pandemic might have been an unforeseen crisis that sent the world spinning but, general volatility and the incidence of global or major crises are expected to rise in the coming decades. This is the result of a complex matrix of overlapping issues, including climate change, globalization, population growth and urbanization, and migration.

Against this backdrop, analysts have been warning that companies need to relook at their plans and forecasts through an ESG criteria lens. ESG stands for environmental, social, and governance.

According to a McKinsey report on the topic (published in Nov 2019), “ESG-oriented investing has experienced a meteoric rise. Global sustainable investment now tops $30 trillion—up 68 percent since 2014…” They ascribe this sharp acceleration to “heightened social, governmental, and consumer attention on the broader impact of corporations, as well as by the investors and executives who realize that a strong ESG proposition can safeguard a company’s long-term success.”

ESG in CRE

ESG is a rising concern for all businesses, and commercial real estate (CRE) is not exempt. ESG within this context would include matters such as the energy footprint of a property or development, its carbon emissions, ethical and local supply chains, labor relations, diversity, and inclusivity, and then the governance procedures and controls in place to comply with the law and meet the needs and expectations of all stakeholders.

A solid ESG strategy creates opportunities for partnerships, strengthens ties with communities, and links back directly to things like corporate missions and visions, for the way you want to operate and the changes you want to make in the world. On the other hand, failing to account for ESG in your property or development plans can become a material risk for your business.

Competitive advantage

ESG platform Goby looks at these issues specifically within CRE, and they believe having an ESG strategy is a competitive advantage for CRE professionals and brokerages. There are, they say, many tangible benefits to this – such as lowering your energy costs – but moreover, emphasize the intangible benefits that flow from a solid ESG strategy.

Goby’s ESG in CRE report (hosted on HubSpot) argues: “Intangible benefits are harder to measure directly, and include metrics like tenant comfort, word-of-mouth advertising from tenants about building improvements, and a reduced environmental impact.

Attracting investment through ESG

Over and above “doing the right thing”, ESG advocates believe that these holistic sustainability matters can make a compelling investment case within CRE investing.

As the Goby report outlines, when asked what they considered essential and important elements of ESG investments some 79% of investors cited ethical parameters and values, 78% mentioned positive environmental and social impacts, and 77% reported that they believed ESG factors could play a critical role in broader financial performance.

This echoes the McKinsey investment growth story, and with those numbers, it’s not a leap to say that that’s the final word on the bottom line.

CRE Capital Markets: making money work for you

The capital markets function within commercial real estate (CRE) is such a huge part of the property industry these days but is still quite poorly understood by those on the outside. Yes, there is a certain magic to bringing all the right elements together to support a smart capital market deal, but that doesn’t mean it’s a mystery or unknowable. Conquering capital markets is a matter of strategy and value. You just need the right partners to guide you.

Course 101

Let’s get back to basics: If you are talking about capital markets as a general term (not necessarily within real estate), then you are describing a place for buying and selling stock, bonds, and debt instruments. A stock exchange, like the NASDAQ, is a type of capital market.

Zoom back into CRE

Within CRE then, you can see how capital markets are places for brokering financial deals specifically in property. When a brokerage, like ourselves, offers capital markets as a service this means we are providers of capital solutions relating to property. This can mean solutions for investors and for occupiers and may include advising on investments, recapitalizing, or debt placement – what’s on offer really depends on the brokerage and its own expertise in-house.

NAI Global’s capital market services include:

  • Investment sales
  • Note sales
  • Live and sealed bid auctions
  • Debt placement
  • Acquisition advisory

The right capital market partners

A capital markets service provider needs two overarching things for success: A depth of knowledge (expertise in the financial specifics and deal types), and a breadth of network (access to the right people and right primary and secondary markets).

Emerging trends

From crowdfunding to app-based finance, capital market professionals are also facing a wave of innovation and change, largely driven by factors like digitization and the fourth industrial revolution.

“Evolving technology means the barriers to entry are coming down, but expertise and experience continue to be what sets capital market service providers and consultants apart,” explains Jay Olshonsky, President & CEO of NAI Global. “That’s what you want on your side when you’re looking for the capital solution you need.”