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In A Market Shaped By The Pandemic, Patient Investors Will Be The Big Winners

Tens of millions of people filed for unemployment in the past few months, and the coronavirus pandemic still grips the nation. This may not seem like an auspicious time for investors to get aggressive, but experts say there could be opportunities for those willing to look.

Many of those opportunities will be in distressed or value-add properties, but at least for now, most investors are taking a breather, and trying to understand the constantly shifting landscape.

“April [investment sales] volume was down 71% from a year ago,” Blue Vista CEO Peter Stelian said Tuesday during Bisnow’s Chicago Deep Dish: Distressed Real Estate Opportunities webinar. “I have a feeling May volume is going to be down even more than April’s was.”

In A Market Shaped By The Pandemic, Patient Investors Will Be The Big Winners
Austin skyline

Good deals are already out there, he added. His Chicago-based firm is  pursuing several industrial deals, one in the Pacific Northwest and two in the Midwest, including one in Chicago, but there are major challenges to completing proper due diligence.

“How do you do a deal when you have to ask someone to get on a plane to go check out a transaction?”

That’s just one example of how the pandemic is still shaping the environment, and Walton Street Capital Managing Principal Jeff Quicksilver said investors should stay disciplined and not get overeager.

“I think patience is going to be rewarded,” he said.

But both Stelian and Quicksilver say investors should still be prepared to play offense.

“We’re starting to see transaction activity pick up,” Quicksilver said. “A lot of lenders, particularly the big banks, are out of the market, on the sidelines, but generally we’re starting to see opportunities in both debt and equity become more appealing.”

“Our investors want us to focus on the types of investment we’ve done historically, and not venture too far afield,” Stelian added. “At the same time, we built our business significantly through the last downturn and I think strategically there are a number of things we’re doing to play offense so we can further expand our business.”

He pointed to the creation of Peak Campus, a division of Blue Vista that since 2003 acquired or developed $2.8B of student housing, as an example of how to execute a long-term strategy.

Stelian said the switch to the technology that enables people to work from home could help shape how investors eventually decide to build long-term value.

“Companies have now recognized that people can be very productive while not necessarily being together,” he said.

In A Market Shaped By The Pandemic, Patient Investors Will Be The Big Winners
Clockwise from top left: Blue Vista CEO Peter Stelian, White & Case partner Gene Leone and Walton Street Capital Managing Principal Jeff Quicksilver.

The most far-reaching change may have come from Nationwide, which announced in April it would shut down most of its offices, and switch to a work-from-home model. But even if most companies don’t make such drastic changes, dense urban markets will definitely take a hit.

“The big urban areas are saddled with lots of costs from the virus,” Stelian said. “I’m a believer that more people are going to move to lower-cost places, and the internet will give them access to many of the benefits in terms of entertainment and so forth that the big city provides. It will be interesting to see if institutional investors start changing their view of both the appeal, as well as the risks, of urban centers.”

Quicksilver said the coronavirus crisis could reinforce trends that were already underway. Before the crisis, his firm focused on sectors such as industrial, multifamily, single-family for rent and life sciences, and that may not change going forward.

“You continue to see those sectors perform well in the post-COVID-19 world,” he said. “I expect that trend and focus to continue for us in terms of property type selection.”

On market selection, Walton Street has always focused on high-growth, low-cost metros such as Raleigh, Nashville, Charlotte, Austin and Denver, all of which have sustained population and employment growth, he said.

“The danger we’ve avoided is trying to chase yield by going into markets and buy at high cap rates in what I call tertiary markets, where the fundamentals of tenant demand are very shallow, and that don’t have a lot of liquidity.”  

Quicksilver agreed that going forward there will be even more concern from investors about higher-cost urban centers like Chicago, and that will end up favoring Walton’s chosen markets.

“These high-growth, low-cost markets will really be a focus for a lot of funds similar to ours."