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If There Are ‘No Soft Landings,’ Where Can CRE Investors Put Their Money?

Clockwise from top left: Ivy Zelman, Aaron Appel, Willy Walker and Kris Mikkelson on the Walker Webast

Federal Reserve Chairman Jerome Powell on Wednesday announced the Federal Reserve would raise interest rates by half a percentage point, saying the Fed is “highly attentive to inflation risks.”

So are the experts on this week's Walker Webcast, who discussed how inflation and other trends are impacting the commercial real estate industry and where investors might look for opportunities in this uncertain economy.

Joining Walker & Dunlop CEO Willy Walker were Walker & Dunlop executives Ivy Zelman, executive vice president of research and securities; Aaron Appel, senior managing director of capital markets; and Kris Mikkelsen, executive vice president of investment sales.

“We've never been in an environment before where we have extraordinarily high inflation,” Appel said. “The only way to really slow the inflation is to aggressively pump rates. And the Fed sort of has a choice to make: Do they protect the assets and the capital markets and the wealth? Or do they fight the inflation?”

Appel said he believed the Fed would “do whatever they can to fight inflation because it's going to cripple the country otherwise.”

The Walker team agreed that the U.S. economy is in an unsettled place. On one hand, employment is high and the country appears to have mostly reopened after the pandemic. On the other hand, there are concerns in some circles about a looming recession, stoked in part by a weakening stock market and inflation that is at a 40-year high.

Compounding concerns for CRE investors, borrowing costs have about doubled in recent months, including in the “two hottest asset classes” of multifamily and industrial, Appel said.

“It's a tough pill for a lot of people to swallow, to see the cost of their funding come close to doubling in such a short period of time,” he said. “We've seen a pause on certain types of transactions, or larger-scale transactions that were out in the market for fixed-rate financing that have been pulled back. People are sort of waiting to see how this plays out. But I do think that the days of seeing 3% fixed-rate money are gone.”

Appel recommended that investors fasten their seatbelts because the economy is facing issues that markets won’t be able to easily self-correct.

“There's no soft landing here,” he said. “It's an impossibility.”

Walker countered that the economy has been in difficult spots before and recovered relatively smoothly. He asked his colleagues what was different this time.

According to Zelman, the answer is simple: inflation.

When Walker later asked where each of the three saw promising investment opportunities in 2022, Zelman, who last year said she would recommend concentrating on upgrading the aging housing stock, stuck to that strategy but said she has a new appreciation for cash.

“I think cash is king right now, even though that sounds counterintuitive given inflation,” Zelman said. “I'm concerned about what we're seeing and the dislocation in the equity markets. There might be some select markets where the land is constrained, the supply is very, very tight, and there's not a pipeline coming. But I'd probably say we'd more and more shift to cash and still go with that strategy.”

Mikkelsen said he would concentrate on buying core multifamily properties in the Sun Belt.

“I think it's a time to de-risk and have a flight to quality,” Mikkelsen said. “It's a time to focus on high-growth and migration markets and best-quality assets. And within those markets, those are proving to be the most resilient. I think it's a reflection of some of the smartest institutional capital in the market really understanding the resiliency that those assets offer.”

For his part, Appel said he is increasingly bullish on bitcoin. But in CRE, he said, the smart money is in hospitality.

“In the right cities with urban infill hotels, there's been a huge reduction in supply,” he said. “I think there's a big play in that space where someone can really outperform the market and get into assets at a very, very low basis with tremendous upside.”

The next Walker Webcast is on May 11. For more information, visit here.

This article was produced in collaboration between Studio B and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.

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