Commercial Real Estate Investing In A Changing Market: An Expert Adviser Weighs In
Commercial real estate investment volume dwindled across the nation in 2020 as a result of the pandemic. In 2021, the market made a dramatic recovery, with CRE investment hitting a record $746B in the U.S., up by 86% from 2020. Now, however, the market could be facing a decline once again because of interest rate increases and fears of recession.
As a result, investors are now caught between what was working six months ago, and what to do next.
Investment in commercial properties, especially those in the multifamily, office and industrial sectors, increased by nearly 50% in the first quarter of 2022 compared to the year prior. There is an elevated demand for higher-end rental units due to roughly 60% of the American workforce still working from home. Brick-and-mortar retail space suffered an immense loss in 2020, but it is showing signs of recovery because of its swift moves to adapt to the digital commerce landscape and the reopening of the global economy.
While some are concerned about the market's volatility, a wide array of investors remain steadfast in their optimism for the future. However, no market comes without its challenges.
Matt Bear, founder of Bear Real Estate Advisors, believes that, generally, there are two types of investors: growth investors and value investors.
“Growth investors believe that if they buy an asset for $1 today, in the next five years it will be worth $5,” Bear said. “That increase in value could be pure luck, or it could be that the buyer has added value to the investment or done some other skills-based work to make the asset more valuable over time.”
On the other hand, he said, value investors believe that if they can buy an asset for less than a dollar because of mispricing or capital markets freeze, it will be worth a dollar or more in the future. Put simply, a value investor believes a cheap purchase is more valuable than the quality of the buildings they purchase.
According to Bear, both types of investors are forward-thinking. They are focused on the future because they can’t invest in the past. They can, however, learn from it.
Bear shared some insights into what his team is learning from today’s market. First, interest rates will always rise and fall. Adapting strategies to market movement is paramount to the success of this business. If a business plan relies on market stasis, that plan will win until it loses.
Bear said there is an inevitable risk involved with property investment. Risk should be viewed as the likelihood of losing money. While some investors may be focused on the risk of their potential investment, it must be weighed against the risk of missing out on opportunities. If an investor likes industrial assets at a 4% cap rate, they should display more interest at a 5% to 6% cap rate. If they believe that industrial demand persists, then they’re happy there is a reprice. Investment involves an evaluation of the time it will take to get the desired result. Time horizon relative to debt maturity is what makes real estate investing difficult.
“Real estate is a functioning market if there is lending,” Bear said. “While the cost of money is important, the availability of money is what determines the stability of a market. In capital markets, the mantra is liquidity, liquidity, liquidity. When there is no lending, massive price shifts occur and fears of market collapse arise. Great investors recognize these moments and capture value that is being overlooked due to fear or lack of capital.”
According to Bear, real estate is a micro-business, but investment strategies are based on macro news. The pandemic caused regional shutdowns of offices, retail spaces, restaurants and schools. As industrial and logistics real estate were thrust onto center stage because of delivery demand, housing and multifamily assets skyrocketed in value due to pandemic policies and the movement of people. Investors responded to this, as evidenced in CRE investment volume.
As for the current, uncertain office market, Bear said that companies will continue to call people back to work, which should create value-add to core-plus return opportunities, provided they are in a market that has employment drivers and amenities that meet the needs of the employee base. Desirable office space before the pandemic is still desirable and undesirable office space remains undesirable. Obsolescence of buildings across all property types is a risk that needs to be addressed first and foremost. Investors are still unsure that they can buy a building that has insufficient windows and at a price favorable to them. Those buildings will eventually just be worth the land value.
That is a painful process, Bear said. The lack of investors buying office buildings is the signal that there is the possibility of outsized returns and of course risk, but that is the game. Therefore, knowing risk tolerance relative to desired return goals is of utmost importance for investors.
The team at Bear Real Estate Advisors is working with clients to navigate the waters by using its established network of relationships that gives the firm a unique opportunity to build clients’ real estate portfolios.
“Our priority is to deliver real estate investments that fit the thesis and strategy of their clients,” Bear said. “We are an extension of our client’s internal investment teams to assiduously scour the globe to connect the right combination of people, property and capital. This is what enables us to provide insight, value and lifelong relationships.”
While the state of the CRE market remains ever-changing, many CRE professionals, investors and developers still have questions about the future, particularly concerning capital markets. Join Matt Bear and other industry leaders as they discuss the investment opportunities, challenges and overall strategy for 2022 at Bisnow’s upcoming webinar: Moving with the Market: A Commercial Real Estate Global Capital Flow Discussion.
This article was produced in collaboration between Studio B and Bear Real Estate Advisors. Bisnow news staff was not involved in the production of this content.
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