Contact Us

Stockbridge Capital's Steve Steppe: Real Estate Remains Attractive, But Caution Is Key

With global uncertainty affecting investing decisions, real estate remains an attractive investment, though caution is key, says Stockbridge Capital Group executive managing director Steve Steppe. Steve will be among our panelists sharing their insights at Bisnow's San Francisco Capital Markets event March 10 at Parc 55 Hilton Hotel.


We caught up with Steve to talk about his expectations for this year. Steve tells us it pays to be conservative in the current cycle.

In his 40 years in real estate, Steve says people always have underestimated volatility, which is true for the entire Bay Area. Market timing of any asset class is almost impossible, Steve says.

Seasoned, smart investors leverage conservatively to ride through the downturns and not be forced to sell in down cycles, he tells us. Real estate returns have exceeded investor expectations for the past six years. At some point, returns will disappoint expectations, he says.

Still, real estate remains an attractive asset for investors. Long-term returns for low-leveraged real estate should exceed bonds and fall below US equities, Steve says. In the current economy, which has low inflation and slow growth, rates of return have exceeded a 5% real return—the expectation for most institutional investors. There has been a pullback in core capital allocations in the past six months, he says. Real returns for new properties are at or about an unleveraged 6 IRR.

Most pension funds have long-term investment assumptions for a 7% or 7.5% rate of return, and real estate is supposed to yield at least 8% to 9%, Steve tells us, helping to reach that goal.

Stockbridge has two value funds producing 14 to 16 IRR using 50% debt, making them attractive for investors, he says.

When asked what Stockbridge is most bullish on at the moment, Steve tells us industrial is by far the company's favorite property type, though it's priced out of the West Coast for the time being and can find much better opportunities in other regions.

He says Stockbridge is fairly negative on multifamily because there is excess supply in many markets—including the Bay Area. An exception to that is manufactured housing, which have been very successful for Stockbridge's opportunity fund, with one of the largest portfolios in the private market.

Office buys are a more selective process, and Stockbridge opts to use no debt for those purchases since cash flow can be volatile.

Steve mentioned Stockbridge has bought a lot of retail in recent years and is looking for more. "It is the toughest property type to buy, but we have been very successful in what we have purchased," he tells us.

To hear more from Steve and our other speakers, join us at Bisnow's San Francisco Capital Markets event March 10 at Parc 55 Hilton Hotel, starting at 7:30 am. Sign up here!