Even as the pandemic recedes in the rearview mirror, 2022 has brought its own set of challenges to commercial real estate investing. For market participants looking for advice on overcoming these challenges, it is always instructive to glean insights from seasoned institutional investors. That’s what Transwestern will be offering at its 15th Annual Transwestern Capital Markets Symposium on Wednesday, June 15 in Chicago.
The discussion moderator will be Steve Pumper, Executive Managing Partner of Transwestern’s Capital Markets and Asset Strategies Group. Confirmed speakers include Tuba Malinowski of Stockbridge Capital Group, Craig Tagen of Clarion Partners, Tim Ellsworth of DWS, Gio Cordoves of KBS, Paul Ketterer of AEW Capital Management and Jim Halliwell of Principal Real Estate Investors.
Connect CRE will provide post-event coverage of the symposium. To provide a sample of the insights the conversation will yield, we polled panelists for their observations on current market conditions. Below are answers from Tuba Malinowski, Head of Portfolio Strategy at Stockbridge.
Q: 2022 has seen its share of surprises since the beginning of the year, from stock market fluctuations to the Russian invasion of Ukraine. Have these factors affected your investment prospects, and if so, how?
A: Yes, soaring inflation and Fed interest rate hikes have affected our investment outlook. We began to consider the possibility of a recession in our underwriting. Prior to the surge in inflation, the consumer was healthy, and real estate fundamentals reflected this consumer and business strength. Today, we adjust our underwriting to assume a 50% probability of recession. The combination of interest rate hikes and inflation concerns led us to increase our exit cap rates and adjust prices for certain property types downward by 3% to 8%.
Q: Is your investment strategy a continuation of 2021, or are you looking for newly discovered opportunities?
A: In 2022, our acquisitions were a combination of new opportunities and a continuation of the strategy. We remain bullish on multi-family and industrial in specific markets. Rising interest rates should provide us with more opportunities as a cash buyer. Recently, we’ve seen debt-driven buyers exit buying pools, allowing us to buy at higher cap rates than six months ago. We think there will be opportunities and see ourselves as relative opportunity buyers. The current market disruptions are creating many opportunities.
Q: What are the key elements of your investment thesis for 2022?
A: Throughout the country, we buy and develop industrialists. We favor the Southeast markets due to their strong growth and performance over the past few years. In particular, Southeast markets with a lower relative cost of living that were more “open” during the COVID pandemic have attracted people who can work from anywhere and businesses that seek a conducive environment. to business. Additionally, we have a large industrial presence in the Inland Empire of Southern California and we continue to be active in both development and purchasing in this market.
Due to the affordable housing crisis in the United States, we turned to affordable housing in our type of multifamily ownership. The vast majority of new apartments are unaffordable and we have started to develop and buy this product.
Currently, for retail, we like malls anchored in a grocery store. In what many would consider a contrarian game, we recently acquired a large portfolio of grocery-anchored centers in the Southeast. These centers have always been considered a type of defensive property, but during the COVID pandemic they have been shunned along with the rest of retail. Centers with a strong grocer have proven resilient to the pandemic and have performed well over the past two years. We viewed them as a valuable income component of our strategy, as they have higher cap rates than multi-family and industrial properties.
Q: Regarding your acquisition activity, are the Fed’s actions on rates likely to have a material impact on the cost of capital by the end of this year and into 2023?
A: We believe it will and are already seeing an impact. Talking to our brokers, there is between 3% and 5% price adjustment in most property types. We are seeing a price adjustment of more than 5% in properties rented on long-term credit. Frankly, we think there could be good buying opportunities.