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Real Estate – Four Factors today

PPB keeps its pulse on today’s market by being immersed in annual fund manager meetings and conferences around the country. This Spring’s meetings left many, including myself, bullish on the potential returns of private real estate. While cap rates for Core, Class A apartment buildings in major cities are certainly compressed, other classes and strategies remain of interest, such as work force housing and grocery anchored retail.

Consider these four factors in private real estate, as they indicate the real estate cycle is still strong for commercial properties:

• Demographics matter – baby boomers are still starved for yield. With the baby boomers coming out of the work force and bond yields remaining near historic lows worldwide, real estate provides an immediate solution to produce income, resulting in demand remaining strong for real estate.
• Cap rate spreads – while cap rates have certainly compressed over the past ten years, the spread to treasuries remain attractive, especially if interest rates climb back down.
• US market transparency – the information quality available for US investments continues to attract yield starved investors from around the globe who are experiencing negative interest rates in their home countries.
• Portfolio diversification – private real estate has proven to be an excellent portfolio diversifier over the past thirty years. Private real estate markets experienced half the drawdown of the public markets while maintaining strong cash flows. The premium of private, illiquid funds has proven to be significant compared to public REITs.

Multifamily has proven to be defensive in general and an excellent diversifier late in a cycle.  Even so, investors should be mindful of the compressed cap rates of Core properties in Tier 1 cities and look for better values in the secondary/tertiary cities or in subsectors like senior living or affordable housing.  Retail remains a contrarian play and grocery-anchored properties are another excellent defensive investment that can deliver substantial cash on cash yields.  We believe this market remains mispriced and an excellent buying opportunity.

While cap rates are lower across the board, allocating prudently across commercial real estate will help investors solve for yield needs while providing a better store of capital in a late stage market cycle.

For more information on private real estate and other alternative investment strategies, please contact me.

Frank Burke, CFA, CAIA
Chief Investment Strategist, PPB Capital Partners
484.278.4017 Ext. 108