Mid-Year Gut Check On Top 10 CRE Investment Categories
What a difference half a year makes.
At the start of 2022, the investment profile for commercial real estate was generally bright, albeit tempered with concerns about rising inflation and interest rates on the horizon.
Now that we are in the thick of these events, one silver lining is that it is easier to see the strengths and weaknesses of the various asset classes.
Following are observations on the top ten asset classes for CRE based on an analysis that CrowdStreet did that factored in above-average inflation, rising interest rates, and the current and potential future geopolitical landscape. Not that this assessment is carved in stone.
As the company states: “Our thesis isn’t static, and as the next phase of “normal” shakes out, we will adjust accordingly.”
With the prospect of full recovery next year, we suspect this will likely be the final year to acquire hospitality assets at attractive pricing before the market enters an expansionary phase.
We suspect that much of our industrial deal flow this year will be focused on development, due in part to the competitive transaction market and institutional capital that is chasing lower-yield projects. We also suspect that a lack of well-located, industrial zoned land, combined with population expansion outward from urban centers, will continue to push new supply farther from existing inventory. With rising land prices and lengthy timelines for permitting and entitlement, projects that break ground this year stand to benefit from users’ willingness to pay premium rents for buildings, especially those with modern features that are well located.
Medical Office Properties
A consistent and ever-growing need for healthcare bodes well for the medical office sector. We see strong opportunity, especially in areas where the population of older Americans is expected to rise. We also expect increased demand for medical offices located farther from central business district locations as hybrid workers are less tied to medical services near their offices.
We continue to favor ground-up multifamily development. Tremendous rent growth in 2021 led to massive appreciation of this asset class, outpacing increased construction costs that are the highest in years. We will focus on assets we believe can stabilize by the third year after being built and leased up.
Of all property types, we believe office is the most polarizing this year. Opinions range from office being the biggest opportunity in commercial real estate to the entire sector going the way of indoor malls. While we like stabilized, cash-flowing office deals, we also believe now is the time to begin seeking value-added deals, particularly those with an attractive going-in basis, high asset quality, resilient submarkets, and experienced sponsors behind them.
Retail was one of the hardest-hit sectors in 2020, but is now on a path to recovery. With a continued rebound in consumer spending likely this year and supply that will remain muted, we see opportunity for further increases in both retail rents and occupancy rates. It remains true that future investment in retail will require careful consideration for the rapidly growing e-commerce sector driven by online shopping and accelerated by the pandemic. We look at Amazon Fresh as a trend leader for retail, and expect to see increased cohabitation of e-commerce and traditional brick-and-mortar retail uses.
Self Storage Properties
There is increasing need for self-storage due to work-from-home and relocation trends, which likely will create more opportunity in non-coastal markets due to pandemic-induced migratory patterns. We also expect major university towns to see strong demand for storage space. The older competitive set for self-storage often lacks climate-controlled and newer products, which continues to create opportunity for new development.
Senior Housing Properties
We are taking a wait-and-see approach for senior housing. While the need for senior care is growing, we may not see a meaningful spike in demand until closer to 2025. Advancements in medical technology have increased opportunities for alternative living arrangements, affording many seniors the opportunity to live in their own homes longer, which can potentially reduce demand for traditional senior living arrangements.
Student Housing Properties
The opportunity in this sector is dichotomous, and location plays a key role in choosing the right investment. The most desirable and best-capitalized flagship universities will exploit their competitive advantage to attract students in record numbers, which will propel the student housing markets in areas with large universities at the expense of markets with smaller institutions and community colleges.
Life Sciences Properties
Life sciences is one of the fastest-growing industry sectors. We see opportunities near bustling urban environments, especially in areas with top talent, high intellectual capital, and the presence of top research universities. There is a limited supply of lab space and R&D facilities nationwide, leading to rising rents and record new development. We see creative opportunities to reposition existing properties when they are suitable for conversion.