Wednesday, April 17, 2024
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Yes, bright spots still exist in CRE

Between rising interest rates, high office space vacancies and decreased enthusiasm for investing in commercial real estate, it’s easy to see why the mood around the industry isn’t great. However, despite the many concerns around CRE, there are some bright spots in the industry — it’s just a matter of knowing where to look.

For example, housing for college students has proven to be a silver lining within the CRE industry, the Wall Street Journal reports. Student housing property sales hit a record high of $22.9 billion in 2022, according to CRE firm CBRE Group. While multi-family rents appear to have cooled off from the double-digit increases they hit last year, student housing rent has increased at about 9 percent, according to apartment market tracking firm RealPage.

Real estate investment firm Blackstone purchased American Campus Communities for $12.8 billion last year, a sign that the company is confident in the sector’s potential.

“This is a sector that we think has stood the test of time and is going to be a continued bright spot in the future,” Jacob Werner, co-head of Americas acquisitions for Blackstone real estate, told the Wall Street Journal.

Werner also deemed student housing attractive because economic downturns don’t usually impact it.

“It’s an all-weather asset class,” he said. “In good times, people go to school. In bad times, more people tend to go to school.”

Additionally, increased interest rates have limited how much new construction will be developed, meaning there’s less new supply that will be available. Less options allow landlords to increase rents.

While student housing property sales aren’t projected to be as strong as 2022, the sector is still expected to fare better than others because of rent growth and consistently strong occupancy numbers, Jaclyn Fitts, national student-housing co-leader for CBRE, said.

One downside to the student housing sector is developments near smaller or lesser-known schools aren’t seeing the same demand as their larger counterparts.

“What we’re seeing in the enrollment story is almost this tale of two markets,” said Elsa Wilson, senior research analyst at JLL, a real-estate investment firm.

Investors remain optimistic about student housing overall, however. Properties are 70 percent preleased for this coming fall — approximately the same rate as May 2019, according to JLL.

Farmland — a viable CRE asset

Investors may be shying away from CRE, but that doesn’t mean they want to avoid it completely. They just want a safer place to put their money, which looks to be farmland at the moment, Moneywise reports. Farmland was reported to be 15 percent more valuable in 2023 than it was during the same time period last year, according to the Federal Reserve Bank of Chicago’s quarterly survey. The increase marks eight consecutive quarters of year-over-year growth.

There are a few reasons why farmland has become so reliable in investors’ eyes, according to Moneywise. The sector not only allows investors to preserve their capital, but it also offers opportunities for yields and for capital to appreciate. Farmland has also proven to be a stable CRE asset — the standard deviation of farmland prices was 6.64 percent between 1992 and 2022, according to farmland investment manager FarmTogether. That’s 98 basis points lower than private real estate and only 104 basis points higher than bonds over the same period.

The asset was also less volatile than publicly listed real estate and equities. Farmland’s value comes from income and capital appreciation, allowing it to have a net positive return almost every year since 1992. During “down” times for farmland, its losses were just 0.1 percent.

Additionally, farmland typically has a low correlation with other asset classes. So, when other CRE sectors are going through a tough time, like right now, farmland’s values and performance are not usually impacted. It’s perhaps why well-known investors such as Warren Buffet, Jeff Bezos, Ted Turner and Bill Gates have allocations to this asset class, according to Moneywise.

CRE investment opportunities are there for the taking

The current CRE rough patch has scared off some investors, opening the door for well-capitalized ones, Blackstone co-head of global real estate Kathleen McCarthy, said, Bloomberg reports.

“When sentiment gets really negative, prices decouple from fundamental value,” she said in a Bloomberg Television interview. “We have a practice of trying to quiet that noise and look at the information in front of us.”

The combination of high U.S. office vacancy rates and rising interest rates on European property values has led to large selloffs in publicly traded real estate stocks and bonds. While some investors are expecting prices to collapse, Blackstone has invested approximately $3.8 billion in European CRE so far, Bloomberg reports. The firm has put funds into sectors with the best potential for rent increases such as warehouses, student housing and lab space.

“We have more data than any other investor on the planet,” McCarthy said. “That informs where we transact. (Blackstone is still prepared to) lean in to where we see strength in the short term and over the long term.”

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