Panel, Conference Presentation, Fireside Chat
Traversing Real Estate Realities | Milken Institute Global Conference 2024
- Interest rates are expected to remain elevated with a trajectory "sprinting" ahead of fundamentals growing at 2% to 3%, creating a dislocation that offers opportunities for outsized yields without additional risk, though the current cycle is predicted to last longer than the Global Financial Crisis (GFC) as asset repricing is slower.
- A structural housing shortage is forecast to worsen over a "multiple-year period, maybe decades," with single-family detached supply at less than 1% of itself and multifamily at 8%, driving expectations that residential markets will remain "on fire" with limited new supply.
- The commercial real estate sector faces a "$2.6 trillion wall of maturities," with 38% in multifamily loans and over half of the deleveraging demand coming from this sector, alongside expectations that the regulated banking sector, particularly community banks with under $10 billion in assets, will not return to previous lending volumes or rates.
- Office assets are characterized as "tricky" with specific avoidance planned for overbuilt markets like Austin, Texas, while opportunities are identified in refinancing distressed buildings and lending at 50% to 60% loan-to-value with SOFR plus 450 to 600 basis points in markets like New York where a unit shortage persists despite population constraints.
- Diversification strategies will target alternative sectors including data centers, industrial outdoor storage, truck parking, manufactured housing, and student housing, driven by secular tailwinds such as digitalization, power needs, and supply chain reconfiguration, with a goal of achieving 150 to 250 basis points of lift if capital is deployed within the next 24 months.
- Geographic allocation plans involve heavy investment in growth markets in the southeast, Texas, and the Carolinas due to population growth, while avoiding California, the northeast, and New York for general growth, though New York is noted for specific multifamily shortages; resort investments will focus on public companies trading sub 10 times EBITDA or assets at 8 to 11% cap rates.
- Return expectations include mid-teen to high-teen returns from second-lien lending without distress, low teens returns on senior credit across all commercial product types, and potential uplift of 50 to 75 basis points to reach fair value in private markets which currently trade north of 6% cap rates.
- Operational plans include acquiring a second loan originator named "Spring EQ" to access trillions in untapped equity, operating in single-family rentals at a large scale, rolling up fragmented businesses, and building cold storage and truck parking sectors, while avoiding prepayable debt to ensure long-duration returns.
- Risk factors include the "painful" adjustment period to high rates, potential prepay risks on debt investments, development risks in "build-deco" strategies, and macro risks where Fed liquidity floods could lower rates and spreads, alongside the possibility that multifamily faces "meaningful pain" in the short term despite long-term interest.
- Performance drivers are linked to population growth as the single most critical factor for residential assets, with expectations that inflation of 3.5% since 1989 has historically resulted in single-family rental returns far exceeding inflation, while resort cash flows are expected to see north of 10% growth despite a "mean reverting" statistical risk that is deemed inaccurate.
- Market dislocations are expected to generate opportunities in mortgage servicing rights, home equity loans, tax liens, and non-qualified mortgages due to prepay speeds differing from historical norms, with the belief that the current environment represents the greatest career opportunity due to a repeat of conditions from previous cycles for different reasons.