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A key component of a successful real estate investment is choosing the right asset class to invest in within the given market.

Supply and demand is constantly changing, meaning what was a lucrative investment one, two, or 10 years ago may not be worthwhile today. See what types of real estate are in high demand right now and how investors can participate in the growing market.

Before we dive into where opportunity lies, note that just because there’s a general demand for these types of real estate doesn’t mean there’s opportunity for them in every market. Real estate is a very localized business that operates on a macro and micro level. For active investors, it’s important to identify what opportunities lie in your local market or participate in a more diversified investment portfolio specializing in these asset classes through a real estate investment trust (REIT).

1. Cold Storage

Cold storage is a type of industrial real estate responsible for the storage and transportation of cold goods, including food products. The global pandemic interrupted the food supply chain, making consumers and large grocery retailers adapt to the shift in consumer preferences for online grocery sales as well as the need for more cold storage as a whole.

This specialized niche has several barriers for entry, making it a difficult asset class to invest in outside of Americold Realty Trust (NYSE: COLD). Americold is the only industrial REIT specializing in cold storage, owning more than 1 billion cubic feet of cold storage space. The company is well positioned financially to grow with the increased demand.

2. Data Centers

We are undoubtedly in the age of technology, with more people and products becoming reliant on the efficiency, ease, and convenience of technology. Data centers are responsible for safely storing and computing data for the government, large corporations, cloud companies, and even data used from phones.

Demand for data centers has been on the rise over the past decade, but COVID-19-related work-from-home orders have put even more pressure on this growing sector. While demand as a whole is up, certain markets are leading the sector, including northern Virginia and Atlanta.

Data centers are another unique sector to invest in with large barriers for entry, making any of the top data center REITs a wonderful way to participate in this industry.

3. Residential Housing, With Emphasis On Affordable Housing

A study conducted by Freddie Mac found that the U.S. is short 2.5 million to 3.3 million housing units in 29 states, with states like Oregon, California, Texas, Minnesota, Florida, and Colorado the leaders in the housing shortage. These states, among others, are also home to some top-tier markets, where housing prices far outpace wages for the area, putting affordable housing in serious demand.

This means multifamily properties, single-family homes, and new construction can potentially be good investments in the right markets. This asset class is the easiest point of entry for investors, with dozens of options available to participate in actively, like fix-and-flip or rental properties, or passively through residential REITs.

However, it’s important to note that with current eviction moratoriums and a record number of tenants being unable to pay rent, the rental industry is facing tough times, making this a volatile market to participate in right now as a smaller investor. However, this industry is fairly resilient, and while it’s currently facing unique challenges, this market clearly has long-term demand and should bounce back in time.

 

Source: The Motley Fool

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With the Thanksgiving holiday weekend behind, it is not too soon to look at what will be the top investment strategies for next year.

Seven top CRE investment strategies for 2020 include:

1. Sell Overpriced Industrial Assets

The industrial market has been booming for the last few years and is the favored asset class among institutional investors. The market is “hot” because of the strong economy, increased demand for warehouse and distribution space due to rising Internet sales and last-mile same- day delivery of online goods. Cap rates for industrial properties have compressed 1.5% to 2.0% during the last 18 months and we would be net sellers of industrial assets in this market.

2. Acquire Beaten Up Retail Assets

Many shopping center and mall real estate assets are selling at 7.0% to 10.0%+ cap rates and some of these assets should be bought. Retail assets have been out of favor for the last few years and although there are tenant risks, with bankruptcies and store closures, they can still provide a higher risk-adjusted return than other CRE assets. A number of the public retail malls are also selling at deep 50%+ discounts to net asset value and are also ripe for a buyout or being taken private. These distressed retail deals are opportunistic investments and need significant renovation and releasing.

3. Invest In Data Analytics Companies

One of the key growth areas of CRE is in data analytics. Data analytics encompasses all aspects of big data for CRE including; demographics, ownership data, property data, historical value information, sales/lease data and financial analysis. The data analytics space is very fragmented with a few large companies like CoStar, RealPage, REIS (a unit of Moody’s) and many local and start-up companies. These larger firms have been acquiring smaller competitors to expand their service offerings and customer base. Recently, CoStar acquired Smith Travel Research, the leading hotel/lodging consulting firm, for $450 million and RealPage acquired Buildium, a property management software firm, for $580 million. As the industry grows, there will be more consolidation and an opportunity to acquire these smaller private firms and even establish a platform to consolidate these entities.

4. Sell Overpriced Core Assets and Reinvest In Opportunistic Assets

The risk and return for various CRE investment strategies range from the lowest risk, core investments, which are typically fully leased, institutional quality, Class A properties with little or no leverage, to value-added strategies which are higher risk strategies that involve some property redevelopment, tenant adjustment or leasing or with operational problems to opportunistic strategies, which are the highest risk category that involve a high degree of redevelopment, leasing, tenant relocation or change or may be in financial distress. Many core properties are still trading at 3.0% to 4.5% cap rates and should be sold. The proceeds should be reinvested in higher return opportunistic strategies, as discussed in #2 above, buying beaten up retail assets.

5. Provide Participating Mezzanine Loans

Even though there is a lot of capital sloshing around chasing deals, there is a dearth of debt/equity capital for the portion of the capital stack above the first mortgage at about 65%-70% and below the minimum owners’ equity investment of 10.0%. This slice of 20% of the capital stack is ideal for a participating mezzanine loan. The participating mezzanine loan may have terms as follow; interest rate at LIBOR plus 4.0%+, loan fees of 1.0%-3.0%+ and 20.0% to 30.0%+ ownership of the deal. The mezzanine lender will typically not be secured by a second lien on the property but by an ownership guarantee and assignment of the owner’s interest in the property. The lender is entitled to the equity kicker because it is taking some of the equity risk of the project. Internal rates of return of 12.0%-15.0%+ can be delivered with this strategy, which is very attractive for a fixed income investment.

6. Perform A Systematic Review and Analysis Of The 15 CRE Risks

As we have discussed before, there are 15 risks inherent in CRE investment as follows:

  • Cash Flow Risk-volatility in the property’s net operating income or cash flow.
  • Property Value Risk-a reduction in a property’s value.
  • Tenant Risk-loss or bankruptcy of a major tenant.
  • Market Risk-negative changes in the local real estate market or metropolitan statistical area.
  • Economic Risk-negative changes in the macroeconomy.
  • Interest Rate Risk-an increase in interest rates.
  • Inflation Risk-an increase in inflation.
  • Leasing Risk-inability to lease vacant space or a drop in lease rates.
  • Management Risk-poor management policy and operations.
  • Ownership Risk-loss of critical personnel of owner or sponsor.
  • Legal, Title, Tax and Political Risk-averse legal, tax and political issues and claims on title.
  • Construction Risk-development delays, cessation of construction, financial distress of general contractor or sub-contractors and payment defaults.
  • Entitlement Risk-inability or delay in obtaining project entitlements.
  • Liquidity Risk-inability to sell the property or convert equity value into cash.
  • Refinancing Risk-inability to refinance the property.

All investors that own CRE should perform a detailed and systematic review of the above risks and their potential effect on an asset or portfolio.

7. Acquire Small Capitalization Public And Private REITs

There are more than 30 public REITs with market capitalizations less than $1 billion that are trading at or less than their net asset value. These REITs are ripe to be acquired or taken private by other REITs, real estate private equity firms or other institutional investors. It also may be possible to get control of the board of directors of some of these REITs via a proxy contest.

Any acquisition or merger opportunity will have to comply with the REIT tax rules including, the 5 or 50 rule which states that 5 or fewer individuals cannot own more than 50% of the value of a REIT during the last half of the year. Also, more than two-thirds of REITs are incorporated in the state of Maryland which has broader liability protection, more flexible voting provisions for stockholders, easier Bylaw amendment provisions, better protection against hostile takeovers and easier stock issuance procedures. Notwithstanding a Maryland incorporation, there are still opportunities via a friendly acquisition or proxy contest.

 

Source: GlobeSt.

While the U.S. markets are in fear of a recession, investors seem to know one place they want to park their money: real estate stocks.

Of the 28 real estate stocks tracked by The Real Deal — a sample of real estate investment trusts, mortgage companies, brokerages and other real estate services firms — 15 saw an uptick. That’s despite the S&P 500, Dow 30 and Nasdaq showing slight losses as of 1:45 p.m. Thursday, August 15.

The Dow plunged 800 points on Wednesday, August 14, after the yield on the two-year Treasury note pushed higher than the yield on 10-year Treasuries on early Wednesday — a sign investors think it’s riskier to make shorter-term investments than longer-term ones. Markets have been on edge since last week, after President Donald Trump escalated the trade war.

Of the 15 real estate stocks that were up, Realogy saw the biggest gains. The brokerage conglomerate’s stocks were trading at $6.03, up 2.29 percent. But not all stocks were up. Mortgage loan company Ocwen Financial Corporation recording the largest drop of 4.5 percent, trading at $1.40 per share.

The Real Estate Select Sector SPDR Fund, an index that follows real estate investment trusts and real estate management and development companies, was trading at $38.19, up less than 1 percent from the market’s close Wednesday, August 14.

As for only REIT stocks, their returns were up 0.91 percent as of 1:25 p.m. Thursday, August 15, according to the FTSE Nareit All REITs Index. But compared to last week, REITs overall may be losing: Last week the index’s domestic returns were up 1.67 percent, but so far this week they’re down 1.72 percent.

While a yield curve inversion may not always signal a recession, investors will be watching what the Federal Reserve does. Real estate stocks ticked up earlier this month when Fed chief Jerome Powell said there may be a possible cut in interest rates.

Last week, signs of an escalating trade war between the U.S. and China caused real estate stocks to dip but then largely performed well compared to the overall market.

 

Source: The Real Deal