A panel of real estate experts at the ULI Spring Conference 2021 kicked off the three-day event by discussing capital flows, alternative markets, investment currents and what upcoming challenges will likely crop up in the office sector.
In the Monday panel discussion, “Global Capital Flows in Unprecedented Times,” experts shared their predictions for capital flows and the interest-rate environment. Karen Horstmann, head of equity acquisitions at Allianz Real Estate GmbH, said there’s no shortage of capital out there, and investors are ready to invest wisely. Opportunities for investment are plentiful and varied, but investors are thinking strategically about where to place their money and determining “what will persist and what might be a near-term fad,” Horstmann said. She also said that investors are considering a number of factors, including the type of risk their capital will assume and the convergence of yields.
In a panel on the real estate economic forecast, expert speakers at the ULI Spring Conference, which began Monday, May 10, and continued through Wednesday, May 12, gauged the U.S.’s path to economic recovery. The recovery will be K-shaped rather than V-shaped—a model that was projected last summer—according to Mary Ludgin, senior managing director & director of global investment research at Heitman.
The labor force and the economy are still constrained, and although spending on the rise, the labor market isn’t where it was before the pandemic. Supply disruptions have driven inflation, and it will take time for hiring and employment to return to pre-pandemic levels. Inflation will increase, but the recovery will continue, fueled by widespread vaccinations, monetary policies and stimulus packages, the panelists predicted. Returns in private markets are on the rise but the levels of increases in value will vary across several sectors.
With rising interest rates, capitalization rates will also fluctuate. Well-capitalized investors are under no pressure to sell distressed assets, and rates are going down instead of up because “the relationship between cap rates and interest rates is complicated,” said Tim Wang, managing director & head of investment research at Clarion Partners.
Executives at the ULI Spring Conference discussed the impact of the pandemic on alternative assets (such as self storage and medical offices). The perception of these sectors is changing due to durable cash flows, lower capital expenditures and lower volatility, Wang said. His firm has invested $2.5 billion in life science assets. Demand currently outweighs supply for single-family rentals, and the sector has become more appealing to developers. Although the sector is institutionalizing, it can be challenging to scale, to find the right operator and to align with the right capital stack.
On the other hand, the self storage sector, which has traditionally seen a large supply, saw its surplus disappear in 2020. This trend was generated by the life changes prompted by the pandemic, such as renters downsizing or moving in with family, or small-business owners seeking space to store their inventory and equipment.
Ludgin, as a Heitman representative at the ULI Spring Conference, said her firm’s portfolio includes self storage assets in 13 countries on four continents. She added that although the sector is doing well, it’s not recession proof and occupancy can be affected, though she said she hasn’t seen this make a significant dent on returns.
While the office sector faced a slowdown during the pandemic as a result of the remote work structure, experts are confident the sector’s performance will improve. Benjamin Breslau, chief research officer, Americas, at JLL, said occupancy will start to rebound after Labor Day at the end of the month. Firms are ready to bring their employees back, but Breslau believes that “the office will have to do more in the future than it’s done in the past.”
Companies that were already prioritizing amenitization, health and wellbeing, as well as the quality of their space, will recover more quickly and outperform, said Breslau, adding that 50% to 60% of businesses will likely choose a hybrid work model.
Nathalie Charles, global head of investment management at BNP Paribas REIM, said owners and operators will have to take care of what’s inside their buildings to encourage their tenants to return. Going deeper into how the space caters to the people who occupy it will be critical to retaining a good percentage of tenants.
The benefits of in-person interaction are still valuable, and company leaders recognize that. The return to the office is inevitable, said ULI Spring Conference panelists, but it will be influenced not only by what tenants are willing to pay and by the renewal probability rates, but also by the way the space feels and the effectiveness of the collaborative areas and wellness systems that are in place.
