"It's probably a pretty good time to be looking at getting back into real estate." - Shawn Lese shares his feelings about the current real estate market in the US. Shawn Lese, CIO and head of funds management for Nuveen Real Estate, shares his insights into the US real estate market, indicating emerging opportunities despite recent declines in property values. Highlighting the stabilization of interest rates due to disinflation, Lee suggests the market may be recovering, with potential for increased transaction volumes and investment opportunities. The presence of significant dry powder suggests readiness for capital deployment. While the office sector faces challenges from remote work trends, industrial and certain retail segments show robust fundamentals.

The USA Conference by FondsForum, focusing on non-direct US real estate investments and hosted by PIA Pontis Institutional Advisors, provided a detailed overview of insights, forecasts, and strategies that clearly depicted the current state and future possibilities in the real estate sector. With a series of engaging talks, panel discussions, and presentations, the event provided a comprehensive overview of various segments within the industry, including industrial, residential, office, and niche sectors such as student housing, data centers, and life science real estate.

David Rückel, host and managing partner at PIA Pontis Institutional Advisors, and Oliver Strumpf, founder of FondsForum and initiator of this conference, set the stage by highlighting the conference's objective to strengthen the ties between Europe and the USA markets through investment opportunities in the USA, calling it the largest event of its kind for non-direct US real estate investments. This introduction laid the groundwork for a series of discussions that would not only explore the complexities of the market but also offer actionable insights for investors.

The conference was kicked off by Dr. Timo Blenk, Partner & CEO of Agora Strategy, who analyzed the complex geopolitical environment, emphasizing disruptions in an important election year and highlighting the significance of geopolitical conflicts and strategic divergences between Western countries and other global powers. Blenk argued for the integration of geopolitics into business strategies to navigate these uncertainties effectively, pointing out the impact of rising protectionism and potential tariffs on global stability. Concurrently, Michel Schram, PGGM, and Joey Lansing, Harrison Street discussed the US real estate market's complex landscape. They highlighted that certain sectors might be at their lowest, presenting investment opportunities, though the market's future direction remains uncertain. They explored how demographic trends favor US investments, particularly in multifamily, student housing, and senior living sectors, given their quicker adaptability to market changes.

Todd Henderson, CEO of Real Estate Americas at DWS, and Andy Zgutowicz, CEO of High Street, explored the resilience and future of the US logistics sector amidst a challenging capital market landscape. Henderson highlighted the sector's robustness, with industrial pricing stability and cap rate expansions aligning with historical averages despite interest rate volatility. He underscored the importance of investing through cycles without attempting to time the market bottom, noting that strong fundamentals, driven by e-commerce, supply chain security, and regional economic shifts towards just-in-case inventory models, support continued investment.

Andy Zgutowicz, CEO of High Street, shared insights on the development of next-day and same-day delivery services, pushing the demand for closer, smaller-scale distribution centers. Andy discussed his strategy of targeting logistics assets under 300,000 square feet, citing less volatility and stronger demand for these spaces. In addition, Andy raised concerns about how high interest rates could lead to challenges for tenants and their ability to afford rent: "My biggest worry is that over time, if we don't see a decrease in interest rates, we start to see tenants slow paying rent."

A panel discussion about the industrial sector showed that start of construction works in the industrial market have drastically decreased, pointing towards a constrained supply and potential for rent growth. The conversation also touched upon structural trends like robotics and driverless cars, affecting tenant needs and investment strategies. Despite the concerns about aggressive market valuations, panelists viewed the industrial sector as fairly valued, with rent growth expectations supported by low vacancy rates and high demand.

Experts such as Drew Spitler, Principal and Partner of Dermot, and Ziv Cohen, CIO of Resmark, and a panel discussion of real estate and investment professionals addressed the pressing issues and evolving trends within the US housing sector, focusing on multifamily housing, Single-Family Rentals (SFR), and Built-to-Rent (BTR) sectors, alongside the broader theme of American living and housing affordability. Spitler highlighted the multifamily housing sector's historical attractiveness, particularly in the Southeast of the USA, underscoring the worsening affordability crisis as a significant portion of renters spend a large part of their income on rent. He emphasized the sector's shift towards enhancing tenant experiences through lifestyle amenities and technology, including AI and autonomous services, and the growing importance of ESG factors in investment decisions.

The residential panel discussed the broader US housing sector's challenges, notably the affordability crisis, with an emphasis on the need for innovative solutions to address the shortfall of units for moderate to low-income households and the complexity of converting obsolete office spaces into residential units.

William P. Kieser, Ph.D., from the Ares Quantitative Research Group, shared insights on market timing, especially in private markets. He discussed their research, including a white paper and ongoing studies, focusing on the relationship between public and private real estate markets, the cyclical nature of investments, and the effectiveness of different investment strategies (fixed, pro-cyclical, and counter-cyclical) in market timing. Their findings suggest that counter-cyclical investing, or going against market trends, generally outperforms other strategies in terms of internal rate of return (IRR), although results vary by region and asset class.
Concurrently, a critical examination of the office real estate market revealed the challenging state of the market, highlighting a shift in investor sentiment and market dynamics. The market faces significant valuation challenges due to a capital freeze in lending and equity, driven by discomfort at current valuation levels. A notable trend is the “flight to quality” with leasing primarily happening in top-tier buildings. The presentation also touched on the restructuring of office real estate, focusing on the importance of asset quality, location, and the potential for repurposing lower-tier assets.

Following the office discussions, Troy March, Director of Real Estate at the State of North Carolina Retirement System, shares his perspective as a US Investor. He oversees an $8.6 billion real estate portfolio, primarily in the US, with a focus on separate accounts over commingled funds. Despite the pandemic's denominator effect, their portfolio is underweight, having not deployed capital during 2017-2019 due to leadership decisions, positioning them uniquely among peers. Their investment strategy includes diversifying into niche sectors like self-storage and manufactured housing. However, the office sector faces uncertainty, with Troy advocating for a cautious approach and focusing on iconic properties. At last, Troy advises investors to prioritize finding skilled managers over low fees, highlighting the critical role of management quality in achieving investment success: "Good managers can make you money at any point in the cycle. Bad managers can lose you money at any point in the cycle."

The second day of the conference started with an anticipation of a technical, possibly mundane conversation given the panel's composition: a German investor, a lawyer, and a tax advisor. However, the tone quickly shifts to an engaging session. The panelists, who are representing diverse expertise in investment, legal, and tax advisory fields, discussed structuring investments with a focus on the US real estate market, navigating regulatory and tax complexities, and leveraging opportunities in debt funds. The conversation highlights the challenges of financing in the current market, especially in the office sector, and the growing interest in real estate debt as an alternative investment opportunity.

The USA Conference 2024 explored the specialty sectors within real estate and their evolution from niche to potentially mainstream markets. These sectors include data centers, student housing, life science, and cold storage, each presenting unique growth opportunities and challenges.

Data centers, as discussed, are experiencing robust growth due to the exponential rise in digitalization, cloud computing, and generative AI technologies. As modern life is increasingly becoming dependent on digital services, the demand for data centers is skyrocketing. These facilities, which are capital-intensive and driven by the need for substantial power and connectivity, are seen as a mix of real estate and infrastructure investment.

Student housing has evolved beyond a niche, with institutional investors recognizing its resilience and profitability. The sector benefits from demographic trends and the institutionalization of lease structures which makes it an attractive alternative to traditional multifamily investments. Despite recent challenges like COVID-19, the sector demonstrated its resilience, with strong occupancy and rent collection rates.

Life science real estate is at the intersection of scientific innovation and real estate, driven by advances in medicine and the critical need for lab spaces near top-tier universities and research institutions. This sector is still small compared to traditional office space but it offers significant investment opportunities due to its specialized nature and the high demand for research and development facilities.

Cold storage, a subsector of industrial real estate, is expected to grow due to the rise in e-grocery delivery and the global food trade. The aging inventory and the shift towards more efficient, automated facilities present opportunities for disruption and investment. Despite its niche status, cold storage offers attractive yields and long-term tenant commitments, making it a sector worth watching.

Following the niche sector discussions, Darrell Carter, CEO and founder of Avanath Capital Management, a company specializing in affordable housing, shares his insights and experiences in the sector. With over 40 years of experience and a portfolio of properties worth $3.5 billion, Carter emphasizes the critical need for affordable housing in the US. He underlines the importance of more efficient construction methods, such as modular housing, to lower costs and meet the huge demand for affordable housing units.

The ESG panel explored the dynamic landscape of real estate transition risks and resilience in the USA, highlighting the multifaceted challenges and opportunities in navigating sustainability initiatives. From uneven regulatory frameworks across states to the requirement of data availability for informed decision-making, the discussion underscored the complexity of integrating ESG factors into investment strategies.

The last discussion of the USA Conference was the Investor Panel with a spotlight on the US market outlook. Speakers such as Max Beekmann from Bayerische Versorgungskammer (BVK) and Anja Ritchie from Stepstone Group highlighted the challenge of uncertainty and the significant influence of factors like interest rates on investment decisions. The panelists discussed strategies for managing market cycles, including debt investments and flexible allocation approaches. Finally, the discussion underscored the importance of a good asset manager, especially in such times when the market isn’t growing at rates as in the past ten years.

As the conference wrapped up, participants were left with a wealth of knowledge and insights into adapting their investment strategies to the changing dynamics of the real estate market.

Author:

Marin Kolev
MKE Munich Investment GmbH