Keys to Success for CRE and Investing
The final panel at the 2023 University of Miami Real Estate Impact Conference was an expert examination of the financial markets influencing the real estate industry today, and how those financial conditions may continue to shape the market going forward. Joining that discussion were Ralph Rosenberg, Global Head of Real Estate for KKR and Roy Hilton March, CEO of Eastdil Secured.
“So let’s start with where we are now,” began Rosenberg. “I think we can all agree the world is in a slightly better place than it was in Q4 of last year. The fallout that was associated with deep fears about recession seems to have abated. Cost inflation is starting to plateau. It’s still rising, but that upward curve isn’t as steep as it was.” He pointed out that the early indicators of controlled inflation are beginning to be more visible. “Energy costs are down, both in Europe and in the U.S., thanks in part to mild winters, but also because of some infrastructure investments coming to fruition. There are better checks and balances in place for manufacturing that keep a more steady relationship between supply and demand. That’s promising as well.” Another factor Rosenberg cited in the stabilization of the global economy was Asia. “The whole region is moving towards an accelerated GDP, which not only helps Asia, but also helps kickstart the global economy. I believe it’s safe for us to move from a ‘walk’ to a ‘slight jog’ in terms of investment. It’s not all green light go, but there’s forward movement.”
“A flashing yellow light, if you will,” replied March. “I agree. The market is betting that inflation will cool somewhere in the 2.3% to 2.4% range within the next couple of years. That’s within normal ranges. We’re also seeing different responses to oil. The supply is remaining more or less steady, no one is tightening or loosening that supply significantly at present.” One of the most important global economic conditions March pointed out relates directly to the real estate industry - cost of debt. “We’re seeing the fastest rise in discounted lending rates since the 1980s,” he explained. “There’s been a lot of visibility and questioning into capital and lending, and smart investors are going to have to continue to ‘Survive, Adapt, Advance’ if they want to succeed.”
March then shared a closer look at the banking industry’s role in steadying the economy and improving investor confidence. “The CCAR requirements of the 2000s have meant banks have serious reserve requirements, which has stymied liquidity in the corporate banking realm, but has a stabilizing effect on what would otherwise be volatile markets.” As proof, March noted that Q4 of 2022 saw a 65% decrease in transaction volume, a downturn that could have continued to plummet without regulations in place, but is instead rebounding in Q1 and should continue to do so in Q2. “This is especially true in commercial real estate,” he said, “with strong demand for data centers, office, and hospital/medical leading the way.” Non-bank lenders, he said, have also been instrumental in this trend, as lucrative opportunities attract capital from other financial sectors. “When you look around South Florida,” he offered, “there is a lot of capital and very little over-building, which points to a sustainable dynamic for Miami.” In other words, Miami’s growth is moving behind the ‘development cycles’ and phases that have previously defined the city’s expansion and appears to now be entering a period of constant incremental growth.
After highlighting present conditions, the two then discussed how the market got to where it is today and what the future may hold. “Well, certainly, the fact that interest rates were at historic lows for as long as they were has something to do with it, coupled with a high-growth market at the same time” said Rosenberg. “It’s led to a situation in which the cost of credit has doubled in a very short period, and depending on where you are in the cycle, it’s going to get more and more expensive to maintain certain assets.” March agreed. “At any given time in the commercial real estate market, you have properties that are coming up on certifications and will need additional capital to make those properties viable. It will be interesting to see who puts more money into properties that are underperforming because it’s not exactly like the banks want those assets on their books either.” Rosenberg predicted there will be some dissolution of certain asset classes through short sells as the cost-to-ROI picture skews negatively for some properties. “Carrying costs are already high, and re-investing at higher rates isn’t tenable for many investors.”
“That means they’re going to have to start looking at non-bank alternatives for capital,” replied March, “which is great for companies like ours, but comes with a lot more internal oversight and hands-on involvement with the handling of assets.” With that, March invited Rosenberg to share the kinds of criteria required by non-bank sources of capital, such as KKG. “Generally speaking, we look at three things when evaluating future markets,” Rosenberg shared. “Aging and migration as a whole; how goods and services move around the world - things like the widening of the Panama Canal for example; and how consumers are moving and behaving, and why. How those three things work independently and against or in concert with one another are then evaluated against how real estate figures into the bigger picture.” An example would be noticing heavy migration by older residents to a warmer climate, and then seeing not enough options for senior housing or medical offices and outpatient centers. Another would be recognizing the ability for cargo ships to transit the Panama Canal from Asia and reach new ports of call, then realizing that major port cities will need more industrial and warehouse space to accommodate additional global shipping activity. “For us, multifamily, industrial, and office, are almost always in the picture here in South Florida,” continued Rosenberg. “But we are looking at other asset classes like logistics.”
When asked what advice the two had for students and other professionals looking to grow within the industry, both men agreed. “We are an in-the-office workplace,” said Rosenberg. “There is no other way to do what we do as effectively when you’re on your own and away from the collaborative energy of a team.” March echoed those remarks with “I don’t think I would have been taken seriously as a ‘remote’ professional, and I think that sentiment remains today. You have to be willing to put yourself in front of others.”
As well, Rosenberg added that real estate is a diverse, multi-faceted industry, and that future professionals should concentrate on the specific area of real estate that interests them most. “I personally have never picked up a shovel or a hammer on any development our firm has been involved in, but I do work with all the financial details that makes that possible,” he shared. “If your interest is in building and architecture, focus your efforts (and studies) there. The same goes for law, sales, marketing, whatever it is that interests you. Above all, make sure it’s something you can give more than 110% to… because real estate is a competitive sport, and you have to show up, each and every day, ready to compete.”
