Each year, UNC-Chapel Hill hosts a real estate conference attracting institutional investors from every sector. This year’s focus included retail, hotel, and office properties, and the impact of interest rates on commercial real estate (CRE). The keynote centered around the growth of the real estate company Greystar led by founder and CEO Bob Faith. Here are my key takeaways from the conference:
Retail, Hotel, and Office Outlook
Retail, hotel, and office properties have been impacted by interest rates, work-from-home trends, and e-commerce, presenting challenges and opportunities. Here are five key takeaways for savvy investors:
1. Office sentiment remains negative, but opportunities exist: The general outlook for the office sector is pessimistic, but each market differs, offering various investment opportunities. Sunbelt regions, for example, benefit from in-migration and are expected to perform well.
2. Co-working spaces gain traction: Co-working office spaces have proven successful, ranging from basic suites to entire floors. As smaller to medium-sized businesses expand their space, this trend could continue.
3. Hotels face CapEx needs but owners are not forced to sell: Hotels require significant capital expenditures, but owners are not under pressure to sell, resulting in a wide bid-ask spread between sellers and buyers.
4. Retail adapts to e-commerce and online presence: Historically, the debut of the iPhone in 2007 and the global financial crisis of 2008-09 forced retailers to adapt or shut down. To survive, savvy retail brands have pruned their locations and focused on e-commerce, while still maintaining physical stores to cater to consumer preferences. In today’s market, some retailers are continuing the push towards e-commerce and closing some physical locations. However, retailers like the Gap are discovering customers still want a physical location to shop even though they purchase more online.
5. Importance of submarkets, demographics, and amenities: Investors should prioritize properties in the best submarkets with desirable demographics and create amenities that attract customers. Highwoods Properties, for example, described building Pickleball courts in some of their office locations to attract employees back to the office.
Higher interest rates and changing customer behavior present unique challenges for the office and retail sectors. Deals in markets with growing populations and diverse economies can survive, but they must create experiences and provide amenities to attract customers. Interestingly, hotels are doing fine, but they need to adjust in operations as they feel the impact of wage inflation and aging buildings.
The Economy & Interest Rates
The economy and interest rates and their effect on CRE came into focus with representatives from the Richmond Fed, Goldman Sachs, JLL, and KKR leading the discussion. Here are the key takeaways:
1. Pressured CRE values: Rising interest rates and reduced liquidity from banks have put pressure on CRE values, causing potential challenges for investors seeking financing.
2. Alternative lending sources: In response to bank pullbacks, debt funds and lending platforms are emerging to provide liquidity to the CRE market, offering investors new opportunities for financing.
3. Changing mindset on hedging rates: There has been a significant shift in investor mindset regarding buying caps or hedging rates, with buyers now pricing in caps to mitigate potential risks.
4. Employment and economic factors: National employment trends, such as strong growth in NC and SC, and workers preferring non-customer-facing jobs like work-from-home call centers, impact the CRE market, especially office. These trends are influencing investors to seek opportunities in states where economic growth is optimistic, causing a positive upward spiral for those states.
5. Inflation and interest rates: The Federal Open Market Committee (FOMC) aims to get inflation to two percent, but the timeline remains uncertain. A recession in 2023 is unlikely, but another quarter-percentage-point interest rate increase is likely. Rates are expected to begin their decline in 2024. Investors should be prepared for a return to two percent inflation to take a few years unless there is an economic shock to speed up that timeline.
The current challenges in the commercial real estate market demand flexibility and patience from investors. By understanding these key factors and adjusting their strategies accordingly, investors can better navigate the market and capitalize on opportunities that arise.
The Growth of Greystar
The story of Greystar and its founder, Bob Faith, offers valuable insights for investors who want to succeed in the industry. Here are five key lessons from Greystar emphasizing the importance of adaptability, relationships, and strategic planning:
1. Adaptability in tough times: When faced with challenges, such as a shifting economy, it is crucial to have a backup plan. In Greystar’s case, property management services helped maintain steady cash flow during difficult times.
2. Importance of relationships and execution: Building strong relationships in the industry is vital, but it is equally important to execute the business plan effectively. This combination allows for growth and expansion into new markets and trust from investors.
3. Leveraging scale advantage: Achieving a scale advantage not only benefits purchasing and vendor relationships but also hiring, data analysis, and reputation. This advantage can contribute significantly to a company’s success in the real estate industry.
4. Timing and opportunity: The best deals often arise when coming out of a market cycle, so it is essential to have people in place to recognize and capitalize on opportunities. This includes being prepared to invest in distressed assets when they become available.
5. Focus on key performance indicators (KPIs): Assign responsibility for each KPI to a specific individual. This strategy promotes accountability and enables the company to monitor progress effectively.
The story of Greystar demonstrates that adaptability, strong relationships, and strategic planning are crucial for success in the real estate investment industry. Bob Faith emphasized they’ve made many mistakes over the years, but by learning from their experiences, they developed best practices and were ready to seize opportunities when they arose.
The 2023 UNC Real Estate Conference highlighted key trends and insights for investors in retail, hotel, and office properties, including the impact of interest rates on CRE and Greystar’s growth story. Adapting to changing market conditions, fostering strong industry relationships, and leveraging strategic planning are essential for success in the real estate sector. I’m looking forward to attending in 2024 and sharing key insights with you again.
