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Small Business
PRIVATE REAL ESTATE: FIVE CHALLENGES FACING INVESTORS TODAY
Chris Loeffler
Forbes Councils Member
Forbes Business Council
COUNCIL POST
Expertise from Forbes Councils members, operated under license. Opinions
expressed are those of the author.
| Membership (fee-based)
Small Business
Mar 31, 2022,07:15am EDT|
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Chris Loeffler is the CEO of Caliber (CaliberCos Inc.), an alternative asset
manager and fund sponsor with approx. $500M in AUM.
getty
In the opening months of 2022, the private real estate sector has benefited from
positive macroeconomic momentum, boosted by rising GDP, record levels of job
growth, strong consumer spending and stimulus programs.
The landscape, however, is not entirely serene. Participants in private real
estate markets—including individual investors, asset owners and portfolio
managers—are facing several challenges:
1. Sustained Inflation, Strained Supply Chains And Tight Labor Markets
In January, the annual U.S. inflation rate accelerated to a 40-year high of 7.5%
as what arguably began as a pandemic-related trend has become a broader,
sustained phenomenon. The sharp increase in prices is driven by strained supply
chains, tight labor markets and an uptick in energy costs. Together, these
forces make certain real estate investments more expensive and create the
potential for heightened volatility across wide swaths of the market.
That said, private real estate has the reputation of performing well during
periods of elevated inflation. For investors seeking a hedge against inflation,
the challenge is to identify the right private real estate investments. These
could include opportunities with favorable supply and demand conditions that
allow property owners to pass higher costs to tenants or development projects
where rent growth and cap rates can protect profit margins in the face of rising
construction costs.
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2. Rising Interest Rates
In light of stronger hiring, consumer spending and inflationary pressures, the
Federal Reserve is expected to reduce its balance sheet and embark on a series
of interest rate increases. As a result, the private real estate market will be
challenged to manage interest rate risk and navigate the subsequent impacts on
property values and investment performance.
To minimize any damage from rising interest rates, real estate investors will
need to think carefully about leverage, with a sharp focus on managing higher
borrowing costs, bolstering cash flows and creating value.
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3. A Growing Focus On ESG Factors
Environmental, social and corporate governance (ESG) factors, once seen by many
participants in real estate as peripheral concerns, are now taking center stage.
Several developments are fueling the sense of urgency, including net-zero
commitments, new regulatory standards and a massive transfer of wealth to
younger generations.
In this environment, asset owners and investors are reconsidering their
fundamental approaches to developing and operating real estate by asking:
• What ESG factors are material?
• How should ESG be incorporated into asset and portfolio valuations?
• What ESG risks do private real estate investors face, both direct and
indirect?
• How can private real estate participants create new sources of value for
investors, tenants and communities?
Real estate investors who proactively address ESG challenges will be well
positioned to generate attractive financial returns, establish wider competitive
moats and, perhaps most importantly, improve the world for future generations.
4. Changes To The Way We Live And Work
The Covid-19 pandemic spurred significant changes to our daily lives. Today,
real estate investors are challenged to assess if, and to what extent, the
changes will be sustained. What will stick, and what will be tossed aside as
society feels “normal” again?
Such assessments must be made on a granular level—often property by property. In
the office sector, for example, outcomes for individual buildings could be
vastly different depending on location and whether a building’s layout can be
reconfigured or made more flexible.
The analysis is similarly complex for the hospitality sector. Vacation travel
might be rebounding, benefiting hotels in certain locations. Business travel, on
the other hand, might be slower to recover, putting a damper on hotels, retail
centers and restaurants, which rely heavily on expense-account spending.
5. Powerful New Technology
A boom in property technology (proptech) is catalyzing change in the private
real estate sector, empowering asset owners and investors to improve all areas
of business operations, from design and construction to tenant relations,
climate risk assessments and financial management. Data analytics and artificial
intelligence, for example, can help predict property values, pinpoint new
investment opportunities and determine the timing of rent increases.
As the pace of proptech adoption accelerates, real estate enterprises are
challenged to stay ahead of the curve. To remain competitive, private real
estate companies must succeed in identifying and implementing optimal tech
solutions.
In summary, the private real estate market is poised to benefit from supportive
fundamentals in the months ahead. While several challenges do exist, I believe
that they ultimately present opportunities for well-positioned market
participants to come out ahead.
--------------------------------------------------------------------------------
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Follow me on Twitter or LinkedIn. Check out my website.
Chris Loeffler
Chris Loeffler is the CEO of Caliber (CaliberCos Inc.), an alternative asset
manager and fund sponsor with approx. $500M in AUM. Read Chris Loeffler's full
executive profile here.
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