CBRE IM: Having the courage of your convictions

This article is sponsored by CBRE Investment Management

What are the most interesting opportunities you see in real estate today?

Achal Gandhi: Ten years ago, portfolios were 70 percent weighted toward offices and retail. That has now been completely turned on its head, with investors looking for 70 percent exposure to logistics and residential, alongside new-economy sectors such as student accommodation and senior living.

Julie Ingersoll: We were early adopters of overweights to industrial and residential in the US, and that has definitely served us well to date. Then, as we have gone through the pandemic, we have made calls on the short- and long-term changes in demand. For example, we are seeing interesting opportunities to double down on emerging growth sectors in residential, including single-family rental.

We have found student housing to be extremely defensive, and we continue to actively develop Class-A multifamily assets, which is another area where we are bullish. Finally, we recognize that workforce housing will be important to the evolution of our multifamily strategy. It’s all about understanding the demographic and structural drivers of demand.

Within office, meanwhile, we are placing big bets on life sciences, both from the perspective of development and stabilized assets. We are also thinking hard about what the office of the future will look like more generally and which properties are going to achieve the best demand going forward in terms of rent and occupancy.

Wellness, infrastructure, environmental, social and governance considerations, flexible workspaces and state-of-the-art digital connectivity will all be key, and repositioned, mixed-use assets that offer a 24-hour environment will become even more compelling. We continue to make bets in office but are being highly strategic and selective about where those bets go.

Finally, we continue to see unprecedented low vacancy and high demand across industrial. And, based on where e-commerce penetration is today in the US compared with other markets, there is still a lot of growth remaining. This is a structural demand-based opportunity that isn’t slowing, and we continue to allocate to industrial in a significant way.

Paul Gibson: From a European perspective, we are following those same structural growth trends. But we are not alone. There is a lot of competition, so you have to be disciplined. For us that means getting extremely close to the occupiers of our buildings and really understanding their needs.

And sustainability is chief among those needs, particularly in Europe?

PG: ESG is critical to our investors and to the occupiers of our buildings, and so it is critical to us. It is integrated in every stage of the investment process. After all, 96 percent of our assets are in countries where there is a commitment, or a pending commitment, to be net-zero carbon, and 80 percent of buildings are still going to be around by the time that has to be implemented in 2050. There is going to be a massive renovation wave coming, and I think that provides a fantastic opportunity.

AG: The other point to note with regards to sustainability is climate risk. We analyze where the potential risks of climate change lie to ensure we take that into account in our underwriting or else have mitigation plans in place to ensure our clients aren’t left with stranded assets. We rolled that out in 2021 and intend to move forward with it this year and beyond.

PG: Sustainability isn’t only about the environment, however. We have funds in Europe focused on social impact as well. To give you an example, we have a scheme in Amsterdam where an old outdoor shopping center is being regenerated, bringing in residential, leisure and community uses.

That scheme will be efficient from an environmental perspective, but more importantly it will help connect people. Those multi-use projects are really exciting to be a part of and will also deliver exciting returns to our clients.

Chuck Leitner: Affordability of housing is another global social challenge. There is a general undersupply of solid, workforce-orientated housing and supplying capital solutions that address that issue creates a very interesting investment opportunity, while also being the right thing to do.

What are some of the other important demographic shifts that are shaping opportunities?

JI: Even before the pandemic, we were starting to see a dispersion of our population across the country. That is going to have a very significant knock-on effect on all sectors. Getting those dispersion bets right and factoring them into portfolio construction will be vital.

AG: I think that trend is creating interesting opportunities in single-family residential, in particular. People are making different decisions about where they choose to live, based on maximizing space and the ability to work from home. But single-family residential is not an institutional sector across most major markets. That means there is risk but also huge opportunity. We are already starting to see institutional capital flow into SFR in the US, and I think it is a trend that will continue elsewhere.

“Data is critical when it comes to improving ESG performance”

Paul Gibson

What role is data playing in your investment decision making?

CL: Ensuring that our investment teams have access to the real-time information they need to drive decision making is paramount.

We can use occupier data to inform the evolution of our strategies because it enables us to understand what is important to them. That data includes everything from carbon emissions to behavioral patterns and even commuter traffic.

There is a huge opportunity to mine this data and to use it to drive good long-term decision making. Capturing that opportunity will mean continued investment in data technology tools.

JI: One of the key “must haves” that will inform investment performance in the future is the array of tools we use to capture and analyze data. CBRE is really putting its wallet to work here in an efficient manner, beta testing quickly and making fast determinations around what will impact performance and make the team more efficient. It is an absolute priority for us.

PG: Of course, data is critical when it comes to improving ESG performance as well. And that comes back to getting close to the occupier. You have to work hand in hand with them to first get the data around energy consumption, waste and water and then to make the necessary improvements, which right now involve a lot of easy wins such as LED lighting, solar panels and heat pumps. Our pan-European core strategy reduced greenhouse gas emissions by over 30 percent last year, and we intend to keep moving in that direction.

“Remaining competitive in a market where there is an abundance of capital is probably what keeps most of us awake at night”

Chuck Leitner

What are some of the biggest challenges associated with real estate investment today?

CL: I think Paul has already pointed to the biggest challenge that we face, and that is that there is a lot of capital out there. We are not alone by any means. It is a very competitive market.

On the flip side, that means the market is liquid, very much open for business, and our existing assets are appreciating. But it can be challenging in terms of deploying capital in the right places to generate attractive risk-adjusted returns. You need to separate short-term cyclicality from longer-term secular changes in order to determine the bets you want to make to achieve the returns that you need.

Remaining competitive in a market where there is an abundance of capital is probably what keeps most of us awake at night.

JI: One thing that helps us be competitive is our ability to leverage the depth and breadth of CBRE across our platform, to help pry loose deals that are off market. Because there is no doubt that the market is competitive.

AG: Echoing my colleagues, investment discipline in an extremely competitive market is our biggest challenge. Portfolios of very different quality are being priced at similar levels because of the volume of capital coming into the market and we, as fiduciaries and investors, need to be disciplined on location quality, asset quality and ESG quality. We are at a point in the cycle where there is a lot of divergence. That means we are at a point in the cycle where mistakes could easily be made for those that lack that discipline.

Given all the dynamics at play, how do you think the real estate investment industry is going to evolve and who will the winners and losers ultimately be?

Paul Gibson: Those that know their customers best will thrive. Real estate is becoming a key part of many businesses’ brand. Tenants have high aspirations for the buildings they want to occupy and high demands of the landlords they partner with. Having those relationships will be critical to driving the performance of assets.

Chuck Leitner: Capital inflows will create some opportunities for new entrants, but on balance, I think we are entering a period of consolidation. In a low-returns environment, performance will be the ultimate indicator and I think the market will be a harsh judge when it comes to determining who is making the right bets and maintaining discipline and who isn’t.

Scale is also going to be important – the ability to play in different strategies at different points in the cycle, offering clients a range of solutions and allowing them to pivot where necessary. Some smaller, niche specialists will also be rewarded, but players in the middle may struggle, and that is where we will see consolidation take place.