In recent years, real estate investments have generated more than outsize returns. For some investors, they have also produced unbridled optimism that huge returns would continue to be a leading source of growth in their portfolios.
However, most industry observers at the fall 2006 Pension Real Estate Association demurred. While the most recent real estate boom may be at its crest, PREA attendees remained optimistic about the future, albeit inclined to proceed with caution.
“It’s the top,” Mary Ludgin, head of the US private real estate group at Heitman, said during a panel discussion on the fundamentals of the US real estate market. “The question is, ‘How long can it be sustained?’”
In his remarks leading to the conference’s opening panel, which took a look at the broader investment market across asset classes, Philip Riordan, director of real estate at GE Asset Management, paraphrased former GE chief executive officer Jack Welch. “You deal with things the way they are and not the way you want them to be,” Riordan said.
And the way things are is giving many investors pause. One panelist noted that approximately $2 trillion (€1.6 trillion) in sub-investment grade debt is currently outstanding.
“There has been an explosion in more esoteric debt structures,” said Ron Insana, author and senior analyst on financial news network CNBC, who was moderating the panel on the broader investment climate. While they have performed well up to this point, many of these instrument have not yet been tested under adverse circumstances, he said. The question is what will happen when that test comes.
“We don’t know how they’ll behave, but we can bet they will behave badly,” he added.
Although the theme of the conference was “Back to Basics,” panelists discussing the broader investment market frequently highlighted opportunities for investors in both distressed debt and emerging markets.
Staking a claim in some emerging markets, particularly finding a way to get a piece of the explosive growth projected for urban areas in China and India, is practically a must for institutional investors. However, one of the most important factors on the attractiveness of emerging markets, be it in real estate or other asset classes, is the price of oil.
Robert Kessler, chief executive of The Kessler Companies, said that those in the US tend to forget that low oil prices, while beneficial to the domestic market, can often produce political instability in key areas of the world. The solution to the greater risk in emerging markets for investors is to hedge their bets.
“Figure out what you can buy on the opposite side to protect yourself,” he said.
The second crop of panelists focused on the four primary sectors in the US real estate market: logistics, office, residential and retail. And despite the competitive state of the industry, the group saw some bright spots ahead.
Logistics properties near major ports and rail hubs have been performing especially well and are expected to continue to do so, particularly in Los Angeles, California’s Inland Empire, Northern New Jersey, Miami, Chicago and Kansas City.
The office sector continues to look strong in one-time secondary markets, especially Seattle and Florida, which have joined the ranks of primary markets due to strong growth.
In the multi-family sector, the 78 million “echo-boomers”, the children of the Baby Boom generation, are driving a strong rental market; the panel concurred that there is more to come. And additional opportunities exist as immigration remains strong.
As far as retail goes, most agreed that the sector crested more than a year ago. However, ethnic retail centers were noted as one potential opportunity. Some centers that cater to mainly Hispanic and Asian immigrant populations are showing numbers that one panelist called “off the charts.”
Rounding out the first day of the event will be a keynote address given by former Federal Reserve Alan Greenspan.
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