At Goodwin Procter’s 2016 Real Estate Capital Markets Conference in New York last week, Seth Weintrob, global head of the real estate investment banking group at Morgan Stanley, raised an important question about the US private real estate market: where do we go from here?
Weintrob said that there were two schools of thought. On the one hand, “there’s a lot of good things actually going on in the market, and while values have plateaued, there are a lot of reasons to suggest that it could stay like this for a while,” he said.
For example, the US real estate market continues to enjoy strong fundamentals, supported by solid job growth and household formations, as well as a robust housing market, said Weintrob. New real estate supply also has remained manageable and interest rates have remained low.
Moreover, the US remains a bright spot in the global property market and the desired destination for much of the world’s institutional capital. With limited leverage being used on real estate transactions, it is both domestic and foreign equity that has been driving up property values in the country, not debt, Weintrob noted at the conference, which was co-hosted by Columbia Business School.
“There are a lot of great things to suggest that there’s fairly good momentum,” he added.
However, economists are projecting at best very slow growth in the US, while the probability of a recession is becoming increasingly likely. Weintrob said some concerns included record-high valuations, record-low internal rates of return, potential oversupply in certain sectors and regions of the country, as well as geopolitical shocks from areas such as China and the Middle East.
Another factor is the public market, which historically has led the private market. Currently, the stocks of public real estate companies are trading at a discount, which is a potential indicator of where the private real estate market is headed as well, he observed.
Also, with the US now entering its eighth year of economic recovery, “this cycle is long in the tooth,” he said. “It’s very rare for a cycle to get to that efficient frontier and it just stays there for a long period of time. Generally, it always ends.”
However, if a downturn, both in terms of the economy and real estate valuations, were indeed to occur, it could potentially be shallower than previous downturns and be more concentrated in certain sectors, said Weintrob. It also could take more time to unfold rather than be characterized by a sharp and sudden decline.
“It’s rare that we’ve seen such a diversion of factors that point the market in one direction or the other,” he said. “It really demonstrates the importance of scenario planning and being ready for events if they come.”