Podcast Summary
Commercial Real Estate Trends and Future Direction: Institutional adoption, low interest rates, and affordability crisis fuel commercial real estate market growth. Technology modernizes the industry and opens up niche asset classes. Despite interest rate hikes, prices continue to rise due to macro trends.
The commercial real estate market has seen significant changes over the past decade, with real estate becoming a primary asset category alongside stocks, bonds, and cash due to institutional adoption. This trend, along with low interest rates and the affordability crisis in housing, has led to rising valuations and increased demand for housing and industrial real estate. Charles Clinton, the CEO of Equity Multiple, a leading online investment platform, highlighted these trends during a conversation on The Investors Podcast. He also discussed how Equity Multiple is leveraging technology to modernize the real estate industry and invest in niche asset classes like storage units and car washes. Despite recent interest rate hikes, Charles sees commercial real estate prices continuing to trend up due to these macro trends. Overall, the conversation provided valuable insights into the current state and future direction of the commercial real estate market.
Evolving Commercial Real Estate Landscape: Industrial, Onshoring, and Remote Work: Industrial real estate is on the rise due to e-commerce and logistics needs, onshoring could impact supply chains and investments, and remote work shifts the focus from office spaces to housing and multifamily properties. Niche markets like self-storage and car washes offer opportunities for value in a changing landscape.
The commercial real estate landscape is evolving, with industrial real estate gaining popularity due to e-commerce and logistics needs. Another significant trend is the onshoring movement, which could lead to major changes in supply chains and commercial real estate investments. Housing and multifamily properties have been major investments for the past decade, but office spaces have seen unexpected shifts with the rise of remote work. Commercial real estate encompasses various sectors, including retail, hospitality, healthcare, data centers, and specialty properties like self-storage and car washes. The commercial real estate market is about half the size of the residential market, which is roughly the same size as the stock market. As the market evolves, investors are exploring niche markets like self-storage and car washes, which offer opportunities for relative value in a constantly changing landscape.
Institutional investment in self storage and car wash sectors: Institutional investors are increasingly buying self storage and car wash businesses from mom-and-pop owners due to their subscription revenue models and high customer stickiness. These sectors offer potential for future sales to larger institutions, providing economies of scale and diversified risk.
Self storage and car wash sectors, which have historically seen less institutional investment due to their fragmented nature and cash-based operations, are now attracting institutional capital due to their subscription revenue models and high customer stickiness. Self storage, further along in this process, has seen large sales to private equity companies, while car washes are also following the trend towards monthly memberships and institutional ownership. This presents an opportunity for investors to buy from mom-and-pop owners now and potentially sell later to larger institutions willing to pay a premium for professionally managed assets. The economies of scale and diversified risk in larger commercial real estate deals make them an attractive investment, especially in the face of rising interest rates. Commercial real estate is typically valued based on cap rates, an inverse of the multiple on net income. Recent trends in these sectors indicate that they are being re-evaluated and re-priced accordingly.
Commercial real estate valuations adjusting to rising interest rates: As interest rates rise, commercial real estate valuations face pressure to adjust with increasing cap rates and decreasing multiples. The bid-ask spread widens, and transaction volume is low, potentially leading to a 10-15% dip in long-term valuations. Investors should wait for a broader market shift for buying opportunities.
As interest rates rise, commercial real estate valuations are experiencing pressure to adjust, but the process is not instantaneous. Cap rates are increasing, and multiples are decreasing, making it essential for buyers to ensure their unlevered yields on investments exceed the cost of borrowing. The pricing disparity between buyers and sellers, known as the bid-ask spread, is widening, and transaction volume is currently low. It is estimated that commercial real estate valuations could dip by 10-15% in the long term. However, the relationship between cap rates and interest rates is not perfect, and the gap between the two is magnified by leverage. As cap rates and interest rates trend closer together, a more significant dip in valuations is expected. The buying opportunity for investors will emerge when the market experiences a broader shift, leading to an increase in transaction volume.
Staying Informed About Real Estate Market Trends: Profit margins are squeezed, future cap rates and interest rates impact investment decisions, office space prices may not have bottomed, and uncertainty surrounds office usage and remote work.
Staying informed about the markets is crucial for investors, and Yahoo Finance is a valuable tool for keeping up with the latest news and trends. In the real estate market, profit margins are being squeezed, and the future forecast of cap rates and interest rates plays a significant role in investment decisions. Office space prices are coming down but may not have hit the bottom yet, and the future of office usage and remote work remains uncertain. From an investment perspective, there is a lack of conviction that the bottom has been reached yet.
Commercial real estate market driven by debt duration: Commercial real estate has shorter debt durations than residential, leading to more transaction momentum and potential sales when refinancing becomes unfeasible. This, along with unique market dynamics, makes it less likely to be the 'next shoe to drop' in a market downturn.
The commercial real estate market, unlike the residential market, is driven by the duration of debt. Commercial real estate mortgages are typically shorter term, with the longest being 10 years, and a significant portion being 2 or 5 years. This shorter debt duration creates more transaction momentum and can force sales when interest rates make refinancing unfeasible. The historically low inventory in the residential market due to homeowners unwilling to sell with low-interest mortgages is not as prevalent in commercial real estate due to the shorter debt duration. The shorter-term debt also means that commercial real estate may not be the "next shoe to drop" in a market downturn as some believe, but rather, it may have its own unique market dynamics.
Building intergenerational wealth through commercial real estate: Commercial real estate offers opportunities for long-term wealth building, but the time horizon and investment strategies vary greatly depending on market conditions and individual goals.
Commercial real estate can serve as an asset for building intergenerational wealth, especially through a value-add business plan. However, the time horizon for investors varies greatly, from those looking for quick profits to those aiming for long-term holdings. The residential real estate market, with its low inventory and high demand, presents both opportunities and challenges. While some may see the potential for profit in short-term rentals or new construction, others may face increased competition and higher costs. Ultimately, life circumstances and market conditions will drive the direction of the housing market, potentially leading to increased inventory and lower prices. Cash continues to flow towards sectors offering high returns, but the impact of short-term rentals on the overall market may be limited.
Long lead times in home building industry impact accurate forecasting: Private credit, involving lending instead of equity, is gaining popularity due to rising interest rates and withdrawal of traditional lenders, creating opportunities for non-bank lenders in the real estate market.
The home builder industry has faced unexpected challenges due to their long lead times, which has made it difficult for them to accurately forecast market conditions. This was evident during the pandemic when they slowed down due to anticipated market downturns, but housing prices did not fall as drastically as predicted. Meanwhile, private credit, which involves lending instead of investing in equity, has become increasingly attractive due to rising interest rates and the withdrawal of traditional lenders from the market. Regional banks, in particular, have pulled back due to regulatory scrutiny and investments made at unfavorable interest rates, leaving room for non-bank lenders to step in and capitalize on short-term opportunities. Overall, the private credit market presents a significant opportunity for investors looking to generate income and position themselves for potential future buying opportunities in real estate.
Private credit: Higher yields through active involvement: Private credit investing offers higher yields than public markets, allowing for active involvement and potential for income and value appreciation in real estate projects.
Private credit investing offers investors a chance to earn higher yields, particularly in the range of 12%, compared to public markets. This is due to the active role investors can play in the private markets, where they can match their investments to specific market conditions and investment opportunities. Private credit investments in real estate, for example, can offer both income and the potential for value appreciation through business plans to improve the value of the underlying projects. Rates for private credit investments can vary widely depending on the type of project, with debt starting at a similar rate to a home mortgage and rising into the mid-teens for value-add investments. Public.com offers a high yield cash account with a rate of 5.1% APY, which is significantly higher than many other financial institutions. Private credit investing allows for more active involvement and the potential for higher returns, making it an attractive alternative to traditional bond allocations.
Making Private Real Estate Investments Accessible: Equity Multiple, founded in 2015, offers accessible private equity-style real estate investments through a range of options, with a focus on transparency and institutional-level due diligence.
The Jobs Act of 2013 opened up new opportunities for online investing in real estate, and Equity Multiple, founded in 2015, aims to make private market real estate investments accessible to a wider audience by operating as a private equity-style model. The company offers various investment options, including short-term notes, income-oriented real estate, and upside equity investments, all with a focus on transparency. Equity Multiple's edge comes from its institutional-level due diligence and real estate expertise, providing investors with confidence and understanding in their investments. The company's offerings are divided into three categories: keep (short-term notes), earn (income-oriented real estate), and grow (upside equity investments). By offering a range of investment opportunities and prioritizing transparency, Equity Multiple has distinguished itself in the crowded crowdfunding landscape.
Focusing on value-add properties and middle market transactions: The investment platform selectively validates investments, emphasizes diversification, and operates in the middle market, dealing with transactions between $10 million and $50 million.
The investment platform focuses on validating a select few investments out of the many they consider, with a heavy emphasis on value-add properties. They prioritize diversification in terms of investment types (equity, debt, and value-add) and deal sizes, which are typically in the middle market range. The platform encourages investors to build a portfolio rather than putting all their funds into a single investment. The risk associated with each investment is communicated, and investors are advised to diversify to mitigate potential losses. The platform operates in the middle market, dealing with transactions between $10 million and $50 million, as they believe there is more value in this sector due to less institutional capital in this range.
Less institutional competition in commercial real estate leads to potential higher margins: In commercial real estate, less competition from institutions allows for potentially higher returns through increased leverage, with opportunities for Equity Multiple to launch a debt fund and consider an equity fund, while prioritizing investor education and communication.
The current market conditions in commercial real estate are seeing less institutional competition, leading to potential higher margins. This trend also raises questions about the amount of leverage being used in these deals. Generally, leverage in commercial real estate is lower than in residential real estate, with mortgages typically falling between 60-70%. However, there are opportunities to use more leverage for higher returns. Looking ahead, Equity Multiple is launching a debt fund and considering an equity fund, as well as exploring alternative investments outside of real estate. To learn more about Equity Multiple and their offerings, visit equitymultiple.com and reach out to their team for any questions or investment inquiries. They prioritize investor education and direct communication to help new and experienced investors navigate the real estate investment landscape.
