“We don’t know.”
That was the response of Denise Olsen, managing director at GEM Realty Capital, when asked about where the real estate industry is in the business cycle at the recent KAYO Women’s Private Equity Real Estate Summit in Chicago.
The truth is, economic cycles and real estate cycles don’t die of old age. Most of the top industry investors, executives and advisors at the conference agreed that the industry currently finds itself in a mature part of the cycle, as property values throughout the country and across asset classes remain richly priced.
The state of the industry
The summit, which brought together 250 real estate industry professionals for two days beginning June 24, provided perspectives on the current state of the industry and the myriad trends that could affect strategic planning:
Prepare assets: Many market participants are hopeful that the end of the current cycle will not be as dramatic as the Great Recession. For real estate investors pricing in risk at this point, the key will be to ensure that they position their assets to withstand a downturn. This should allow managers to finish planned re-positioning strategies and successfully play through the increasingly mature part of the cycle. It would be prudent for managers to find the soft spots in their original underwriting of assets and proactively address workout considerations and modifications to their plans.
Stick to the fundamentals: Markets remain frothy, with ample capital and dry powder available for fewer and fewer attractive opportunities. While fundraising is not a concern, it is critically important to pay attention to underwriting fundamentals and not chase deals simply to put capital to work. Otherwise, managers may find themselves overpaying for assets.
Raise funds: The historically low-interest-rate environment continues. Even the promise of a rate cut by the Federal Reserve later this summer likely won’t do much to jolt investment in real estate markets. Investors have recapitalized and refinanced assets with abundant capital, and financing sources are still readily available in the marketplace.
Watch the demographics: Millennials and baby boomers remain the demographics to watch. Millennials continue to drive preference for tech-enabled solutions; the growing adoption of e-commerce by retailers will support a long-term, positive outlook for industrial spaces, warehousing and logistics. Additionally, millennials have been famously straddled with student debt and are facing the home ownership affordability crisis that is gripping the country. The affordability of housing will drive trends for residential real estate, with investors focusing on bringing entry-level housing solutions, including rentals and affordable single family homes.
The baby boomers still have a large share of population in their late 50s. As they advance into retirement, they will be increasingly dependent on fixing their housing costs. This means either staying in low-interest-rate mortgages (and exacerbating the housing supply issue), or downsizing into smaller, more convenient homes and affordable neighborhoods (as opposed to isolated senior-living communities). The downsizing trend seen in previous generations is being delayed as boomers continue to live and work longer.