Investors Must Have a Macro-View
The old adage, where you stand depends on where you sit certainly applies to the commercial real estate (CRE) investment market. Investors – as opposed to traders- must have a macro view of the market that informs their investment strategies. Indeed, an investor cannot make rational capital allocation decisions without such a viewpoint. In today’s market, there appears to be two (2) basic, competing macro paradigms.
Some investors are of the view that the Federal Reserve (FED) will soon lower interest rates, cap rate expansion will either not occur, or revert to previous means, and that negative leverage is only temporary. Covid is considered to have been the market culprit. These investors will continue to acquire property(s) at historically low cap rates, leverage property at 200+bp to acquisition caps, and apply discount rates that are formulated on future interest expectations. Essentially, these capital allocators are expecting the CRE fundamentals to revert to previous market levels. If these expectations actually transpire, these investors will have been able to grow their portfolios at a time when other investors have moved to the sidelines – and achieve medium-to-long term investment returns that are in-line with relative market expectations. There is, however, a competing perspective.
Other investors are of the view that CRE market is undergoing a fundamental realignment. These investors believe that the FED will be higher for longer, that cap rates will need to expand. These investors will not engage in negative leverage. These capital allocators believe that a re-pricing of CRE assets must occur across asset types. For such a re-pricing to occur, both sellers and institutional lenders will need to adjust their expectations and capitulate on pricing. Until such a capitulation occurs, these investors will either remain on the sidelines, or be extremely selective as to both capital allocation and asset type preference.
Economic forecasting is difficult at best. Any prognosticator is bound to be found out to be wrong. Yet investment thesis must make certain macro assumptions. WINPRO is of the opinion that interest rates will stay higher-for-longer. Zero bound rates will not reappear for quite some time. WINPRO believes that the previous zero-bound rates distorted both the debt and equity markets. As a result, a re-pricing of CRE assets is likely to occur over the short-to-medium term. The depth of any such re-pricing will depend on each particular asset. Understandably, sellers of hard assets, and holders of CRE debt, will be reluctant to reprice assets. Capitulation will be a slow process. Nonetheless, WINPRO believes that such a shift will occur. The question then becomes, when will the capitulation occur?
WINPRO is the Manager/Member of CRE Private Credit platforms which offer investors attractive preferred returns on collateralized debt instruments. To Learn more about WINPRO please call us at 720.344.1174