QOFs Continue on Pace for $10 Billion Year Fueled by Multifamily Investment
Multifamily and commercial investment is outpacing other types of real estate projects in QOFs by a 3-to-1 margin. An under-the-radar real estate sector is earning solid returns for savvy investors. A single-family rental giant is seeking a $1B joint venture partner to bail them out of trouble. And one particularly resilient real estate sector refuses to back down from rising interest rates and high inflation.
QOFs Continue on Pace for $10 Billion Year
Good morning, in today’s email: Multifamily investment is outpacing other types of real estate projects in QOFs by a 3-to-1 margin. An under-the-radar real estate sector is earning solid returns for savvy investors. A single-family rental giant is seeking a $1B joint venture partner to bail them out of trouble. And one particularly resilient real estate sector refuses to back down from rising interest rates and high inflation.
📚 CRE 101: Leasing occupies its own particular corner of the commercial real estate landscape, but some can be more complex than others. In this article, Connect CRE highlights the basic types of commercial real estate leases and the building blocks that are commonly part of each agreement.
WHEN OPPORTUNITY KNOCKS
Qualified Opportunity Funds (QOFs) Continue on Pace for $10 Billion Year Led by Multifamily
More and more investors are pouring capital into qualified opportunity zone funds that focus exclusively on multifamily development, outpacing other types of projects by a 3-to-1 margin.
Building momentum: According to Novogradac & Co. tracking list, total investment in QOFs hit $32.69 billion as of Sept. 30 by 1,231 QOFs. The YTD fundraising compares to $24.40 billion at the end of 2021. The latest figures through the first nine months represent an $8.29 billion increase putting QOFs on the verge of breaking 2021’s record and going well beyond $10 billion.
Leading the way: Opportunity zone funds that focus exclusively on residential projects reported raising equity of about $5.9 billion YTD, according to Novogradac. It said that commercial-only funds had raised about $2 billion, while those focused strictly on hospitality, renewable energy and operating businesses have raised less than $700 million.
Why it matters: The latest figures come as demand for multifamily property has surged. Higher interest rates are driving up home mortgage costs, resulting in more potential homebuyers choosing to stay put. The results come as some major cities already reported a housing shortage before the Federal Reserve began aggressively raising interest rates earlier this year.
Cell Phone Towers Just Keep Delivering Solid Returns
Long-time real estate investors, including several REITs, are doubling down on cell phone towers and antenna rays—profitable real estate assets with less competition.
Blue ocean, not red: Since the pandemic started, the most popular CRE sectors have been industrial and multifamily. But a profitable niche market of cell towers and antennas is flying under the radar and earning solid returns for some savvy investors. Buyers range from infrastructure REITs to telecommunications companies.
Divide and conquer: According to Hoya Capital, as of Q3 2022, four REITs controlled around 75% of the wireless communications infrastructure in the U.S., purchasing more than $557 million in assets during the first six months of 2022. The four REITs received 27.19% in total returns through the month of September.
Getting more competitive: Some investors are negotiating longstanding relationships with landowners and antenna operators without the help of facilitators. But without 3rd parties, the market has grown harder to break into. The challenge is to find the right team with an established portfolio to “execute over time and grow to scale,” said Noi Spyratos, managing director of CBRE Investment Management.
Invitation Homes Seeks $1B Joint Venture Partner
According to Bloomberg, single-family home rental giant, Invitation Homes (INVH), is eyeing potential partners for a $1B joint venture in anticipation of an impending market shift.
Matchmaking: Invitation Homes is actively searching for a joint venture partner in an effort to raise equity after its stock price fell 28% this year. It’s a tempting offer for qualifying suitors. Invitation Homes owns upwards of 85K houses nationwide and is among the largest players in the single-family rental space.
Shifting strategies: In order to address the nationwide housing shortage, single-family rentals skyrocketed while built-to-rent homes turned into the fastest-growing housing sector in the country. But price growth and purchase volumes are slowing down. Homebuilders that stockpiled extra homes to meet expected future demand are now offering discounts of up to 15% to get rid of empty houses.
Follow the lawyers: Invitation Homes was in the hot seat after being accused of using extreme and abusive tactics to evict tenants during the CDC’s eviction moratorium period. Senator Elizabeth Warren publicly condemned the company, claiming it was “taking advantage of the housing shortage.” The company was also accused of ignoring permits and doing poor repairs on its properties.
CAN’T STOP, WON’T STOP
Rising Interest Rates Barely Slow Down Data Center Investors
Data center investors are starting to feel the compound effects of increased capital costs, rising interest rates, soaring valuations, and falling cap rates—just not as much as other sectors.
Still in demand: The data center sector is flooded with new and existing investors. As demand continues to outpace supply, valuations keep rising, which could lead to an eventual price correction. But that isn’t stopping investors from closing deals, even if it means raising more capital and paying a premium to get the job done.
By the numbers: The higher cost of capital has compressed valuations and cap rates have climbed 200 basis points. A perfect storm of inflation, rising rates, and supply constraints have also hammered the sector. “There’s got to be a point here where there’s a repricing,” says Robert Walters, principal at Avison Young’s data center practice.
Bullish euphoria? There was broad consensus at Bisnow’s DICE Capital Markets Summit that major data center players won’t see lower deal volumes anytime soon. In 2020 alone, the percentage of U.S. real estate investment in data centers doubled from 4–8%, and the trend is expected to continue. While rate hikes might impact individual valuations, the overall data center market remains resilient.
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.