Shopping for Deals in Commercial Real Estate Amidst Market Uncertainty

The one thing that just about everyone in commercial real estate can agree on is the sector is undergoing a significant valuation reset. Despite the doom and gloom, opportunities for risk-tolerant investors are emerging.

The current state of CRE: The commercial real estate market is currently undergoing a significant valuation reset, drawing attention with alarming headlines about impending debt challenges. However, this reset also uncovers potential lucrative opportunities for investors who are willing to embrace risk. Many properties remain in good condition, particularly in the office sector, suggesting that the market’s distress might be an overreaction.

A tale of two valuations: The private CRE market, known for its slower and less liquid nature, has been the source of many alarming headlines. In contrast, public markets have already factored in much of the distress. For instance, US CRE real estate investment trusts (REITs) are trading 35% below their peak, indicating an overcorrection in public markets.

Between the lines: Experts like Kiran Raichura from Capital Economics foresee a 20% peak-to-trough price decline across various property types, with a starker drop-in office REITs. Cathy Marcus of PGIM Real Estate suggests that public markets might be undervaluing certain assets, especially those with high-quality properties. She advises against generic investments in all-property REITs or CRE ETFs due to the sector's diversity and varying returns.

So where to buy? FT asked three industry CRE-watchers what they think looks interesting out there.

• Senior Living Facilities: Favored by Uma Moriarity of CenterSquare, these are seen as a demographic opportunity, banking on the aging US population and a lag in supply.

• Necessity Retail: Both Marcus and Moriarity recommend this sector, focusing on high-traffic supermarkets in affluent suburbs. This sector benefits from consistent demand, even in economic downturns, and has seen limited supply due to fears of e-commerce disruption.

• Global Data Centres: Marcus highlights the continuous and seemingly limitless growth in the need for data centers, driven by trends like streaming, remote working, and AI advancements.

• Apartment Market: Despite mixed press, Lonnie Hendry from Trepp views the apartment market positively, citing a strong economy, housing shortages, and favorable government financing as supportive factors.

➥ THE TAKEAWAY

Big picture: Today's valuation reset presents difficulties but also opportunities for astute investors. The fundamental takeaway is this: do your research and have a keen eye for undervalued assets, which can lead to market dislocations and profitable opportunities on the horizon.

Evercore Grows Real Estate Arm as Clients Look to Private Credit

Evercore Inc. is expanding its real estate advisory division, led by the recent acquisition of Neil Wolitzer, an ex-Goldman Sachs partner, as the industry shifts towards private credit sources.

What happened: The New York-based investment firm welcomed Neil Wolitzer, a former Goldman Sachs partner, to its real estate group. Wolitzer's role is pivotal in guiding firms through property purchases, sales, and particularly debt refinancing in a market increasingly dominated by private credit sources.

Market opportunity: The CRE sector is witnessing a significant shift. Over $3 trillion in global property debt is due by 2025, presenting a ripe opportunity for investors. The stabilization of interest rates allows for more accurate deal valuations. With traditional banks retreating from commercial property loans, especially in office spaces, private lenders are filling the void.

Strategic decisions: Public real estate investment trusts (REITs), having suffered from high-interest rates, now face a critical period. The changing financing landscape also prompts company founders and executives to reconsider their growth strategies, exploring options like selling minority stakes or raising capital.

➥ THE TAKEAWAY

Why it matters: In 2024, private investors like pension funds and wealthy individuals are expected to increase acquisitions of operating companies managing diverse assets. This move aims to streamline large portfolios and includes sectors like student housing and data centers. The struggling U.S. office market might also attract more flexible investors.

Evercore's expansion into real estate advisory, spearheaded by industry veterans like Wolitzer and Vitulli, signals a strategic shift toward an environment where private lenders are gaining an ever-greater foothold.

With Tri-Rail's expansion to downtown Miami, South Florida is further expanding its transportation choices. Brightline, which has added more stops in recent years, initiated the move towards improved mass transit, and Tri-Rail now offers a more cost-effective option at a quarter of Brightline's price.

1 References made in this email to RM Communities portfolio of properties include four properties that were acquired prior to the formation of RM Communities. Consequently, these assets are managed by an affiliate and are included as part of the RM Communities portfolio as a result of being acquired and managed by the same executive leadership and according to the same investment strategy employed by RM Communities.

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