Trends Watch: Distressed Real Estate
May 28, 2020
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Christopher Johnson, Managing Partner, Tailor Ridge Capital.
What is your outlook for alternative investments?
I think alternative investments will remain attractive for some time. Dispersion makes alpha generation “easier” and considering the wide range of potential outcomes for the economy, including some very dark scenarios, just being long the stock market does not seem that interesting with the S&P500 above 2,900 again (In late March, that case was easier to make). Opportunistic strategies that can act as liquidity providers should do well for some time.
What are the greatest opportunities you see and why?
In our space specifically we’re seeing liquidity dry up between banks going risk-off and competitors worrying about their balance sheets. We see this as a great opportunity to pick and choose good deals in a way that was more challenging in a late cycle, competitive environment. The risk-adjusted potential returns have certainly improved and we think great opportunities will abound for some time. We typically fund distressed real estate transactions, so if things get bad our universe actually expands.
What are the greatest challenges you face and why?
In terms of our strategy, we’re actually very excited about the opportunity set, although this is clearly a time to be cautious. We are a lender, so our upside is capped and while we’re capable of taking over collateral, we try to avoid having to do so. The biggest challenge right now is raising capital for a new fund, as many allocators are either raising cash or allocating to existing managers during these uncertain times.
What keeps you up at night?
I think there is a very real possibility that households and market participants are underestimating the risks of negative outcomes: 70% of the U.S. economy is the U.S. consumer, and it is plausible that lingering high unemployment and more problems with COVID-19 could do long-lasting damage to consumer confidence and behavior. Combine that with record debt levels at every level of society and we could be facing a very unpleasant deflationary period with high unemployment, lots of insolvencies and below-trend growth. While our strategy can cope with such an environment, we would obviously prefer to see a different outcome both from a business and a societal perspective and I’d be lying if I said that did not keep me up at night from time to time.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.