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Trends Watch: January 26, 2016

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 to Alex Speaker, Managing Partner and Co-Founder, Arel Capital. 

What is your outlook for real estate investing?

The start of a new year is always a good time to take stock of past accomplishments and challenges, whilst reviewing our outlook for the coming year.  On the investment side, we remain cautiously optimistic on the continued attractiveness of our main investment strategy of acquiring and adding value to cashflowing properties in major markets.  Notwithstanding the recent uptick in long term interest rates, we believe that buying attractively priced, well-located, urban, primarily residential properties in markets with strong demographics, using relatively moderate leverage, should enable us to generate superior risk-adjusted returns.  Our strategy does not rely on market timing or momentum style investing.  While we maintain the ability to sell assets as market conditions dictate, we feel strongly that the bulk of our multi-family rental portfolio, which expected to generate sustained free cashflow, does not rely on exit conditions to generate returns for our investors.

What is your outlook for the economy?

Let’s begin by stating the trite but true statement that “we do not have a crystal ball.”  Nonetheless, much of the economy in 2017 and beyond will be directly correlated to the policies and, perhaps even more importantly, their implementation by the incoming Trump administration.  One primary goal of Trump is financial deregulation of key aspects of the Frank-Dodd Act which will loosen lending practices.  While such deregulation may lead to increased lending and more deals being consummated in the short run, it may also create a higher risk environment which could lead to another financial crisis.  Another worrisome factor is the increase in lending rates which could limit real estate acquisitions as they become less affordable.  On the other hand, higher rates will incentivize buyers to become more conservative in their underwriting and also act as a harbinger for a stronger economy which tends to generally increase real estate purchases both for personal and investment reasons.

What keeps you up at night?

In a nutshell, the two “T’s” – namely, Trump and Technology.  Both have the ability to vastly further positively develop and improve our real estate and financial markets (as well as our lives in general) while also presenting a great degree of potential danger if not properly harnessed and developed.  On the positive side, Trump arrives on the scene with a goal to reinvigorate the markets through de-regulations, tax cuts (mainly corporate tax and perhaps even capital gains) and keeping jobs in America. He has also surrounded himself with industry veterans who are theoretically capable to successfully execute. On the other hand, it is entirely possible that Trump’s brash style, commando communication skills and his non-establishment modus operandi could seriously hamper his ability to execute.  Secondly, while technology has, particularly in the last several decades, played a quintessential role in our personal and business lives (i.e., drones are being increasingly used as a cheap and effective means of surveying properties, software programs enable multifamily owners to have in-depth T+1 property data at the press of a button, and the electronic sharing community – see Uber, Airbnb, Via – is growing by leaps and bounds, all of which are enabling us to function in a manner barely imagined in science fiction films).  The flip side is that technology also presents an enormous risk as evidenced by phenomena such as total digital connection to the workplace, all data becoming increasingly digital and thus subject to hacking (See breach of Yahoo’s 1 billion accounts) and loss, over reliance on technology and many others.

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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