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Trends Watch: July 12, 2018

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 CEO, Terrell Gates - Virtus Real Estate Capital.

What is your outlook for real estate? Where do you see the best opportunities and why?

The easy money has been made in commercial real estate (“CRE”), as has been the case in almost all other categories of risk assets. It is difficult for many to see how traditional CRE categories can continue performing as they have over the past several years. Given current lofty valuations, rising interest rates, new supply, and waning demand for some traditional CRE (particularly retail, hospitality, and office which have experienced disruptive forces to their business models), it is reasonable to expect a retreat in valuations and softness in income streams. However, we believe that more defensive categories of CRE, aka niche, alternative, or recession-resilient property types, have an arguably rosier outlook. Historically, yields have been more resilient and valuations have been less downwardly volatile in property segments such as medical office, senior living, workforce housing, self-storage and educational related properties. However, even within these niche types, there has been new supply risk and expanded valuations. Further, there are more idiosyncratic risks to investing in these operationally intensive property types and it requires a sage investor with domain expertise to navigate. That being said, we believe these niche categories should fare well in the coming years.  
     
What is your outlook for the economy?

Short-term it is positive and long-term it is negative. In the short term, we see nothing on the horizon to prevent the economy from continuing to expand based upon the knock-on effect of all the liquidity presently in the system, robust asset prices (fueled by an equity bubble rather than a debt bubble), moderate inflation and a fiscal policy that should provide stimulus in the short to intermediate terms. In the long-term, expect continued pressure on rising interest rates, and a mild-to-moderate recession in the intermediate term as the overly liquid monetary supply is contracted to closer to historical norms. Our view is there is a low probability of long-term sustained growth and a higher probability of a moderate recession. In summary, we believe there is generally a 30% chance the economy and markets continue to perform at a stable level over the next two-to-three years. We believe there is a 50% chance of a mild-to-moderate recession during that period and a 20% chance there is a deep recession likely tied to a “V” equation where liquidity is more forcibly removed from the system and the asset price bubble bursts.  

What keeps you up at night?

Making sure our properties deliver great outcomes for our residents and tenants, while also performing at an optimal level for the ownership. I spend time thinking through where and how we are going to evolve next as an organization while maintaining the key criteria that has made us successful thus far. In other words, making sure we evolve without drifting. I also lose sleep making sure we have enough capital to seize upon quality investment opportunities in the coming years. 

 

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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