Trends Watch: Real Estate Affordability

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 Kevin White, CIO, Virtus Real Estate Capital.

What is your outlook for real estate? 

It feels almost redundant to say, but there is a lot of uncertainty in the world today. This question is one we are getting constantly, and we have been tracking the outlook of the commercial real estate market and specifically our property types in a series of COVID-19 update letters. Commercial real estate is undoubtedly feeling the impact of COVID-19, although at varying levels depending on property type. No surprise that hospitality and retail especially are feeling the pinch, but the pervading uncertainty on the lasting impact to credit markets and fundamentals is consistent across all property types. We are researching, collaborating with partners, and reading as much as we can to understand the near-term and long-term effects of COVID-19, including the opportunities that it will lead to for us.

Transaction volume for 2020 will likely be a fraction of what it was for 2019. We have entered a phase of price discovery. Buyers are pricing in more conservative assumptions coupled with an increased cost of capital and owners are pushing for values as close to pre-COVID-19 as possible. Everyone’s crystal ball just became a lot cloudier and there is going to have be a story behind any deal that closes in the next 120 days.

We are excited about the near-term opportunity to find distressed projects and for many of our industries to absorb the new supply that has hindered the fundamentals of many commercial real estate asset classes. Our investment strategy revolves around being cycle-resilient. The sustaining demand for our property types helps insulate us against shocks to the system. People always need a place to live, go to school, and utilize medical services.

Where do you see the greatest opportunities and why?

Two places. One, we currently see a near-term opportunity around finding creative solutions to invest in distressed deals. Our team found many of these opportunities coming out of the global financial crisis in 2009. The window of opportunity will likely be less coming out of COVID-19 because there is more dry powder sitting on the sidelines ready to invest than the last cycle. This is where relationships, creativity, experience, and remaining disciplined are keys to knowing the difference between recognizing a good opportunity and catching a falling knife.

The other area we have been focused on for a while now is affordability.  Whether it’s housing, education, or health care, we are dedicated to finding opportunities where we can hit a lower price point that others either can’t or choose not to.  We believe this offers a competitive advantage in times of economic expansion, but particularly in challenging times like we are facing today.

What are the greatest challenges you face?

Helping investors understand that this, right now, is the time to lean in. Our job is to know when and where to deploy capital. This is the time we want dry powder. If investors wait until they feel like the storm has passed, they will miss the window.

What keeps you up at night?  

Risk that is outside of our control.

As you can probably guess, all of my previous answers have been influenced by COVID-19. This answer remains unchanged. We spend a lot of time understanding political implications, force majeure, property taxes, new supply, insurance, and other risks that are out of our control. We are well positioned to manage risk that we can influence.

Our job is hard enough implementing complicated business plans to create value. It’s frustrating when you execute your business plan and one of these uncontrollable risks moves against you and your value creation is muted. Our focus on cycle-resilient property types helps insulate our investments from larger economic forces – our recent portfolio performance is a perfect real-world example of that – but there are still plenty of other risk factors we are constantly researching to ensure we are making the most informed investment decisions possible. The next ten years will look very different than the last decade.  Now is the time to remain disciplined. The best-in-class investors, developers, and management companies will separate themselves from the herd.