Three major trends have been impacting investment in real estate—the rise of interest rates, persistence of the work-from-home paradigm, and re-shoring the supply chain—and advisors need to choose carefully if they’re going to use this asset class to add exposure for growth, income and diversification, according to investment managers.
“It all comes back to customer suitability. What is suitable for your client? Because there’s a lot out there,” said Bernard Wasserman, president of Participant Capital, a Miami-based firm that manages a portfolio of mixed-use, multifamily and hospitality real estate development projects.
Wasserman spoke yesterday at a virtual roundtable discussing private real estate investment, along with Robert Picard, managing director and head of alternative investments at Chicago-headquartered Hightower Advisors, and Brian Pollak, partner and portfolio manager at Evercore Wealth Management, a registered investment advisor headquartered in New York.
“Make sure the liquidity expectations of your client are aligned with the investment and they understand the risks,” he continued. “Once you get over the hump of suitability, then look at markets.”
Hot areas for investment are Sunbelt multifamily and industrial, both of which are resilient, the panel said, with additional opportunities for office and retail under practiced management. Self-storage is also a good area, as prices can reset quickly to adjust for inflation and industry consolidation is creating efficiencies that drive income. In addition, real estate developers are building single-family homes for rent, not ownership, and those homes will remain in investment pools.
That said, reminded Wasserman, not all Sunbelt markets are created equal. “The Sunbelt is a lot of states, and not all of them have performed as well, and not all property types have performed as well,” he said. “Office is something that’s doing well in cities like Miami, and doing less well in other cities that haven’t benefited from strong corporate migration.”
According to a Cerulli Associates report earlier this year, allocations to alternative investments among high-net-worth investors will average 9.1%, compared with 7.7% in 2020. That percentage is expected to increase to 9.6% by 2024, and private real estate is expected to benefit, the panel said.
For the investor, the opportunities to deploy money in private real estate have never been better, Picard said.
“Historically, if you wanted to invest in real estate, you’d invest in public REITs,” he said. “And otherwise for the private real estate portion, basically you looked at your own personal home, maybe a vacation home, and of course all of us are familiar with those individuals in our towns or cities who are doing speculating or investing in commercial real estate. But it’s very much mom and pop.”
Over the past decade, however, the concept of professional funds that have much better data has gown, and now offer pooled investment vehicles that provide an opportunity for accredited investors to access private real estate.
“With this avenue of new professional funds, it’s really important that investors have seasoned professionals that can do the due diligence and understand who will be best served and which are the best funds to get access to that specific sector of private real estate,” Picard said.
When considering at manager selection, aspects of real estate investment that are germane to the asset class including having real regional expertise, understanding local regulations and zoning, and having a network, the panel agreed.
“When you look at a management team you need to see where their regional footprint is. If they’re expanding, where they’re expanding,” Pollak suggested. “A lot of firms outsource their relationships, and that’s fine, but you have to understand the fees that go with that.”
If they’re vertically integrated, advisors need to understand how the operating company interacts with the fund, he said. Other fees include the management fee and carry, but also fees for property management, sourcing, development, contractor fees.
“You need to understand how all those fees are interacting and what the industry standard is,” Pollak said.
“In our view, when you invest in alternatives you want to do it for three reasons,” he continued. “One, you can get growth above and beyond what you can get in the equity market. You can get income above and beyond what you can get in the public debt market. Or you can get diversification to low correlation and low beta with both equity and debt. Depending on the type of real estate, you can access all three of them.”