Transcript: High interest rates, low liquidity complicating real estate deals
Steve Marino of GWL Realty Advisors says transaction formulation in the real estate industry has slowed dramatically in recent months
- November 15, 2022 November 16, 2022
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life.
For today’s Soundbites, we’re talking about real estate with Steve Marino, executive vice president of portfolio management at GWL Realty Advisors. We talked about what sectors show promise and the pace of transaction formation. And we started by asking about the allure of real estate investing in the current environment.
Steve Marino (SM): With significant volumes of capital on the sidelines, real estate provides an opportunity set in which to create attractive risk-adjusted returns. It’s imperative that investors remain focused on the long-term strategic objectives of real estate investing and avoid being consumed by the near-term headlines. We think about real estate as having real strong capabilities of generating reoccurring cash flow and the ability to generate strong capital returns over full investment cycles.
Sectors that show promise.
SM: Our focus continues to be quite constructive on both industrial and the multifamily sector in particular. And I think that’s really a product of strong demand with supply constraints really helping to enhance pricing power on the behalf of owners of real estate and really helping to accelerate and preserve income returns over the near term. We believe those two asset classes are best positioned to continue to perform.
What sectors carry more risk?
SM: Certainly, the asset class that continues to face the most uncertainty is the office sector. And I think that’s largely related to ongoing questions around the uncertainty of future-of-work models. September of 2022 was really the restart for many organizations to return to the office in a more meaningful fashion, and what we are seeing, early days, is that tenants are being very tactful in terms of their use of the office. We see tenants wanting to ensure that the office is truly an amenity for their employees and really using the office as a key tenant attraction and retention tool. And so, I think, within that, what we’re seeing is tenants are prioritizing highly ammenitized buildings. To compete in this environment, older generation buildings are going to be forced to ammenitize or to compete purely on price. It’s a headwind that I think investors need to be cognizant of.
Why transaction formation is slowing.
SM: We are seeing a longer process around transaction formation, which is really the process by which an asset is marketed, receives bids, and ultimately culminates in a transaction. And in many respects, it’s related to some of the constraints on availability of capital in the marketplace. On the equity side of the equation, we’re seeing a number of investors coping with some challenges related to equity market corrections. They’re seeing their real estate allocations approach target, simply by virtue of the fact that real estate has generally outperformed other asset classes. And that’s really depleting the availability of fresh equity to deploy or invest in the marketplace. And then, on the other side of the ledger, the pricing and availability of debt has also moved out, restraining the availability of capital. There certainly continues to be significant volumes of capital looking for assets that are well-leased and secured by cash flow that have high conviction. Where we think there is more exposure in the marketplace is assets that have material execution risk attached to it. And certainly, in that respect, I would say we’re entering what I would describe to be an area of price discovery, where the bid-ask spread between willing participants in the marketplace is certainly widening, and often when it widens, we might see assets not trade because buyers and sellers can’t come to a meeting of minds on pricing.
Near-term prospects for real estate investing.
SM: You know, I get a lot of questions about which sectors people are in favour of. And I certainly believe that’s a huge element of successful investing. I always, though, continue to believe that asset selection — picking the right house on the right street, if you will — is the other key virtue in developing a successful real estate portfolio. And so, within all asset classes I am always bullish on the ability to select and manage individual assets that can outperform their peers. So, I remain bullish on the ability of the asset class to adapt and to respond to conditions as they continue to present, but it’s also incumbent on managers at the table who really can drive those outcomes.
And finally, what’s the bottom line for nervous investors?
SM: I would say real estate has historically generated stable and predictable return profiles with the opportunity for capital appreciation across investment cycles. My advice would be to remain focused on your long-term objectives and the role that real estate can play in helping to build and preserve value for your investment portfolio.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Steve Marino of GWL Realty Advisors.
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