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Panelists Say Real Estate Is In New Cycle, But Not Recession

By Nathan Hale· Oct 20, 2022 - Law360


At a conference this week in Miami Beach for family offices interested in real estate investment, industry professionals and investment experts said strong fundamentals should keep the sector out of recession for now, while acknowledging that it is entering a new cycle due to broader economic concerns.


Speakers at Information Management Network's Real Estate Family Office and Private Wealth Management Forum cited strong supply and demand imbalance and abundant, if not as easily accessible, capital as reasons to remain on offense, while addressing the influence of hot-button topics such as the growing build-to-rent and single-family rental segment and the impact of ESG principals.


Here are four takeaways from the two-day event.


1. Real estate activity has slowed, but the industry is not in a recession.


Right off the bat, opening speaker DJ Van Keuren, co-managing member of family office real estate consortium Evergreen Property Partners and the founder of the Family Office Real Estate Institute, sought to dispel the notion that real estate is heading into a downturn.


"There are opportunities in every single part of a cycle. Just because you're hearing online that there's all of these issues, I can tell you right now that there is no real estate recession now. The fundamentals are too strong," he said.


Van Keuren pointed to the significant housing supply shortage still confronting the U.S. market and suggested that even if the country descends into a deep recession, demand will arise from people looking to exit expensive markets like California, New York City and Chicago for more affordable locales.


In a panel discussion on build-to-rent and single-family rentals, Paul Megler, executive vice president of real estate asset management company Walton Global, said that because the country has underbuilt the past 15 years, the "runway in housing has years of legs to it," probably across different housing types.


"You can't find a house to buy, you can't find an apartment to rent, costs are increasing. … We might have a pause now because of [rising] interest rates, but that fundamental of just needing a place to live is going to be there in the medium- and long-term for sure," he said.


Dawson Ransome, chief investment officer at Florida-based Ransome Asset Management LLC, which acquires and prepares land for homebuilders, said he thinks developers and investors are in a reasonably good position with people having to choose to rent if they decide to hold off on buying a home to see which direction the economy takes.


"I call it, we are in an 'air pocket' still, so until we see inflation numbers change, nobody's going to be comfortable because everything [rates and inflation] are going in the wrong direction," he said. "Once you see the crossover [with inflation] happen, people are going to start to be more comfortable about making decisions."


2. Capital is out there, but it is harder to come by.


While some traditional bank financing has gone largely into retreat, there is substantial capital available for the right deals, speakers said. On the flip side, this dynamic opens up opportunities for sharpshooting by well-capitalized investors who may have been outbid by larger institutional investors, or when facing bigger pools of potential buyers in the recent past.


"If you're trying to raise capital, if you haven't seen it already, you're probably going to see it's more difficult to do," said Paul Wendee, who runs a boutique investment banking and consulting firm in California. "But I've been through a lot of these cycles. You stick with it, you stay the course. It's a little more difficult, but it can be done."


Elena Otero, a Miami-based partner with Holland & Knight LLP whose practice focuses on advising ultra-high-net-worth individuals, families and family offices on real estate investments, said financing is available, but the rates do not make sense on many projects when you run the numbers.


"Most family offices are fairly liquid and have other avenues to raise capital, so liquidity is not a concern, unless you are not liquid and are facing a refinance," she said.


Northwind Financial CEO Chip Cummings said that in the current situation, experience from past cycles proves beneficial.


"Now, it's a little bit more challenging. You've got to think, you've got to creatively put together deals so they make sense, you've got to do the research. And it separates out the wannabees," he said.


3. The single-family rentals and build-to-rent segment is more than a passing fad.


Viewed by many as a niche and an experiment in the previous cycle, build-to-rent properties and single-family rentals are now an accepted asset category, speakers said. That's led to systems being standardized, resulting in added efficiencies, noted Rick Courtney, managing partner and CEO of Essential Realty Partners.


Ransome said he's seeing a transition to build-to-rent developers driving his work preparing land tracts for building, and he sees more capital chasing this segment now that the market is slowing.


Home rental platform Bungalow's CEO Andrew Collins said the rise in rents in some ways tracks with what happened in 2008 and 2009 as the housing bubble burst.


In "the vast majority of markets across the U.S., rentals actually went up in price because people were losing their homes. Today, we're seeing that because individuals are priced out of affording homes," he said.


Panel speakers discussing the segment pointed to several advantages they see in build-to-rent over multifamily development, saying there is greater risk of overbuilding quickly in multifamily, and build-to-rent offers easier exit routes, including selling off packages of homes or transitioning them for sale to individual homebuyers.


But Walton Global's Megler said the industry needs to work on improving education that these are "nice products" that are professionally managed and maintained to overcome opposition to them in certain communities.


Speakers also stressed the need to conduct careful research on the depth of an area's rental markets and its proximity to job markets, even with a more dispersed workforce.


"Not all of them are going to be screaming home runs, and so I think it's still fundamental you have to have the right location," said Gary Beasley, CEO and co-founder of investment marketplace Roofstock.


4. ESG can be beneficial, but governments need to step up.


While not all the speakers said they have incorporated so-called ESG, or environmental, social and governance, principals into their businesses, numerous examples of how real estate can provide benefits or benefit from these efforts came up during the panel talks. These included embracing carbon capture technology in construction, reusing and upgrading existing building stock in the conversion of outdated hotels to apartments, and realizing reduced energy costs through the offering of resident mobile apps.


But speakers also pointed to the need for governments to step up in various ways to encourage ESG adoption and legitimate results.


Peter Powers, a second-generation principal member of MPI Family Office, which has been involved in hotel conversion projects, said the feasibility of these efforts comes down to cost, and that it will be interesting to see what happens if the economy continues to decline.


"I think incentives need to get there, and where the debt markets are and the cost of capital, it's not there for us to do it at scale," Powers said.


Chris Clemente, founder and CEO of the development and asset management firm Comstock, pointed out that building codes have not caught up to the latest technology in building materials and techniques, and they are insufficient to meet goals such as those set in the 2015 Paris Agreement on climate change.


"It's going to take government to get involved," he said.

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