A mid-year gut check of the top CRE investment categories

What a difference half a year makes. Entering 2022, the commercial real estate investment profile was generally good, albeit muted on concerns about rising inflation and interest rates on the horizon. Now that we’re in the midst of these events, one bright spot is that it’s easier to see the strengths and weaknesses of different asset classes.

Below are observations on the top ten commercial real estate asset classes based on analysis by CrowdStreet, which takes into account above-average inflation, rising interest rates, and the current and potential future geopolitical landscape. Not that that assessment is set in stone. As the company tells us, “Our thesis is not static, and as the next phase of ‘normal’ emerges, we will adjust accordingly.” Follow the slideshow for more information.

hospitality properties. With the prospect of a full recovery next year, we suspect this will likely be the last year that hospitality assets will be acquired at attractive prices before the market enters an expansion phase.

Industrial properties. We suspect that much of our industrial dealflow this year will be focused on development, due in part to the competitive transactional market and institutional capital chasing lower-yielding projects. We also suspect that a lack of well-situated industrial land coupled with population expansion outside of urban centers will further drive new supply away from existing stocks. With land prices rising and lengthy approval and eligibility deadlines, projects breaking ground this year will benefit from occupiers’ willingness to pay prime rents for buildings, particularly those with modern features and good locations.

medical practices. A constant and ever-increasing need for medical supplies bodes well for the medical office sector. We see great opportunity, particularly in areas where the population of older Americans is expected to increase. We also anticipate increased demand for medical practices located farther from central business district locations as hybrid workers are less tied to medical services close to their offices.

apartment buildings. We continue to favor the development of apartment buildings from the ground up. Huge rental growth in 2021 has resulted in a massive increase in the value of this asset class, beating the highest rise in construction costs in years. We will focus on assets that we believe can stabilize by year three after construction and leasing.

office properties. Of all property types, we think offices are the most polarizing this year. Opinions range from offices, which represent the biggest opportunity in commercial real estate, to the entire industry going the route of indoor shopping malls. While we like stable, liquid office deals, we also believe that now is the time to look for value-added deals, particularly those with an attractive entry base, high asset quality, robust sub-markets and experienced sponsors behind them.

retail properties. Retail was one of the hardest hit sectors in 2020 but is now on the road to recovery. With consumer spending likely to continue to recover this year and supply remaining subdued, we see opportunity for further increases in both retail rents and occupancy. It remains true that future retail investments require careful consideration for the fast-growing e-commerce sector, fueled by online shopping and accelerated by the pandemic. We see Amazon Fresh as a trend leader for retail and anticipate increasing coexistence of e-commerce and traditional brick-and-mortar retail usages.

Self Storage Properties. The need for self-storage is increasing due to work-from-home and relocation trends, which are likely to create more opportunities in off-shore markets due to pandemic-related migration patterns. We also expect strong demand for storage space in the large university towns. The older competitive set for self-storage often lacks air-conditioned and newer products, which continues to create opportunities for new developments.

Residential real estate for seniors. In the case of apartments for the elderly, we take a wait and see approach. As the need for elder care grows, we may not see a meaningful increase in demand until around 2025. Advances in medical technology have expanded alternative housing options and given many seniors the opportunity to live longer in their own homes, potentially reducing the demand for traditional senior housing.

student residences. Opportunities in this sector are mixed and location plays a key role in choosing the right investment. The most desirable and well-capitalized flagship universities will use their competitive advantage to attract students in record numbers, which will propel student housing markets in large university areas at the expense of smaller institution and community college markets.

Life Sciences Properties. Life Sciences is one of the fastest growing industries. We see opportunities close to busy urban environments, particularly in areas with top talent, high intellectual capital and the presence of top research universities. There is limited supply of laboratory space and R&D facilities nationwide, leading to rising rents and record new developments. We see creative ways to reposition existing properties when they are suitable for conversion.

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