What is the private real estate asset class?
Private real estate typically refers to direct or indirect (via an unlisted fund) equity investments in real estate properties. This includes assets such as office buildings, retail units, logistic warehouses, apartments and hotels.
‘Core’ commercial real estate is a category of property that is often leased to high quality tenants on long-term leases. It can provide investors with a stable source of income that has a low correlation to traditional fixed income investments. It can also offer some protection against inflation.
What’s happening now?
Over the past 24 months, the real estate market has faced significant challenges. The Federal Reserve’s efforts to tame inflation through rate hikes filtered through all aspects of the economy, and real estate was no exception, with both lenders and investors having to reset their expectations.
Not only has the cost of borrowing risen substantially, but until recently, lenders were hesitant to lend at all given the volatility in the market. However, the debt markets have started stabilising in the first half of the year. With a relatively strong economic backdrop and potential rate cuts on the horizon, lenders are increasingly re-entering the market.
This has helped buoy parts of the real estate market, which had been falling until the end of last year. Spot market and publicly traded REITs indices have shown stability in recent quarters and, in some cases, have begun to climb again. This shift in sentiment suggests that the worst may be behind us and the window to take advantage of rock-bottom pricing may be closing.
Staying nimble, acting decisively and adapting and expanding portfolios to incorporate the assets and subsectors that cater to future demand is the best path to success. To navigate this backdrop effectively, an experienced team and disciplined investment process are required.
Where are we seeing opportunities?
Demographic shifts, as well as changing consumer and worker preferences, continue to change the way real estate is used in the post-pandemic economy. Rows of office cubicles are being replaced with more amenity-rich open floor plans, warehouses closer to population centres are growing in popularity, consumer adoption of online shopping continues to grow and millennials are now favouring less dense suburban living options as opposed to the high-rise towers they once coveted.
That’s not to say all previous uses of real estate are obsolete, but legacy assets need to adapt, and portfolios must expand to incorporate newer subsectors that complement the more traditional uses.
Opportunities include:
1. Traditional sector evolution
New/creative office: Office design has evolved to become more worker-centric. Individual desk space is reduced, but has been replaced with amenities such as lounge areas, game rooms, conference centres, roof decks and gyms, providing a more welcoming environment. These attributes often work most efficiently in new construction, but an adaptive reuse of older assets can also yield successful outcomes.
Infill warehouse: As e-commerce and direct-to-consumer sales continue to grow, warehouse assets that are closer to the population bases they serve are increasing in popularity. For owners, the lack of developable land serves as a governor to supply, increasing negotiating power in lease discussions.
Experiential retail: As brick-and-mortar retail battles growing online competition, centres that provide services and experiences that can’t be replicated online are at an advantage. Gyms, movie theatres, restaurants and now even medical tenants drive foot traffic and boost centre performance, while also having minimal overlap with internet competition.
Suburban multi-family: As millennials age into their peak family formation years, they are increasingly leaving cities and apartments behind and moving to suburban locations. As these locations are typically more antidevelopment than downtown cores, supply is less of an issue. This, combined with the growing demand, creates a more landlord-favourable environment.
2. Extended sector growth
Single-family rentals: These assets benefit from the same demographic drivers as suburban multi-family, but offer more space and greater privacy, without the down payment, elevated mortgage rate and transaction costs of owning a home. A muted for-sale single-family supply pipeline and healthy demand should keep home prices elevated, pushing more would-be owners into rentals and driving future rent growth.
Low coverage industrial: The growth of e-commerce benefits formerly niche industrial uses such as truck terminals and industrial outdoor storage facilities, which provide the infrastructure that supports the growing shipping and trucking networks.
Age-restricted housing: Baby boomers are one of the largest and wealthiest age cohorts in the country. They are still independent and active, but typically prefer to live in the company of others in a similar stage of life. Age-restricted housing provides the ideal option for many, and enables investors to help serve the needs of an aging population without the operating complexity, costs and risks that come with owning higher-care facilities such as assisted living and nursing homes.
Lab: This same ageing population is also looking to live longer and healthier lives, and the need for additional therapeutics is growing as a result. Demand for the real estate used to facilitate advancements in pharmaceuticals and more advanced health technologies should continue to grow. Although the industry is facing a temporarily unfavourable supply and demand imbalance, the long-term prospects remain promising.
Why J.P. Morgan Asset Management for US real estate
- USD 70 billion in gross asset value across real estate equity and debt
- 60+ year history of managing real estate strategies
- ~250 investment professionals across the US