4 sectors like real estate investors right now

The real estate market has never been so easy to predict, even less so today. The Federal Reserve is raising interest rates for the first time since 2018, and the Russia-Ukrainian war is destabilizing trade around the world. Industry watchers say the market is feeling uncertain.

“I think the economic loss is going to be a real shift in how people think about who their business partners are, and where things are actually produced in the supply chain, and that will have huge implications for real estate and our economy in the United States,” Chris Lee, partner and head of American real estate at KKR, said. Recently at the MIT Sloan Investment Conference.

In 2020, commercial real estate sales in the United States have fallen from a record $600 billion in 2019 due to the COVID-19 pandemic. But in 2021, sales rebounded to a record $809 billion. The market “was back in 2021 and it was one of the biggest years we’ve ever had,” said Kristin Fries Gannon, MBA ’97, director of Eastdil Secured.

Gannon moderated the session which included me; James Chung, MBA ’00, Chief Investment Officer, ROC Fund for Debt Strategies at Bridge Investment Group Partners; and Michael Haggerty, EMBA ’19, Managing Partner at TA Realty. Here’s what’s on their minds right now.

Multifamily is doing well in the narrow housing market

$ 8 0 9 B

US commercial real estate sales hit a record $809 billion in 2021.

The multi-family sector continues to be a real estate hotspot, with rising prices for single-family homes shifting attention to apartment complexes.

Haggerty, an optimist in the sector, said there was about $300 billion in real estate transaction volume during the fourth quarter of 2021, and about half of that was from multiple families. “Before COVID, our book was about 65% multifamily, 20% office, 15% everything else,” he said. “Now, our pipeline is 95% multifamily and 5% everything else.”

Chung said he’s seen more multi-family conversions from unused office space, “a good way to capitalize on the multi-family trend.”

Life sciences resistant to epidemics

The pandemic has accelerated an already growing interest in the life sciences. Chung estimated that about 80% of office deals now have a scientific building turnaround angle for them.

He pointed out to me the interest in spaces in Cambridge, Boston, and southern San Francisco. “I think a lot of these buildings could be modified, and I think that would be a huge job for people,” he said.

Another bonus to the strong demand in this sector: the life sciences require a certain amount of quality control, so you can’t really do research and development or create pharmaceuticals from home.

Retail is improving, offices are still falling

Haggerty said he noticed a “rebound in retail” recently after underperforming during the pandemic when consumers stayed home and doubled down on online shopping.

And with many companies maintaining some level of remote work, the office space sector continues to struggle. Even before the epidemic arrived, Chung said, “the office was actually a bit worrisome.” About 80% of business plans that crossed his office suggested renting an office building with a common tenant, such as WeWork, a market that “hasn’t become what people think.”

“We actually started cutting back on our office lending a little bit before COVID, just because we were worried about business plans,” Chung said. “We still lend them a little bit, but on a much more conservative level.”

The demand for student housing is booming

College towns, especially those that are more affordable and have large “Power Five” schools, Lee said, have great core trends, with educational opportunities and a growing population.

Lenders used to have an unfavorable opinion of student housing, but the pandemic has reversed that very quickly. In the early years of the pandemic, Chung said, the student-tenant base was “the most immune to COVID” and had “the least amount of risk.”

“A lot of universities have stayed open, or opened as much as they can, and students want to go back to campus, and there’s a real demand for that,” he said. “So it was a good stress test for student housing, and as a lender, that’s great.”

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