Keys for Winning the Investment Game? Adaptation and Anticipation

Christopher Macke, managing director of research and strategy, American Realty Advisors

The evolution of the investment environment in 2018 hasn’t played out exactly as expected, which created challenges for those expecting high short-term returns. While there is a significant amount of capital available, it will take discipline, rationality and a strong intuition to draw the winning ticket, according to Christopher Macke, managing director of research and strategy at American Realty Advisors.

In an interview with Multi-Housing News, Macke touches on the investment strategies that are most likely to be successful in the industry today and the markets that are seeing strong growth.

What can you tell us about the investment landscape in the first part of 2018 compared to what was anticipated?

Macke: The primary difference between anticipated and actual is that the yield curve flattened considerably due to the long-end of the curve plateauing. This is counterintuitive given the outlook for a near-term increase in economic growth indicating bond investors are less optimistic about outsized economic growth and inflation. 

This creates an environment in which strategies less dependent on outsized economic growth and appreciation will perform well as will more conservative value-add strategies which are truly creating value as opposed to pure momentum plays.  

Name three factors shaping commercial real estate investment strategies today.

Macke: The most important is the pull of taking on more aggressive strategies to offset today’s moderating return environment. Variation in the levels and types of risks taken among funds within the same investment strategy classifications. For example, two funds can be core funds but have different risk levels with one being a more traditional, conservative core fund and another blurring the lines between a core fund and value-add fund. Third would be the yield curve uncertainty.

Which asset types would you say are most appealing to investors in 2018?

Macke: The industrial sector continues to be a star performer due to most favorable supply/demand dynamics while multifamily housing is showing green shoots of promise as supply is beginning to show signs of life.

While many major markets are peaking, do you think there is room for more growth?

Macke: Major markets were the first to recover from the last downturn, which is important to note given where we are in the current cycle and should be instructive to investors considering significantly overweighing the markets, which only recently began to show signs of life. Growth in real estate rent will track the economy and while moderating in some markets, it is increasing in others where there is greater demand.

Strong technology, educational, health care and bio tech markets continue to see stronger demand, while those markets with a less educated work force are seeing contraction. Another key factor is that lower cost, lower regulated states, which are friendlier to business and with lower living expenses are seeing above trend growth.

How are capital markets responding to the shifts in the economy and legislation?

Macke: Rising economic and legislative uncertainty only increases the value of CRE’s higher income return component in the near-term and long-term appreciation potential but there is an abundant amount of capital for equity, debt and hybrid debt for CRE.                  

What are your predictions for the industry going forward?

Macke: There will be a divergence between the disciplined investors maintaining a long-term perspective and those overweighting outsized short-term returns at the expense of long-term performance by taking on increasing risk as they succumb to the powerful late cycle combination of moderating returns and growing chorus of siren songs promising incrementally higher returns dependent on disproportionately greater risk.

The most important factor that will shape the CRE industry going forward will be technology and how it can and will disrupt users, occupiers, services, firms, etc. Those with a focus on this will be better prepared to understand how these changes will affect their investment strategies and have a better understanding of how artificial intelligence, data analytics and information can be captured and bundled to make better investment decisions.

Image courtesy of American Realty Advisors