GOING UP! RATES, RISK & PRICES Christine Filgiano Executive Vice President Portfolio Construction & Risk Management Ivanhoé Cambridge
It’s an interesting time for real estate. With many traditional core sectors facing headwinds in various forms, alternative sectors – including senior housing, student housing, data centres, self-storage, and lab office – offer increasingly attractive opportunities. A secular shift in the consumer market is driving shopping activity to online and mobile platforms. The impact to brick and mortar retail, together with rising logistics needs, has had a noticeable impact to retail real estate returns over the past several years. As we head into 2019 what are the areas of concern? One is rising interest rates, and the impact to valuation metrics. At current pricing of most core sectors, investors are not being compensated for the additional risk of owning real estate as much as in the past. Furthermore, rising base rates are leading to higher borrowing costs for levered investors, squeezing levered returns. Compressed credit spreads point to elevated risks to any macro disruption. They reflect the level of perceived risk in the economy and are a key component of the level of risk priced into real estate today. The current low level of credit spreads has investors underestimating the possibility of a negative event. Late-cycle pressures, meanwhile, are building in certain occupier markets. Developers are more confident in their leasing prospects, particularly as tenant demands evolve. This extrapolation of the current pace of growth leads to increased risks that growth normalizes or weakens, which may leave several markets oversupplied.
Allison Wolfe Chief Financial Officer & Executive Vice President Oxford Properties
Real estate has never been more institutionalized. Our transactions now compete with all other asset classes for capital allocations, because they are part of a balanced portfolio. This wasn’t really the case twenty or thirty years ago, when real estate investors did nothing but invest in real estate. Raising capital was more a function of banks’ credit appetites, not opportunities in bonds and equities or even infrastructure projects. Many people in our industry see capital coming from Pension Plans as being more disciplined and patient, but make no mistake: we are no less greedy for our pensioners than the most capitalist of private equity funds. It’s not because long term return expectations are inherently lower than short-term ones that we are content with a low return on a transaction. With so many opportunities today, the lines between private equity and real property are getting blurred. An office building is no longer simply a workplace. It’s a community of productivity. A mall is not simply a place to shop. It’s our new town hall, where families can spend time together and people can relax and socialize. Our apartment buildings are starting to look and feel like hotels. Our warehouses are becoming technological hubs that are part of a national or international supply chain. What all this means is that we don’t make money in real estate the way we used to. It’s not about the square footage. The value is in what people are doing in that space. Some call it space as a service. We see space as the enabler to a particular commercial activity. What is that worth? ■ Michelle Morra 11