Lessons From a Multibillion Dollar Real Estate Portfolio
Notes from a Multibillion Dollar Real Estate Portfolio
I attended a lunch hosted by one of the largest private real estate portfolios in the world. There were 30 other advisors responsible for billions of dollars in the room. I took down some notes.
Here are a few thoughts that came up in the room:
1/ Reallocate Exposure
These managers made a significant return in multifamily housing over the last few years. Going forward they prefer to decrease exposure to multi-family just slightly, increase allocation towards data centers/industrial, maintain the sunbelt geography, and avoid hotels and office space completely.
Office space is dead.
2/ “Office spaces are the new malls.”
This was the exact quote used. With high upfront capital costs and 15-20% vacancies it can be hard to repurpose these properties and is not in their interest. The focus is now on smaller, more focused offices that can become a differentiator for companies.
A long slow burn.
Source: Cushman & Wakefield
3/ Cash Flow>Inflation
The goal is to find cash flow growth above inflation and expectations are inflation will continue to be high. The real estate portfolio is an inflation play and aim for steady growth even in volatile markets. However, excess savings from consumers have essentially been drawn down to pre-COVID levels, and double-digit rent growth is not sustainable.
Markets vary, but rent should be consistent.
Source: Apartmentlist.com
4/ People Are Not Saving Money
Both the savings rate and amount of savings have declined to WORSE than pre-pandemic levels. Nor have wages kept up with inflation. Wages need to go up, inflation needs to go down, and savings rates need to increase to support the economy (and rental income).
5/ Climate Change Affects Real Estate
Higher risk areas for flooding or natural disasters like Florida, Texas, and South Carolina also come with higher insurance costs and therefore lower margins. The cost of insurance on hotels specifically, climate change-affected areas has increased, and there are no plans for hotels in their portfolio.
6/ The Fed Made Two Moves
Yes The Fed increased interest rates, but they also increased capital requirements for banks. Because banks need more capital on hand, this restricts their ability to lend and causes an increased incentive to retain capital. This adds an additional strain of available debt in the system (and instead some demand shifted to private credit).
“There's no question that increasing capital for us, 1%, makes us not be able to lend $160 billion of loans into the economy,” Bank of America CEO Brian Moynihan said.
7/ Takeaway: Decrease exposure to multi-family, increase data centers and industrial, and maintain sunbelt geography. Avoid hotels and office space and focus on finding cash flow growth above inflation. There are significant risks, but there is opportunity here for individual investors in these spaces as capital and resources may start to exit from institutional investors.
Regardless of what you are doing on a mico level, it helps to understand what larger investors are doing/thinking as well. This should help provide ideas to think about your own investments.
Hardy Capital Investments is a registered investment advisor. Information provided on these sites is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product. Advice may only be provided by Hardy Capital Investments's advisory persons after entering into an advisory agreement and providing Hardy Capital Investments with all requested background and account information.