Experts in finance-related markets often look in the rearview mirror and use these statistics to project future performance. Real estate is no different. But, according to the old cliché, past history does not predict future performance. An example of how the herd mentality doesn’tyou could be apartments in New York, which were considered invincible until the law on rent regulation changed a few years ago. This shattered projections that were based on these apartments all going from rent stabilization to market rate rents upon turnover.
Today, countless articles tell you how value-added garden-style apartments in the Southeast are the safest investment. Although it could always be the case, as they say in the financial markets: if you missed the wedding, you don’t want to go to the funeral. Opportunity may be overstated at present, and with construction costs soaring and supply steadily increasing, a pause is more likely than continued appreciation.
So where to invest if you don’t want to follow the herd? Disadvantaged asset classes, for which there is a catalyst that can turn them into “favorable”, are receiving renewed attention.
Let’s explore seven possibilities where an investor thinks outside the box:
Well-established retail: The Amazon effect and the bankruptcy of some well-known retailers meant that the baby was thrown out with the bathwater. However, with strong anchor tenants and a correct business plan, higher returns can be seen. For example, TrueRate is currently raising institutional capital for the successful bidder of three major electrical centers in high-traffic areas near Memphis, Kansas City and St. Louis. There are few warts on the properties, but the cap rate is a surprisingly high 7.5%. Even with rising interest rates, leveraged internal rates of return will exceed 20% with very little downside risk. According to Insider Intelligence, total US retail sales will grow 2.5% year-over-year in 2022 to $6.624 trillion.
Hotels in Leisure Markets: While business travel has been slow to recover, leisure travel has taken off due to pent-up demand post-COVID. You could say a lot of money has already been made here if you bought at the height of the pandemic, but traded very little in 2020 and 2021. In these volatile times, some traders are willing to leave meat on the bones in the hope of success. go out. According to Zippia, the industry is expected to grow 33.6% year-over-year through 2022.
Medical practices: Most developers don’t understand the inner workings of the medical system and what drives decisions by doctors and medical groups to rent certain spaces. However, those who understand become enmeshed in medical institutions. They include decisions such as when off-campus medical practices might be more beneficial than on-campus offices in a hospital.
Senior Residence: Baby boomers have aged and many are familiar with the possibility of marketing them as tenants. The National Investment Center says the over 75 age group will grow from 22.6 million in 2019 to 34.5 million in 2030. However, do you opt for assisted living or independent living, or simply a community of over 55? Like the medical office, those who work with teams that understand the nuances will thrive here.
Low-income housing: The complexities of low-income housing transactions are not for inexperienced trading teams and investors. Being able to structure the deal to maximize low-income housing tax credits is no easy task when you need to have the connections and the know-how to navigate the maze of local regulations. and federal. (TrueRate has executed more than $10 billion in agency and HUD deals.)
Industrial Specification: While the industry was already in vogue, to date it has been mostly about bespoke builds for investment grade tenants. I believe well-located land in high-distribution areas with limited land supply could be winners. High-clearance buildings built to specification will be snapped up by tenants desperate for large blocks of space. Partnering with an operator that has these relationships with tenants will bring rewards.
Marinas: They were hot in 2005 as dockominiums became a fad. I was lucky enough to do a $225 million financing of three of these marinas in Florida during this craze. Since 2008, marinas have experienced a slowdown and are only recovering very slowly. However, the cash yields on marinas are quite compelling and TrueRate is working on a portfolio of marinas in Maryland that trade at an 8.4% cap rate. With upside potential beyond that, it’s an interesting acquisition.
Dan E. Gorczycki is the Managing Director of TrueRate Services LLC, which strives to streamline transactions in the commercial real estate capital markets.