EastAlliance Sector Watch: Things To Watch In 2021

By now, you are now familiar with our Sector Watch reports in which we share our thoughts and perspectives on investment news, real estate markets, and the global economy. Considering what we collectively experienced in 2020, there was no shortage of perspective to share. As it relates to the real estate investment sector, the past year came with a broad set of challenges. Some mirrored ones we experienced in our 20+ years in the industry, yet others were entirely without precedent. The economy experienced significant shifts (entire industries, supply chains, consumer behavior, etc.) but simultaneously demonstrated inspiring resilience, innovation, and adaptability.

As for the EastAlliance community of operators and investors, we continue to be encouraged by their ability to navigate uncertainty while remaining focused on strategy and execution over the long term. Because of this, we continue our relatively positive outlook on portfolio performance and our ability to find new opportunities as we enter the new year.

First, An Important Note 

So, rather than recap the entirety of 2020, we want to share some initial thoughts as we enter 2021. But before we do this, we first must thank the entire global medical community in its unified fight against what remains one of the largest challenges of our time. We also want to extend our continued sympathies to all of those that have been affected by the pandemic. The loss of life and economic upheaval has caused so much despair and while words are inadequate to ease the pain, let us all hope that our collective actions contribute to the collective healing and progress, worldwide.   

Our Focus In 2021 

As we enter the new year, we enter a period of caution and optimism: Caution because the effects of the pandemic continue to weigh on the global economy. Optimism from our faith in the world’s proven ability to adapt, collaborate, innovate, and solve. This cautious optimism will continue as a leading theme as we shape our global investment strategy. 

Developing or refining an investment strategy during volatility requires one to carefully observe the always-changing landscape, not just navigate it. While our investors look to us to lead the process of uncovering opportunity, unlocking value, and managing risk, it is equally important that we observe the quickly-changing world around us.  Shifts in investor sentiment, migration patterns, economic models, capital availability, and partner strategies are among the many factors to which we must now pay extra attention in the new year.   

While we cannot list every topic our team will be watching in the coming year (or how these observations will shape our investment strategy), here are some that will be near the top as we enter 2021. 

Office

Our position is simple:  Work from home was inevitable, even before the pandemic hit.  The pandemic simply accelerated its wider implementation.  But we believe that as vaccines make their way throughout the population (thank you, smart scientists!), people will return to the office.  Perhaps they will return in more measured numbers and maybe not daily, but they will return.  Regardless of how long it takes for this to occur, we do know that collaboration and innovation will always require in-person candor and teamwork. Furthermore, specific functions like research and development, legal, human resources, accounting, and other more information-sensitive industries will always need places in which to conduct operations safely and discreetly.  Lastly, we believe corporate culture is such an important component to remaining healthy, relevant, creative, and competitive in an industry.  So, onboarding, training, exposure to the culture, and mentorship will continue to require some element of in-person interaction, especially for new hires.  So, while the office sector was negatively impacted in 2020, we do not think it is dead. However, one needs to be careful and continue to keep a sharp eye on location, industry, functionality (importance to tenant operations), competitive set, and cost basis. It is through this lens we will continue to assess opportunities in the sector. 

Student Housing 

We made several investments in student housing assets alongside experienced operating partners in 2020, and we anticipate a continuation of this collaboration for years to come. Like all other sectors, this one was not immune to the disruption caused by the pandemic, but it also showed a unique resilience and adaptability. We should note, however, this cannot be said for every student housing asset in the country.  But, given the performance of our investments in the sector (even during a pandemic), we continue to believe that well-located, properly-configured, well-managed suites adjacent to certain universities are poised to perform well over the long-term. Similar to the office sector, the shift to virtual is inevitable, but we believe the cultural and collaborative aspects of the in-person experience will continue to drive demand for space over the near- and long-term.  

Multifamily 

In our opinion, this sector may be one of the more dynamic ones in 2021 due to shifts in urban and regional populations; changes in the debt capital markets; volatility in the labor markets; and, the continually low interest-rate environment.  In some markets, we expect the sector to continue experiencing tremendous competition for investment opportunities and tight yields. But, given the underlying uncertainty caused by “post-pandemic” unemployment, 2020 has shown us that the multifamily is not a sector immune from economic downturns. That said, we believe there will be genuinely exciting long-term opportunities in the space, but all assessments of value will require an especially careful eye on cost basis and absorption assumptions (and operator experience) during what may be another year of flat or lagging revenue in some regions.   

Retail  

We know retail has gone through a generational shift in how we shop for products, where we do it, and how we receive them. We have seen some long-standing retail brands disappear while others have used the disruption of 2020 to spark innovation and reshape their business models. All of this will have implications on the retail real estate sector, parts of which will not be known for years to come. Therefore, our focus on location, market segment, surrounding demographic data, cash flow stability, and tenant credit (along with operator domain expertise) will play an increasing role in our evaluation of opportunities. Demand for space has undoubtedly declined (with little prospect for a change in trajectory in the near term), but that does not mean that all retail space is functionally or locationally obsolete: We believe some retail assets may present unique opportunities for superior returns over the long term.  

Logistics  

From an investor’s perspective, this sector saw a lot of activity, increased competition, and plenty of good times in 2020. We suspect this will continue in 2021 (and beyond).  While we believe well-located distribution space continues to make for a sound long-term investment strategy, we also find this segment of the sector to be highly competitive.  This competition with institutional investors and logistics funds has driven yields to a level that are not an exact match for our strategy and requirements in 2021.  This is not to say we will not consider certain opportunities in the sector (especially redevelopments that cater to the growing last-mile segment), but we will carefully allocate our time and resources evaluating these opportunities, as better matches to our investor strategy and allocations goals may lie elsewhere.   

Hotel  

Naturally, this is one of the asset types that was the most disrupted by the events of 2020, but as some flee this sector, opportunistic investors and operators will look to unlock some interesting opportunities.  The sector remains beset by risk and uncertainty, but as vaccines gain broader distribution, economies emerge from lockdowns, and travel rebounds, quality locations run by experienced operators will be among the first to recover. Past cycles suggest it is possible that investing in “out of favor” sectors present interesting long-term opportunities.  So, as we enter a fresh new year, we also view this sector with a fresh new perspective and are open to ideas.   

Debt  

As we have assessed investments across the US and have explored capital structures with our operating partners, we see some unique opportunities in the debt sector in 2021.  In particular, we will continue to explore and evaluate investments in the mezzanine position. Traditional bank lending has tightened, and so for operators seeking flexible capital that is not as costly as equity, non-bank financing from creative capital partners like EastAlliance is a potential solution.  Debt investments are not new to the EastAlliance platform, as we have made several in the recent past.  However, we anticipate there will be continued and increasing opportunity in the space, especially within our target markets and sectors for projects led by our US-based and China-based operating partners.    

Summary 

There is a lot to learn from the last 12 months. Disruption, volatility, and uncertainty can shake any investment strategy.  But those same factors are what shape opportunity and teach valuable lessons.  Because of this, we anticipate our cross-border activity to grow in volume and frequency as the global economy emerges from 2020 with an eye on quality, opportunity, and stability.    

We anticipate that the disruption that shook the world in 2020 will also be what facilitates a new spirit of collaboration and opportunity across the globe.  And this is why the EastAlliance family looks forward to a new year of possibilities.   

As always, thank you for your time and we hope this post finds you and your loved ones happy and well.   If you are interested in staying connected or learning about our platform, please be sure to follow us on social media or visit our website at eastalliance.us   

The EastAlliance Family