EastAlliance Sector Watch: Disruption Can Unlock Opportunity; Lessen Competition Across All Sectors

In previous Sector Watch Reports, we have focused our attention on assessing opportunities and risks in various property types or general observations on what we’ve seen in the marketplace or through our reading and research.  For example, we’ve unpacked our take on the office sector several times; shared some thoughts on the convergence of retail and warehousing; and even shared several Chinese-language perspectives on student housing, tailored specifically for our China-based investors.  

We try to share noteworthy articles while trying to infuse some of our perspective on how the EastAlliance team will approach investing on behalf of its investors during the COVID pandemic of 2020, what’s to come in 2021, and beyond.  However, this time we would like to share a broader perspective as opposed to a sector-specific one – largely driven by an interesting piece written by JLL.   While our investors and clients appreciate our micro- and macro-perspectives, sometimes we appreciate the perspectives of other real estate firms and feel compelled to share.  

As 2020 Comes To A Close

No sector was left untouched by the pandemic.  Hotel demand suffered. Distribution demand soared.  One has to rethink office and retail locations.  Even the multi-family sector has had some rent collection issues in select submarkets in the US.  However,  we continue to believe the best orientation is not to paint all currently out-of-favor sectors as obsolete, but rather to  understand that new risks and unique drivers of change lie within each. But, proceed with caution.  

The point is that with volatility comes opportunity, and that is why while conducting our usual research, we found an article by JLL that resonated strongly with our team.    

Some High Net Worth & Family Office Investors Seem to Concur 

As we’ve written so many times before (and as pandemics, emerging technologies, and globalisation have proven), real estate is not exempt from fast-paced innovation and disruption.  This has put some investors on the sideline as they assess the “state of the world”.  But as outlined in this great piece by JLL, this is not the case for many internationally-minded family offices and high net worth investors, who have been as active as ever amid the uncertainty.  This falls perfectly inline with what we have seen in our own investor community as well.  Where others may feel it best to press pause, others are viewing this as an opportunity to invest in well-located, core assets across all sectors; ones that will go through the short-term ups and downs of cycles, but that are well positioned for the long-term.  

In the aforementioned piece (link below, and we recommend you read the entire thing if you are a stakeholder in international real estate investing), a few comments jumped off the page and so we feel compelled to react and share.  

The Key JLL Observation

It is best if we simply pull a key excerpt from the piece: “We’re seeing high net worth investors emerging on the bidder lists of active transactions, showing their increased appetite for real estate, and, in some cases, real estate assets of scale” says Sean Coghlan, Global Director, Capital Markets Research & Strategy at JLL. “This includes new groups coming to market, attracted by record-low financing rates and lessened competition from bigger players”. The piece goes on: “‘As institutional investors have taken a step back this year to assess risk, private capital —which was already expanding in its influence before COVID-19 — has emerged as an increasingly important source of liquidity,”’ he says. ‘“COVID-19 has prompted these investors to look at assets that they may not have previously been able to secure due to the larger volumes and the competitiveness of capital.”

The EastAlliance Perspective

Yes, we agree record low financing rates are here, however, they have been here for quite some time (as a side note, we are hearing LTVs are tightening in the US).  

What is new from our perspective, is that there does appear to be lighter competition in some markets and/or sectors.  While most sectors in the US have their share of volatility (with the exception of distribution and logistics space, perhaps), we have seen some interesting investment opportunities emerge in some currently “out-of-favor” sectors or in well-located, well-positioned assets that are displaying some short-term fluctuations in revenue.   Furthermore, it would not be a surprise to us if more opportunities to step in and recapitalize assets emerged in 2021.

Just as we have written in previous letters (i.e. “our position that office is not dead”), we feel the same for all sectors including retail, student housing, hospitality, and so on.   These opportunities are unlocked by understanding the shifting fundamentals and drivers of change, coupled with having the patience and discipline to look through many offerings or co-investment opportunities to find the ones that precisely fit one’s criteria and allocation – not by dismissing entire sectors across the entire globe.  There is good office space out there, just as there was in previous years; the only difference is that the calculus of “good” has changed dramatically and has more variables.  And we think this may hold true for all sectors.  

This eye toward patiently and carefully navigating volatility is what drives our perspective as we assess opportunities and unlock value on behalf of our investors, in particular the family office and high net worth individuals abroad. 

Implications & Observations

What does this mean for EastAlliance? As noted in the JLL piece, “Teaming up with a local asset manager is an increasingly common path to take…Such partnerships will become more common as investors seek local expertise to safely place larger amounts of capital”.  

Again, this is something we are seeing and hearing in our discussions with investors, clients, partners, and sponsors.  While capital flows can be from abroad, real estate is local, and that holds true now, just as it did before the pandemic.  As the world shifts and demand across sectors reshapes itself, understanding local market dynamics and economic drivers is paramount – and precisely where an asset management team with rich and strong regional sponsors with domain expertise come in.

Our research continues, and there will be many other articles to share, but we hope you find the piece by JLL (and our perspective) interesting one as 2020 comes to a close and we all think about an agile and relevant 2021 strategy. 

s 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, please be sure to follow us on social media or visit our website at eastalliace.us

The EastAlliance Family

JLL Article: https://www.us.jll.com/en/trends-and-insights/investor/private-investors-ramp-up-real-estate-strategies-amid-covid19-uncertainty