COVID-19, inflation worries point investors to real assets

“Crystal balls are worth what people pay for them,” said Ronnie Gul, Los Angeles-based principal of Mesa West Capital, a subsidiary of Morgan Stanley Investment Management.

Managers have been quite active making real estate deals in 2021, especially in the industrial, multifamily, student housing and self-storage sectors, and 2022 is expected to start out the same way, Mr. Gul said.

“We’ll start the new year off where we’ll end up, which is very busy and (real estate) people being very active,” he said. “Where we go from there is an open question.”

The tailwinds and investor interest in the hottest sectors such as industrial, multifamily and alternative property types like senior housing, student housing, single-family rentals and life science offices are not expected to abate because they promise to offer incremental yield, he said.

Mesa West executives worry about record high prices for properties in the most-favored sectors, he said. In light of factors outside of the real estate industry’s control such as new COVID-19 variants and Federal Reserve interest rate policy, the big question is how long rents will continue to increase enough to make up for the rise in prices, Mr. Gul said.

“We worry about valuations and how sustainable the activity is,” he said.

This is especially the case in industrial, which “is hot and has been hot for some time,” Mr. Gul said. “How much gas is there in the tank in terms of increased values and increased rents?”

As for the alternative sectors, the capital flow into these property types is so strong that contractors cannot build enough of this kind of real estate to accommodate the demand, he said.

Another big question for real estate in 2022 is what will happen to the office sector, he said. It was supposed to have been a sellers’ market in office in 2021 but the delta variant “took the wind out of the sails,” shifting the balance of power to the buyer, Mr. Gul said. Office sales stopped because sellers did not want to sell properties at a market-clearing low price.

Office had been a big component of the largest real estate managers’ portfolios until the pandemic, and at some point, these managers will have to start investing in office properties again to maintain their portfolio diversification, he said.

Long-term offices leases are helping to keep rents coming in and protecting property owners from being forced sellers, he said.

However, an increasing number of office tenants have been entering into short-term leases because they don’t know what their office needs will be in the future, said John D’Angelo, a San Francisco-based managing director and the real estate solutions leader for the U.S. for Deloitte Consulting LLP.

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