Expectations and Market Realities in Real Estate
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As the nation's and world's economies start to emerge from the deadly pandemic amid historically low interest rates, investors are leaving no stone unturned in their quest for higher returns. The search for "alpha" is intensifying amid the surge of capital pumped into the markets by the Federal Reserve's (Fed's) aggressive monetary policies and the government's fiscal stimulus.
How do we find alpha in the real estate sector? It involves identifying the opportunities that others may have not considered. It's about not thinking like everyone else. Alpha can be found as investors commit capital to a broadening array of value-add and opportunistic strategies that reflect an appetite for higher total returns than those expected from core, traditional properties. In particular, the industry should rethink the products in which it is directing capital, those beyond the "four main food groups" that have heretofore not been strongly considered by the private marketplace. These include data centers, single-family rentals, life sciences and cold storage facilities.
This past year has amplified the existing bifurcation in the CRE market, with some property types thriving and others really struggling in this COVID-19 environment. As COVID-19 begins to dissipate, finding alpha will largely be identifying which property types and markets present the greatest opportunities for investors, recognizing that some of the changes brought upon by COVID-19 may be here to stay.
The private market can certainly take a page from the public mart. Major institutional capital sources need to think creatively about what CRE investment can be. Instead of being limited to the core property types, investors are now looking into single-family housing, infrastructure and data centers, to name just a few.