Finding Value and Opportunities in the CRE Marketplace
July 1, 2019 | Luke Schmidt | Blue Vault
On June 27, 2019, Blue Vault hosted an educational webinar with the focus on finding value and opportunities in the commercial real estate marketplace. The webinar had a panel format with three panelists representing three different sponsors: SmartStop Asset Management, CIM Group, and Black Creek Group. Stacy Chitty, Managing Partner of Blue Vault, served as the moderator for the discussion and was joined by the following three panelists:
• James Barry (SmartStop, Senior Vice President of Finance)
• Bill Miller (CIM Group, President & CEO of CCO Capital, LLC, dealer-manager subsidiary of CIM)
• Ryan Strauser (Black Creek, Senior Vice President of Product Management).
The discussion started with a very general question: What are the biggest benefits of investing in commercial real estate for a client’s portfolio? The consensus was that the two biggest reasons to include CRE in a client’s portfolio are receiving current income and the non-correlation to other asset types, including stocks and bonds.
“Institutions have been using commercial real estate for years. The average allocation is 10% to commercial real estate. They’re using it for return, diversification, and non-correlation benefits,” said Ryan Strauser. “At Black Creek, we view commercial real estate as an all-weather component of a portfolio. Those benefits are gained over time. They aren’t gained in a six-month or one-year period. We aren’t viewing commercial real estate as an asset class that you should try and market time. We think it is part of the core portfolio that advisors put in place for their clients.”
When the discussion turned to the advantages of ‘core’ asset types and ‘emerging’ asset types, Bill Miller, whose firm primarily invests in core assets, stated, “If you’re talking about high credit quality assets in the right locations and the diversification of a portfolio overall, you’re talking about providing steady cash flow and predictable rates of return to investors. That’s an advantage. That’s a place for a portion of somebody’s overall allocation that can be predictable”
James Barry, whose firm invests primarily in self-storage properties, believes that while these types of investments have historically been seen as emerging asset types, the narrative is beginning to flip. “The perception on self-storage is that it is still emerging, but from our experience and when we are out there bidding with other people on properties, what we’ve seen is that it’s attracting the same level of institutional capital as other core asset types,” said Mr. Barry. “It is becoming more and more competitive and that’s primarily because the institutions are becoming more attracted to the asset class because of the fundamentals.”
When discussing the key risks of specific asset classes present in today’s market environment, each panelist went into detail about different risks their respective firms consider when making investments in real estate. As was pointed out during the webinar, there are several risks to consider when making investments in different asset classes, but there is one big risk that spans every asset class: new development. “What we are seeing, which is all commercial real estate, is the risk of new development, and adding more supply,” stated Mr. Barry.
The topic then turned to why each panelist believed there was room to grow in each of their respective asset types. The panelists discussed several reasons why their respective investment types, which included industrial, net-lease, retail, and self-storage, had room to grow in the short-term and long-term. However, similar to the discussion around risks of specific asset classes, there is one reason investors should be optimistic about the future of commercial real estate: population growth.
“Population growth is going to drive the need for commercial real estate,” said Mr. Strauser. “Every year, the population of the U.S. adds 2.5 to 3 million people to its population. The census bureau is projecting 356 million people in the U.S. by 2030, up from 326 million in 2017. That’s going to impact all sectors. People need places to live, shop, eat, work, store their stuff, etc.”
The webinar continued with each panelist receiving a sponsor-specific question which gave them the opportunity to discuss common issues and concerns present with their products or industry, as well as what they are each doing to mitigate these concerns.
The final discussion point centered around how each firm goes about deciding what product structures to utilize, primarily as it relates to lifecycle REIT products versus perpetual life REITs. Mr. Barry stated that SmartStop has only utilized lifecycle REITs with the belief that programs should have a beginning, middle, and end. Mr. Strauser mentioned that Black Creek has utilized both lifecycle and perpetual REITs, with the decision on what structure to use being decided by the wants of their distribution partners. Mr. Miller went a step further and stated that the determining factor in the product structure comes down to supply and demand and regulatory issues.
“You react to a couple things. Number one, the marketplace supply and demand. You look at, from a product structure standpoint, what broker-dealers and financial advisors are asking for, where the money is flowing,” stated Mr. Miller. “The next thing is regulatory changes, and that has affected our business in this industry quite a bit over the last few years.”
Blue Vault would like to thank our panelists for their time and insights into the commercial real estate market. Please visit www.bluevaultpartners.com to register for upcoming webinars.
I have been using Blue Vault Partners for the past five years. I have found them to be a valuable, unbiased resource when it comes to evaluating and comparing non-traded REITs. The reports help me analyze which sponsors are doing a responsible job of managing their offerings. This allows me to limit my REIT recommendations to only the most competitive products, and then track those REITs throughout their life cycle.