Strong Dollar and Growth Driving Capital Flows to U.S. Real Estate

A panel of capital markets experts opened the 2022 ULI Spring Meeting with a discussion of the direction of global markets and capital flows in an environment of rising interest rates as well as global uncertainty such as the ongoing conflict in Ukraine.

“We would have liked to have this panel two or three years ago when things were somewhat uni-directional,” said Cia Buckley Marakovits, president and chief investment officer, Dune Real Estate Partners, and the panel’s moderator.

“Fundamentally, we are a leveraged asset class. Without growth, values are going to be challenged,” said Kavindi Wickremage, managing director, Bain Capital. “The CLO [collateralized loan obligation] market is challenged. . . . You will see certain markets get more competitive.”

“A lot of people are taking inventory; there’s a little bit of a pause,” said Amy Price, managing partner and co-head of United States, BentallGreenOak. “[For well-priced assets], we are just buying those unlevered. . . . You have an advantage if you can be unleveraged.” Price said that even on levered deals, the loan-to-value ratios are less than 50 percent.

People are doing more due diligence, such as “making sure you have positive cash flow at some point during your hold period,” Wickremage said.

“I don’t think we’re talking about an environment where rates will be above 5 percent for an extended period,” said Price. She also said that lenders are not completely disengaging, but some are pulling back; Buckley said the commercial mortgage–backed securities (CMBS) market is the most disrupted.

Buckley joked that when she began in the industry, cap rates generally started with a nine.

“There’s some aspects of inflation you can control while others you can’t—oil prices, chips, the supply chain,” said Wickremage. “There is more re-shoring happening in the United States, but that takes time,” she added. “[Inflation] should not be a really long-term phenomenon.”

Europe will have even more inflationary pressure because of energy costs, Wickremage said, and her firm sees China moving into a period of slower growth. Both because of the strong dollar and growth, her firm generally prefers U.S. assets.

“It’s no crash, but it’s a pause or a correction or a reset,” said Buckley. “We’re becoming a much more sophisticated asset class. . . . Real estate always has a bit of a throughput problem where there may be a great trend, but it takes a while to capitalize.”

“I personally have conviction for a lot of future growth [in U.S. industrial],” said Price. She added that e-commerce demand has not peaked, but investment in that sector is about taking a longer-term view.

“We see pushback on new development, but [for] industrial, we don’t typically see that,” said Wickremage. “There’s a lot of light manufacturing happening in the U.S. “

Supply-chain issues are keeping development in check, Price said.

“One of the hottest markets that we’re in is Los Angeles,” Wickremage said, adding that negative cash flow for a little while is okay on some deals.

Price said her firm reinvested in industrial in the last 12 months in Phoenix, Atlanta, and Raleigh, North Carolina.

Office is the sector is in the most flux, she said.

“The spread in cap rates will continue to widen between haves and have nots,” said Price. “There’s a much clearer picture of the building tenants will want in the future versus what they accepted in the past.” Sustainability is interwoven in that, she said.

“Functional obsolescence is becoming apparent,” said Wickremage, which is why the industry is starting to see conversions to residential, life science, or even logistics.

The speakers agreed that household formations and pent-up demand are likely to keep home prices high in the near future, despite higher mortgage rates.

“[Across the industry,] capital flows seem very strong, debt is disrupted, there is some repricing,” said Buckley. “This is what real estate does to keep itself healthy.”