The real estate market has never been easy to forecast, even less so today. The Federal Reserve is raising interest rates for the first time since 2018, and the Russia-Ukraine war is rattling trade across the world. Industry watchers say the market is feeling the uncertainty.
“I think the economic toll will be a real shift of how people think about who their trade partners are, and where things are actually produced in the supply chain, and that will have major ramifications for real estate and our own U.S. economy,” Chris Lee, partner and head of real estate Americas at KKR, said recently at the MIT Sloan Investment Conference.
In 2020, U.S. commercial property sales plummeted from a record high of $600 billion in 2019 because of the COVID-19 pandemic. But in 2021, sales rebounded to a record $809 billion. The market “came flying back in 2021 and had one of the biggest years we’ve ever had,” said Kristin Friese Gannon, MBA ’97, a managing director at Eastdil Secured.
Gannon moderated the panel, which included Lee; James Chung, MBA ’00, chief investment officer of the ROC debt strategies fund at Bridge Investment Group Partners; and Michael Haggerty, EMBA ’19, managing partner at TA Realty. Here’s what’s on their minds right now.
Multifamily is performing well in a tight housing market
U.S. commercial property sales hit a record $809 billion in 2021.
The multifamily sector continues to be a hot area of real estate, as high prices for single-family homes shift interest to apartment complexes.
There was around $300 billion in real estate transaction volume during the fourth quarter of 2021, and about half of that comprised multifamily, said Haggerty, who is bullish on the sector. “Pre-COVID, our book was about 65% multifamily, 20% office, and 15% everything else,” he said. “Now, our pipeline's 95% multifamily and 5% everything else.”
Chung said he’s seen more multifamily conversions from unused office space, a “good way to take advantage of the multifamily trend.”
Life sciences is pandemic-proof
The pandemic accelerated an already growing interest in life sciences. Chung estimated that around 80% of office deals he does now have a life science building conversion angle to them.
Lee noted interest in spaces located in Cambridge, Boston, and South San Francisco. “I think a lot of these buildings can be retrofitted, and I think that's going to be a huge business for people,” he said.
Another bonus for strong demand in the sector: Life sciences requires a certain amount of quality control, so you can’t really do research and development or create pharmaceuticals from home.
Retail is improving, office is still sagging
Haggerty said he’s noticed a “rebound in retail” recently after poor performance during the pandemic when consumers stayed home and doubled down on online shopping.
And with many businesses maintaining some level of remote work, the office space sector continues to struggle. Chung said that even before the pandemic arrived, “office was actually a little bit concerning.” Around 80% of the business plans that crossed his desk proposed leasing an office building with a co-working tenant, such as a WeWork, a market that “didn’t become what people would thought it would become.”
“We actually started cutting back our office lending a little bit before COVID, just because we were concerned about the business plans,” Chung said. “We still lend on them a little bit, but just at a much more conservative level.”
Student housing demand is booming
College towns, especially affordable ones that contain the big “Power Five” schools, have great fundamental trends, with educational opportunities and growing populations, Lee said.
Lenders used to have an unfavorable opinion of student housing, but the pandemic upended that pretty quickly. In the first years of the pandemic, the student housing tenant base “was the most immune to COVID” and had the “least amount of risk,” Chung said.
“A lot of universities stayed open, or opened as well as they could, and students wanted to go back to campus, and there’s real demand for it,” he said. “So, it was a good stress test for student housing, and as a lender, that’s great.”