Cautiously optimistic

2/10/2012 - The U.S. presidential election and a potential European debt crisis will have much to do with confidence in the real estate market this year. What the future holds for the industry’s key sectors is anyone’s guess.

“There’s a lack of consensus about how 2012 will look,” said Erwin Aulis ’82, chief operating officer of Northwood Investors and a speaker on the Kellogg Real Estate Program’s fifth annual Distinguished Alumni Panel on Feb. 1. Moderated by Steve Plavin ’84, CEO of Capital Trust, the panel tackled the topic “Surviving and Thriving: How to Navigate Today’s Real Estate Market.”

Participants did agree that the market is past bottom, with cautious investing the current trend. In their estimation, the slow-to-recover retail, hotel, industrial and office sectors will require more patience. Specialization within these areas may provide the best return on investment. On the upswing, multi-family rentals are performing well.

The real estate pros provided keen insight into some of the major market sectors:

Retail and hotel: Uneasiness about national and world events could present tremendous opportunities, noted Aulis. “There is a fire hose of assets on the market right now, with people worried about what will happen in November regardless of political persuasion,” he said. “Things will get cheaper.”

Quickest to adjust down and/or up, hotels present a good asset class for opportunistic investing. New build developments and extensive renovations will be the focus of K. Jay Weaver ’95 and his firm, Walton Street Capital. Said the managing principal, “That’s how we’re going to make our money.”

Industrial and office: Abysmal job growth and a fragile economy continue to depress these sectors. Jeff Johnson ’83, managing principal at Lakeshore Holdings, predicts heightened interest in deal activity starting in the 2013-14 timeframe but added, “We need demand to pick up.”
 
Specialty: Sectors seemingly delinked from the U.S. economy and demographically driven are guiding the investment choices of Pete Fawcett ’84, director of portfolio management at Heitman. “We’re investing in student housing, senior living, medical office and self-storage,” he remarked. “If you’re selective, the overall demographic story is compelling.”

Multi-family rentals: Fear of ownership and difficulty qualifying for mortgages has more people renting these days. High demand coupled with low supply has apartments going for top dollar. For this sector, Johnson offered a hot tip: single family homes to rent. For the little guy or even the “graduating Kellogg student,” he said, buying the house next door and renting it would likely provide decent yields.