Why Real Estate, Why Now?
Participating in real estate development, lending and investment through multiple market cycles provides valuable context for understanding the current real estate market. While economic indicators and trends are never quite the same as the past, long-term experience as a real estate marketplace participant provides grounding.
In the present moment, the marketplace has factored in the possibility of a rate decrease in September. What is most meaningful about this expectation is the assumption that a rate increase is likely far behind us. We seem to have entered a brief period of economic stability, a solstice moment, where conditions seem to pause, neither increasing nor decreasing. Moments like these are brief.
Now is a strategic time to invest in real estate. The current market environment offers a greater degree of certainty than in recent years, a period that has worn on and worn down many developers. Those who have survived are active, signaling an opportunity.
Key economic indicators offer some certainty of what the future will not become. We have meaningful certainty that the near future will not involve higher interest rates. The current belief is interest rates will come down. The peak of inflation of 2021 is unlikely to return. As interest rates stabilize or gradually decline, developer pro formas start looking better, and consumers begin experiencing greater purchasing power. While some rate relief in the near term seems likely, the Fed’s concern will be to not overheat the economy with dramatically lower rates. The Fed’s goal will be to maintain a period of sustainable growth, with full employment, in a moderate interest rate environment.
The construction industry supply chain disruptions brought on by COVID have largely worked its way through the system. Hiccups in supply chains and material prices remain. However, this is and will always be the case. Material prices following the inflation rate downward pair with more reliable supply chains to offer developers far greater reliability than during the past four to five years, not less.
The presidential election has also taken a turn toward greater certainty for real estate developers. With Kamala Harris as the presumptive Democratic candidate, her administration would likely assume a similar economic policy approach as her predecessor. Should Donald Trump win, his prior perspective as a pro-real estate President would likely favor real estate economic activity and a low interest rate environment.
Markets across the housing landscape still lack enough units to meet demand. This imbalance of a lack of supply relative to demand is especially true and acute in residential housing. At this moment homebuilders’ engines are firing hard to address this opportunity that is more and less severe depending on the market.
At Cambia Capital, our perspective is not only shaped by our experience as fund managers but as executives of a leading sustainable residential developer bringing units to market for decades before and throughout the COVID pandemic. It is abundantly clear to us that today’s real estate market is gearing up for a growth spurt. Investors capable of reading the market landscape and possessing sophisticated real estate underwriting expertise are and should be active. The assumption that disproportionate returns are achieved by investors who deploy capital sooner, relative to investors participating later in the cycle, is clear.
Why real estate at all? A fundamental imbalance of low supply verses high demand favors investments in the supply side of any market, including real estate. In fact, investing in the supply of new housing at a time of generally intense and growing demand offers more certainty and lower risk to investors and development teams. While some markets may have balanced or oversupplied conditions, skilled developers and investors can accurately analyze market dynamics and make sound investment decisions based on specific locations. The ability to analyze markets and align to proven teams increases supply-side advantages in the current moment. Additionally, real estate serves as a safe harbor amid geopolitical rebalancing and provides valuable portfolio diversification. Investing in real estate through experienced and sophisticated real estate teams offers a lower risk, market-rate return in segments in the economy whose market fundamentals are generally well understood.
Why certified sustainable real estate? The built environment is responsible for over 40% of our global carbon emissions. While sustainable real estate is both better for communities and the planet than code-built real estate, we also see opportunities to drive alpha and mitigate risk. Building beyond code to third-party sustainably certified standards requires more thought, planning and typically more sophisticated development teams. Over time better teams deliver better performing projects. Furthermore, certified sustainable real estate is differentiated in the marketplace, offering developers faster lease-up and sales through storytelling and messaging advantages.
Summary:
The current real estate market presents a unique opportunity for investors and developers alike. With a period of economic stability, flat to declining interest rates, a persistent supply-demand imbalance, and developer’s potential access to lower cost capital; the conditions are ripe for strategic investment. Furthermore, market participants on the front end of market cycles tend to receive outsized returns relative to those coming in later in the cycle for a few reasons.
they have been in similar market cycles before and know how to read the real estate landscape,
they have sophisticated development teams or the ability to invest in real estate through those teams,
they invest in the solstice moment.
As a leading impact real estate finance firm committed to accelerating the decarbonization of the built environment, we believe this is the moment to take note and align to strong real estate teams. Not only do we see opportunity for investors, but we also see there is an opportunity to bring more housing to market while catalyzing the transition of the built environment towards sustainability.
For further information, please contact:
info@cambiacap.com