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A Game Plan for Today's Real Estate Markets
A defense’s mantra: protect against the big play. In portfolio diversification, that means guarding against downside risk. Real estate is an asset class that may insulate portfolios against traditional market risks. Yet, in today’s environment, you need an even stronger defense led by true real estate experts.
Build a Blueprint to Get Past Market Roadblocks
For illustrative purposes only.
What You Are Up Against
The real estate cycle has matured, yet attractive opportunities still exist. When devising your strategy, it is important to recognize which headwinds to avoid and how to adjust.
Rising Interest Rates
HIGHER RATES MAY IMPACT REAL ESTATE PROPERTY VALUES1
The 10-year Treasury has climbed since the beginning of 2018.
Slowing Rent Growth
RENT GROWTH IS MODERATING FROM PREVIOUS YEARS2
Rent growth over the last year was significantly lower than the previous two years.
NEW SUPPLY PIPELINE IS GROWING (MILLIONS)3
U.S. office square feet under construction is up nearly 70 million from five years ago.
SLG's Manhattan Office Cash Leasing Spreads
Big Supply Concerns in the Big Apple
Core markets are a good barometer of the state of play in real estate markets. Manhattan alone has 22.5 million square feet of office real estate in its supply pipeline.
Despite a growing economy, Manhattan leasing spreads are falling. Why? Oversupply.
Washington, D.C. Projected New Construction
Cushman & Wakefield. 12/31/18.
Construction is Climbing in the Nation's Capital
After a period of little supply, available and leased new construction is projected to climb in Washington, D.C.
Asking rents are already dropping … and could fall further with increased new supply coming online.
Take the Right Risks
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Defensively positioning your real estate strategy does not eliminate equity opportunities. Rather than relying on organic rent growth, look to value-add and non-core strategies.
Potential play: consider the evolution of the student housing market.
Performance as Rates Rise
Bloomberg. FTSE NAREIT All Equity REITs Index (Equity REITs). Mortgage REITs represents an equity market cap-weighted basket of publicly traded mortgage REITs, including Apollo Commercial Real Estate, Ares Commercial Real Estate, Blackstone Mortgage Trust, Granite Point Mortgage Trust, Ladder Capital, and TPG Real Estate Finance Trust. 1/1/18-8/31/18.
Look to Credit Opportunities
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Historically, property values declined as rates rose.
Potential play: Focus on credit investments like commercial mortgage REITs. They sit higher in the capital structure and may offer a better risk premium than equity investments in this late-cycle environment.