Last week we shared six risks and rewards of real estate investing, particularly in economic uncertainty, followed by our perspective on whether now is the time to invest in real estate. You can check that article out here.
Today, we’re sharing what to look for in a real estate investment to balance and strengthen your portfolio.
When the below criteria are in play, we believe that real estate can be a strong hedge against economic headwinds.
Focus on Core or Core-Plus.
There are different real estate investment strategies distributed along the risk/return spectrum, each with varying levels of uncertainty and opportunity. While some strategies are riskier, such as high-end development projects that would be categorized as opportunistic, other investment types, such as stabilized acquisitions or modest capital-light repositionings, offer more stability and are categorized as core or core-plus.
Core and core-plus investments target lower returns than opportunistic deals; however, because they often have a history of some level of in-place cash flows, consistent historical occupancy rates, and desirable locations, they tend to retain tenants - even in economic slumps - making them the most dependable profile of real estate investment.
Prioritize Multifamily Housing.
Multifamily housing is historically the best performer compared to other commercial real estate types based on its average annual returns and lower levels of volatility (measured by standard deviation below) as reported by CBRE in the below chart.
Why does multifamily housing outperform other asset classes?
It offers the unique benefit of investing in a tangible asset that meets a basic human need - shelter. People will always need housing.
Moreover, demand is steadily driven by population growth, and recent COVID-19 collections data indicate that renters are prioritizing staying current on their leases even in times of turmoil. Recent events have also indicated that federal government support for the multifamily asset class is indicative of how essential this product type is to our society.
Ironically, we believe that multifamily investing possesses the most compelling return profile of all real estate asset classes, while arguably also having the least risk.
Invest in Strong Geographic Markets.
When considering where to invest, remember that in real estate, “location, location, location” wins the day. Bearing in mind that our suggestion is to focus on core and core-plus strategies with modest risk, we advocate for focusing on geographies with lower risk profiles. We believe it’s important to look for markets with diverse economic engines with employment opportunities across a wide array of industries. If a market is fueled by one sector of business (for example, tourism or technology), there is less of a safety net in the downside scenario. During the Great Recession, Pittsburgh housing prices barely budged while other cities experienced deep declines, in part due to its diversified job market spanning technology, finance, healthcare, education, manufacturing, and more.
In addition to a diverse economic backbone, it’s important to search for markets with stable trends in population demographics. One factor to consider is the age of renters; we advocate for markets with a significant population of <30 demographic. With half of America’s renters under the age of 30, this is an important consideration to ensure forward-looking demand is on solid footing.
Diversify your Holdings to Mitigate Risk.
Direct ownership of property certainly offers advantages to the owner in terms of potentially higher margins at the end of the day. However, it also introduces some hurdles for many investors, namely the inability to diversify holdings until a sizable portfolio is assembled. Unfortunately, real estate as an asset class has a high cost of entry and purchasing multiple properties across different locations and asset types may not be attainable.
One way to reap the benefits of directly holding real estate but still achieving appropriate diversification is by investing in a private real estate fund. Not only does this offer broader exposure than a single investment, but investors also gain a team of experienced and dedicated fund managers and operators to guide its strategy.
In closing, when approached with careful evaluation, strategic insight, and long-term vision, real estate investing offers the potential to balance your portfolio, preserve your capital, and grow your wealth - even during economic turmoil.
In part three, we’ll share the tactical steps Birgo Capital is taking to maximize our private equity real estate funds’ performance.