Walker & Dunlop Execs On Where To Invest For 2022
The commercial real estate industry has never experienced a year quite like 2021. As the coronavirus pandemic raged on, retail, hospitality and other asset classes experienced major hits, while industrial reached new heights thanks to the e-commerce boom. As the year comes to a close, CRE professionals have two questions on their minds: What can we make of what happened this year, and what lies ahead for 2022?
CRE finance firm Walker & Dunlop is run by industry experts who spend their days studying the market to advise their clients on the best moves to make in any economic climate and this year they saw the market experience highs and lows like no other.
On this week’s Walker Webcast, Walker & Dunlop CEO Willy Walker spoke with Walker & Dunlop executives Kris Mikkelsen, executive vice president, investment sales, Aaron Appel, senior managing director, capital markets and Ivy Zelman, executive vice president, research and securities to get their opinions on what the industry just experienced, and where smart investors should be looking in the months and years ahead.
Walker started off the conversation by asking each person three questions: What, if anything, is mispriced today? If you had one word to describe your feelings about the market in 2022, what would it be? If you had $100M to invest today, where would you put it?
Zelman went first and said that a lot of deals are being mispriced in the build-for-rent segment of the market given robust land inflation. The word she used to describe her feelings about 2022 was “moderation.” And as for where to invest $100M?
“I’m very bullish on any way to take advantage of the aging U.S. stock,” Zelman said. “So the existing stock that is today approaching 50 years old, depending on what city you're in. I'd be interested in the flipping and fixing business where you can actually provide an upgrade to the current stock.”
Mikkelsen was next, and he said he believes everything right now is very efficiently priced, but he is a little nervous about what’s happening with deep value-add products, where people are going in and rehabbing 40-year-old assets and trading cap rates in core and core-plus opportunities. The word — or words — he used to describe 2022 is “bullish on fundamentals of liquidity," and if he had $100M he would do as much ground-up development with low-density product as possible.
Finally, Appel said he believes that multifamily and industrial, while possibly not overpriced, certainly have rent expectations that investors need to hit to meet their target returns that are astronomical. The words he used to describe 2022 were “more of the same,” and if he had $100M, he said he would put it into Bitcoin.
Mikkelsen said that while the market may seem expensive to folks who have been investing on a consistent basis over the course of the past 15 years, the reality is that Walker & Dunlop is matching up buyers with private and institutional capital that have really repriced their total return expectations across the board.
“We're seeing an operational environment throughout the summer and fall of 2021 that might be unlike any operational environment we ever see in the multifamily space,” Mikkelsen said. “It includes consistent double-digit rent growth, certainly across the Sun Belt, but in large part across all the markets across the country.”
Walker asked Zelman about what she is seeing in the multifamily market and whether she is surprised to see multifamily fundamentals as strong as they are right now given the fact that the single-family market is on fire.
She said that she is surprised to see rent growth up so much, but that’s because not much of the supply that has been in the development backlog has been delivered, so there is not enough supply to challenge those rents. Additionally, the major supply chain issues have kept the market from creating an oversupply.
However, Zelman does believe that more multifamily is coming, and when eviction moratoriums are lifted, occupancy drops and supply rises, there will be a change in rents. Additionally, without raising the cap on legal immigrants allowed in the country, there may not be enough people to fill these new multifamily homes once they are built, especially since the population of 20- to 39-year-olds living at home seems to keep rising.
Walker then asked Appel whether capital had been returning to other asset classes that were hard-hit by the pandemic, including retail, office and hospitality. He said that it has, on a limited basis, returned to the best quality assets in these categories. He added that he hasn’t seen many foreclosures, but is instead seeing recaps and new capital coming in to bolster deals.
The group closed out with Walker asking each of them where there is opportunity in the market today, and where their smart clients are putting their money.
Appel said he’s seen clients really press the super-luxury end of the market and go into markets where there’s not enough of this product and moving the needle on pricing by 25% to 40% on an asset class, and those bets have really paid off.
Mikkelsen said expense ratios and operating margins are soon going to be under a huge amount of pressure and groups that get ahead of these issues by investing in tech-forward management platforms are going to succeed.
Finally, Zelman said that there is a need for automation and there is a significant amount of capital invested in proptech, from smart homes to tools that improve the construction process. She also said that people need to invest in the two extremes of the real estate spectrum: affordable housing and super-luxury housing, because that’s where demand is headed.
The Walker Webcast is taking a break next week, but visit this page for updates on guests Willy Walker will be speaking to in December.
This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.
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