Asset Price Bubbles Could Haunt CRE

A “tectonic shift of capital” is coming to CRE, which could whip up valuations further.

Quote by Jonathan Needell  |  GlobeSt.com

April 8, 2021

While the unprecedented levels of fiscal and monetary stimulus have helped keep the economy afloat during the pandemic, it could ultimately result in market volatility, according to the Urban Land Institute’s Global 2021 Outlook

ULI says stock market bubbles and renewed inflationary pressure in the US and Europe have become much larger concerns for CRE leaders than they were last year.

“In the US in particular, we have an asset pricing bubble that’s not in real estate per se—I don’t think we’re leading this,” a US investment manager told ULI. “But if you just look at the multiples of companies that trade in these different indices, I do think that there is a real risk of an asset pricing bubble resetting, and that would have a very material impact on real estate.”

At the same time, CRE is poised to receive a “tectonic shift of capital” as one global investment manager told ULI, which could whip up valuations further. The low-interest rate environment, as it always does, is making real estate a compelling investment because of the yield spread compared to other asset classes. But real estate leaders tell ULI they believe the attraction of real estate income is stronger now than before COVID.

“What will come out of this is that real estate will be looked at not as an alternative but as an essential investment component of anyone’s portfolio because it’s got the return along with an inflation hedge,” the investment manager told ULI.

There are some mitigating forces at play. ULI expects lenders to be more cautious than equity investors despite the flood of capital coming in. While banks were supportive of business at the beginning of the pandemic, they instituted tougher lending standards as the year progressed. Like others, ULI suggests that distressed debt will increase when government support packages run out. Still, it doesn’t expect distressed debt levels to reach those seen in the Global Financial Crisis.

Industry leaders also tell ULI that they expect “a bifurcation in pricing” between sectors still producing income, like logistics, and those struggling, like retail. There will also be a gap in demand between modern and adaptable buildings and those that are outdated and inflexible.

Even in the frothy industrial sector, there is a difference between high-tech logistical hubs and outdated assets.

Jonathan Needell, president and chief investment officer of KIMC, for instance, notes that not all assets across the industrial sector are trading at high prices. “The reality is that not everybody can get a tenant like that, and not every property deserves a cap rate backed by those kinds of tenants [Amazon and FedEx],” he told GlobeSt.com in an earlier interview.

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