In October 2022, JANA’s Jennifer Cowan, Senior Consultant and Alastair McIntosh Senior Consultant conducted a research trip in US. They focused on meetings with acquisition, leasing and asset management specialists, while undertaking asset inspections to assess the US real estate market from the ‘ground up’. This enabled us to gather real time trends and insights. This article shares their key takeaways from the trip:
Has the “hot” Industrial sector peaked?
- Industrial rent growth is still achieving 20-30% increases in key markets such as Inland Empire in California and Dallas, which is covering any softness in cap rates.
- Vacancy rates are low in key markets, Inland Empire is effectively 0%.
Can residential sectors remain resilient?
- The megatrend of strong growth in residential real estate (multi-family & single family rental) remains intact and is even further supported by rising interest rates. This is particularly true in the sun-belt regions which have and are continuing to see population growth. Rental growth rates on renewal in most cases exceeds 10% (some cases of 20% or even as high as 30%) and occupancy is >94%.
- The institutional portion of the residential market is small relative to the overall size of the market and opportunities for efficiencies (technology) and process improvements are significant.
What’s happening in the Real Estate Debt market?
- Debt markets have pivoted in favour of lenders. Bank lending has dried up so those lenders, particularly with the ability to do complex deals, are able to command premium pricing.
- Lenders are not seeing signs of distressed selling, but are expecting to see distressed capital structures.
- Real Estate Debt is predominantly floating rate debt, so yields are increasing with interest rate rises.
Investor interest & capital flows
- The denominator effect has impacted real estate markets. Redemption queues are significant in the ODCE1 core funds but there is “dry powder” on the sidelines in value-add strategies and those in the “alternative” sectors where investor interest remains.
ESG & Sustainability in USA terms
- US managers generally lag Australian and European managers in respect to their ESG focus and reporting. ESG & sustainability issues were varied across the US based managers we visited. While some barely gave it a thought, others commented that their investor base were increasingly focused on reporting.
- In real estate the ESG has mainly focused on the E but there were some comments on the S (particularly in the residential sector) suggesting evidence of further evolution by US Managers.
Biggest risks and concerns
- Valuations and cap rate softness is front of mind, some 25-50 bps expansion has occurred but in some cases (such as industrial, multi-family and single family rental) there is sufficient positive rental growth, currently and over the near term, to outpace this negative impact, so assets are currently holding value.
- Inflation and the impact on the consumer is a concern but there is little evidence of current slowing. Corporate leasing activity is active and strong in key markets but this will be a watchpoint for 2023.
- The US Opened Ended Diversified Core Equity (ODCE) Index is the equivalent of the MSCI/Mercer Australian Wholesale Property Index and has an aggregate redemption queue of $15-18Bn.
For more information please reach out to your JANA consultant.