AEW Capital Management is seeing a disconnect between what is going on in commercial real estate and what people think is going on. Mike Acton, head of research and strategy at the Boston-headquartered firm, notes that this stems from mainly one issue: the perception of the office sector.
“When people hear about problems in office buildings, it’s natural to extrapolate that to real estate very broadly,” Acton told Real Estate Capital USA. “But commercial property is far from monolithic. There are a million little stories going on.”
Founded in 1981, the $91.6 billion firm has invested throughout economic cycles across the risk spectrum, including core, value-add and opportunistic, as well as in a variety of real estate securities strategies across the US, Europe and Asia. These strategies are offered in a wide range of public and private equity and debt investment vehicles, including commingled funds, separate accounts, mutual funds and securities mandates.
Even without such extensive experience and expertise, what is happening now is in some ways simple, Acton noted.
“Property is only really as healthy as the economy that it serves,” he said. “If your local economy is doing well, your tenants are doing well, by extension, the properties are probably going to do fairly well.”
There is another issue which is tainting the commercial real estate market.
“The overriding issue for everything, and probably part of the reason why people are tending to paint real estate with one brush, is because the Federal Reserve changed interest rates by 500 basis points in about a year,” said Acton. “If the interest rate environment changes really fast, like it has done, it causes a lot of [problems, including the fact that] it’s very hard to finance a commercial property now as the borrowing costs have gone up a lot, and they’ve gone up faster than the property’s yields have.”
Sector by sector
Looking at specific sub-markets, Acton draws some comparisons between the current market and what was unfolding a decade ago.
“[What we’re seeing happen now] really is not that different than what has happened to other property sectors in the past when some form of technological advancement has caused human beings to change the way that they use a space,” said Acton, citing retail as an example, as online shopping became more prevalent 10 years or so ago.
“The same thing has happened now with office,” he said. “Largely accelerated by the catalyst of the pandemic, people have figured out they could work in multiple places if they wanted to.”
Another misconception of today’s market is the focus on industrial and multifamily as the ongoing winning asset classes, with Acton highlighting opportunities arising outside of these main food groups, citing senior housing, assisted living and medical offices as good examples.
“[These sectors] were really hurt badly during the pandemic, because in many jurisdictions people couldn’t move into those properties for maybe two years. But now there is a long tail demand story.”
He continued: “Those same [Baby] Boomers that are now driving the demand for senior housing are driving a ton of demand for healthcare provision [and] medical office properties, outside of city centers.”
Refrigerated warehouses are another area that AEW has been paying a lot of attention to in recent years due to a shift in food preferences over the last decade.
“Younger people want more fresh foods, less preserved food, less frozen food so the demand for refrigerated warehouse has exploded,” Acton said. “[Businesses] are trying to get things to end consumers faster and fresh food spoils so you have to really take care of it [which means] you need more distribution points and a more robust logistics system.”