The Investment Landscape
We are entering a new era of structurally high real estate interest rates, rising inequality, and more and more uncertainties (geopolitical, wars, disfunction of Congress, etc.), so for a new generation of investors these factors will be the new norm. People and investors are nervous. The work-from-home will continue at least partially. No way to go back to pre-pandemic, so the key is how to handle the building stock? Conversion is one direction. For housing affordability, supply side is always the issue. But we do see the positive side that some NIMBYs have gradually changed their approach to environmentally conscious new developments, denser, near transit, etc.
The recent new investment trend is the rising attractiveness of private debt. Senior loans can earn rates of 7% – 8%. Investors want to balance debt and equity. Private debt becomes a “rescue finance” source for the office sector and for very eager borrowers. The current environment could be tougher for value-add, but better for opportunistic/distress – you can go in at a low point and take some more risks.
– Siqi Zheng
Outlook and Opportunity
The recent conference of the Pension Real Estate Association (PREA) took place in Boston, and if the record attendance of some 1,200 pension funds and investment managers is any indication, there is no sign that high interest rates are yet decreasing investor interest in real estate. Here are 5 take-aways from the conference. See the Maastricht Real Estate Blog for the full write-up.
- Interest rates — Higher for longer
- ESG – Escape Stressed Geography
- Debt is where the opportunity is
- Power is a limiting factor for growth
- Did you know that a search on ChatGPT consumes 10x the amount of power of a regular Google search? As large-language models (LLMs) such as ChatGPT evolve (and those AI models are just the beginning), the demand for digital infrastructure is slated to further grow.
- Ozempic is the new AI
- “The two things everybody wants to talk about are AI and weight-loss drugs.” Indeed, looking at the stock price of Nordisk, the maker of Ozempic (medication for diabetes, but better known for its effects on weight-loss), it has been a good ride this year, with a stock return of almost 50%.
– Juan Palacios and Nils Kok
Great View into the Investor Approach
The PREA meetings were a wonderful way for students to see how investors are approaching the market right now. It also provided great networking opportunities and lots of material to help with student theses. MIT/CRE was well-represented at the event and easily had the largest contingent of any real estate educational program. Siqi Zheng was my guest at the Research Affinity Group, where we heard about climate risk models and their application to both the investment and the insurance markets. Finally, Kelly Cameron and I attended a DEI workshop at the end of the conference hosted by the PREA Foundation and the Social Impact foundation. The focus was on what we know about the role of gender for career growth, promotions and compensation led by Dr. Robin Ely of HBS. I hope that the success of this event leads to regular MIT participation in all that PREA has to offer.
– Jacques Gordon