A good deal of properties in this asset class have been chased and hunted down to near extinction. However, given the growth in the millennial working cohort and their propensity to rent over buy, plus the additional amount of baby boomers moving into MF to simplify living expenses, this asset class will see low cost of leveraged capital and relatively good rent growth that will significantly outperform inflationary indexes throughout 2017 and into the foreseeable future.
4) Self Storage
With the self-driving(driverless) car on the horizon, we can see this asset class experiencing some downside risk as more people will free up garage space used for their vehicles, to now store their junk. But, that is a fairly far off reality and suburbia won’t wildly adopt the driverless non-owned vehicle for many years into the future. We also predict that a bounce in consumer confidence will spur some additional spending based on pent up demand. If the public homebuilders are performing well, we expect to see self-storage equaling that matrix.
3) Logistical Industrial
Logistical industrial is a hard to quantify space because it takes a more technical approach to investing. Amazon has opened the door by introducing same-day and next day delivery. Amazon’s change in delivery methods will require more and more retailers to adapt their business model. As retailers continue to struggle, they will look to mimic the free and fast shipping methods that drive so many customers to Amazon. Logistical industrial sites near growing Metropolitan Statistical Areas(MSAs) will see the best upside and increase in value, particularly in markets that can target several top MSAs within a hub (Think New Braunfels/San Marcus Texas area).
2) Urban Infill (Adaptive Reuse)
Urban infill in post-industrial sites and cities will have significant opportunities for walkable and unique developments. These trends have been exploding across the US. Some examples are Wynwood in Miami, RiNo in Denver, Pearl in Portland, Brewerytown in Philadelphia and East Austin. If you google gentrifying or hipster locations, that will give you a good idea of the areas we are highlighting. This type of investment can be hugely rewarding but is also wrought with challenges. The challenges can range from requiring environmental clean-up, being in high crime rate areas, lack of sources for capital and most significant in my opinion is needing a creative approach to design. As there are no two sites or buildings the same, it is the proverbial can of worms. As most Real Estate Investment Trusts (REITs) tend to work on a proforma spreadsheet model to invest, urban infill projects can be challenging for them to quantify or get approved. The hard to quantify will allow nimble private investors and creative fund managers to find opportunities in this space at a much greater percentage in 2017.
1) Single Family Rental Portfolios
It is our opinion that SFR portfolios will see the most significant investment opportunities in 2017. The reason is that the same drivers that have compressed MF (multifamily) CAP rates into low single digits will also cause investors to chase yield in SFR. It is not uncommon to achieve a high single digit going in rate and levered rate up into the low to mid-teens, all with relatively straightforward debt capital sources since it’s easy to underwrite. We are not saying that it’s easy to acquire well performing SFR portfolios, but that those well-performing portfolios will see unsolicited offers and big institutional players trying to continue to aggregate and build their economies of scale. There is some debate that this space and asset class are dead, and that it only made sense to buy when there was the post-housing bubble collapse (2009-2014). Although we all wish we had held onto more properties from that 2009-2014 window, that doesn’t mean the space is dead. We found a range of numbers, but overall there are estimated 16-20M single family rentals across the country. In the last 6-7 years, we have seen the institutional players begin to enter the SFR space (Invitation Homes (Blackstone), Colony, American Homes 4 Rent, Main Street Renewal, Tricon, and many more). The conversations we have heard are that these giants of the private equity world and REITs have entered the space the game is over- they have already picked up all the good deals and there is nothing left. As we have researched this investment class we have found that the institutionally owned SF rentals are approximately only 200,000 units across the country. That means there are still 15.8 to 19.8M SF rentals out there that are owned by small operators or most significantly “Ma & Pa” investors that only have 1 to 3 properties. As technology improves efficiencies and the big players continue to develop best practices, this space will see some of the best opportunities for investment regarding going in rates, rent growths and best overall risk-adjusted returns in comparison to all other asset classes.
This is a layout and look at our crystal ball predictions for 2017. We would love to hear your feedback or comments. We spend a lot of time researching these trends but didn’t want to go too in depth into an analysis that was too lengthy or verbose.
Let us know if you would like additional information on these asset classes. We are very open to helping by sharing our research and methodology behind the list.