The One Sector That Could Benefit from Market Uncertainty

As this cycle winds down, Omar Eltorai, a CRE market analyst at Reonomy, has concerns about several commercial real estate sectors.

“If 2020 does bring uncertainty, which is what I’m expecting, it will be in the latter half of the year, and it could mean that hospitality and lodging would likely have a tougher time,” Eltorai says.

Eltorai’s rationale is that once the economy turns, consumers pull back on discretionary spending. “I do think that hospitality and lodging react quicker to uncertainty,” he says. “It’s far easier for me to cancel a hotel room and to cancel a trip if my purse strings are getting a little bit tight.” While observers are quick to pile on retail, Eltorai still sees some strong operators that should weather any economic turbulence ahead.

“There are some premium mall operators out there that have proven that there are great returns to be made in top-quality retail sales and top-quality malls,” he says. “Maybe retail has been struggling, but if you’re painting with a really broad brush, there are certainly some operators that have demonstrated it is still a worthwhile venture.”

Industrial has been very strong recently, but Eltorai thinks economic uncertainties could slow that sector’s growth. He predicts that apartments, on the other hand, could benefit from turbulence if the economy sputters. “People cut your spending, but shelter is pretty important,” he says.

Because of the need for housing, Eltorai says multifamily has been resilient. “The longer there is uncertainty in the market and investors are still looking to deploy capital into real estate investments, I think that multifamily comes out looking better than ever,” he says. “With uncertainty present, we’re going to continue to see investment focusing on what I would consider generational trends, such as Millennials moving to the west or south.”

Even though Eltorai likes apartments, there are concerns with the sector. If something were to happen to Fannie Mae and Freddie Mac, liquidity could be hampered. This week The Federal Housing Finance Agency (FHFA) hired investment bank Houlihan Lokey to recapitalize the GSEs. Still, Fannie and Freddie’s increased lending caps bode well for multifamily in the near term.

Compressed apartment cap rates in tertiary and secondary markets are also a concern to some investors. “Income earning properties are becoming a far more mainstream investment,” Eltorai says. “Even though this asset class has been around for a century, it has only been considered an acceptable investment class for a few decades.”

As interest in the sector heats up, partially because it’s considered a relatively safe investment, more money comes in.

“You have more money coming into real estate, whether it’s institutional or even individual,” Eltorai says. “There’s more competition. There has been this chase for yield, and that’s contributing to rising prices in secondary and tertiary markets.”