With Investors Flocking to Certain Assets, What is the Next Value Play for CRE?

Decades ago, the famous baseball player Yogi Berra, known for his paradoxical utterings, explained why he no longer went to a famous restaurant this way: “Nobody goes there anymore; it’s too crowded.” 

You could make the same observation about some segments of commercial real estate these days. The rush to such sectors as industrial and multifamily has compressed cap rates, leaving many to reconsider how they measure value and leaning more toward internal rate of return.

With interest rates still low, a lot of capital continuing to pour in due to poor returns in traditional fixed income, and rising rents, there’s still money to be made. But it’s harder as time goes on and cap rates continue to fall. Some professionals have moved to primarily consider internal rates of return to justify investments.

“Everything is getting bid up to the point where it’s hard to see value anymore,” Peter Zabierek, CEO of Sugi Capital Management, tells GlobeSt.com, noting that some people become satisfied with looking for “less expensive.”

But when some places are too popular, there are likely other good choices that are less crowded, including areas in sectors that have been written off by many.

“For the private investor it’s what is that next frontier, the next value play/? Local retail and hospitality,” Ayoub Rabah, president of Coldwell Banker Realty Central West, tells GlobeSt.com. “We don’t know how long the pandemic effect is going to be in place. If you’re hyper local, you have that local market knowledge of what’s happening in your local market.” 

While many hotels, restaurants, and stores will suffer, some won’t. For example, MRP Capital Group has been successful investing in strip malls next to high-performing Walmart Supercenters in small towns and cities. And necessity-based retail, like supermarkets and pharmacies, have shown outstanding returns compared to much of retail.

“One of the more interesting and I think we have to be really thoughtful is multi-tenant office investments in major markets,” says Richard Litton, president of Harbor Group International, which recently bought the 38-story CBS/Viacom “Black Rock” headquarters in Manhattan. “That speaks to our views to office over time. There could be interesting opportunities and plays. It’s about buying at the right price per foot and being in a strong location. We feel those assets will continue to perform well and if you can buy at a discount to historical prices per foot, that also lets you set rents at a level to attract tenants.”

“What we’re starting to see in real estate is specialty products, the rise of them,” Jeff Pori, CEO and founder of Kingsbarn, tells GlobeSt.com. “Self-storage, people want that right now. Manufactured home parks? People want that now. Cold storage? People want that now. Data centers? People want that now. People used to build these buildings on a built-on demand basis for the most part.” Increases in demand, especially in geographic areas seeing large population influxes, have left openings for developers. “They’re specialty items for a reason. But the demand is far-outpacing the supply in these areas.”

“The savviest real estate investors right now are not afraid to be creative and envision a higher and better use for unloved assets,” Zabierek says. “I like what many of the REITs are doing right now, converting office assets to either data centers or life science labs. When you can buy at a seven or an eight cap, invest some capex, and revalue to a three or a four cap, you’re doing something right.”