TWC Sees the Biggest Opportunity in Suburban Residential

The pandemic set new social standards into play that will fundamentally change the way that people interact with real estate. While some of these changes will prove temporary, others will become fixtures of the post-pandemic world. These changes will inform investment strategy for the foreseeable future.

“It is easy to paint with a broad brush, but the details really do matter. We would argue that some of the changes, like the work-from-home model that we saw during the pandemic, are going to be permanent disruptors,” Iman Brivanlou, managing director of Income Equities at the Los Angeles-based TCW, tells GlobeSt.com.

First up on the chopping block is CBD office, per Brivanlou’s work-from-home reference. He used the example of many companies, including his own, that are downsizing office spaces, and in many cases, are moving to higher quality buildings in the process. “This is not atypical. This is the rule, rather than the exception,” he says. “I would say that CBD office has a little bit of pricing power now, but I don’t think that pricing power is going to be sustained.”

For that reason, the firm is the most bearish on CBD office as well as CBD residential assets because Brivanlou imagines that excess CBD office product will be converted into apartments. “For that reason, we are not very constructive longer term on CBD office or residential,” he explains.

Instead, the firm is focusing on periphery residential assets. “On the other hand, what used to be called peripheral always had a connotation of lower quality,” says Brivanlou. “We are actually seeing that there is a spectrum in the suburban or peripheral markets. When you look at residential, the demand is actually quite robust. That type of demand to lead to pricing power on a more sustainable basis.”

On the retail front, Brivanlou expects big opportunity is coming in that sector, but is hasn’t arrived yet. “I think that you are going to see some pain in retail for the next few years. Companies that are very well funded with a cost of capital advantage and bullet proof balance sheets are really going to be able to put that to use,” he says. “They are going to be able to swoop in and pick up some overlevered assets. I think it is too early now, but I think by mid-2023, you are going to start seeing that.”

However, like Brivanlou said earlier, you can’t paint the market with a broad brush, instead, you have to go subsector by subsector and quality tier by quality tier. You have to assess if there is pricing power in the asset and the asset quality along with any headwinds.