Nuveen’s Melissa Reagen on the Outlook for Alternative CRE Assets

The industry veteran talks opportunities and why commercial real estate hasn’t learned more hard truths from the pandemic.

In the spring of 2021, Nuveen’s Melissa Reagen took on a new role after four years spent as head of research at the global investment management firm. The move came after 15 years in research roles at big-name firms including Metlife Real Estate and LaSalle Investment Management. In her new position as managing director & portfolio manager for real estate alternatives, Reagen oversees a fund that invests in alternative real estate sectors.

Melissa Reagen, Nuveen

In a conversation with Commercial Property Executive, Reagen discussed whether the industry has gleaned any hard truths from the past two years of a world mired in the COVID-19 pandemic, how “unloved sectors” are getting a boost, and why she’s not that optimistic about the office market.

This interview has been edited and condensed for clarity.

You were in research roles for a long time prior to your most recent move. What has that change been like?

It’s been a nice change. You can certainly use all the research and data and analytics that you’ve had over the years—I was doing research for almost 15 years before I made the move—so I’ve been able to transfer that skill set really well. And then of course there’s the portfolio management skill set which is a new one.

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So that’s been fun to learn and build all of that up. I’m running a fund that invests in self storage, single-family rentals and medical office. I had done a lot of research in those sectors prior to taking on the role so it’s actually really exciting to be able to have the role and it’s something that I feel very strongly about.

Looking back on the past two years of this strange pandemic, what do you think are some hard truths the real estate industry has learned?

It’s a good question. It’s probably a little too early to tell because we’ve probably got to come out of the pandemic. We probably always knew collaboration really mattered, and we know it matters even more now. Having had to work from home for so long took a toll on a lot of people.

The reality is that real estate has done really well in the pandemic. Green Street just released that values are up 9 percent prior to pre-COVID-19 levels, and so there’s really no hard truths to learn when things are going well, right? It’s hard to learn anything when everything’s going up and to the right. And values have just done really well post-COVID.

People have been moving homes, so that’s generating demand for single-family rentals and that’s generating demand for self storage. Even some of the unloved sectors are getting a boost as all the tides rise. It will take a couple years for that to play out because I don’t think you learn any hard truths until you have to go through something difficult.

What surprised you the most, looking at how the CRE industry has performed so far this year?

When the virus first hit, back in March and April of 2020, at that point I was really worried that risk premiums were really going to kind of blow out, not just for real estate but all asset classes, and things looked really grim at that point. I was really worried there would be a real hit to demand across all sectors—that consumers wouldn’t be spending and that people wouldn’t be going out and there’d be a real hit to demand.

And of course, that never materialized. With all the fiscal stimulus that has now been pumped into the economy, it’s going gangbusters. So I’m surprised—I mean, I’m not surprised now that all the fiscal stimulus has been pumped in, but it looked really grim back in March of 2020 and 2021. And probably without the fiscal stimulus it would’ve gotten really grim because no one was going out, no one was spending, no one was doing anything.

Alternative asset sectors have been attracting a lot of capital lately. How long do you think that trend will continue and why?

All those alternative sectors have a really big tailwind behind them, from a fundamentals perspective and from investor demand, because the reality is that most real estate investors are still under-allocated to real estate alternatives and the majority of their book is still comprised of office, retail, industrial and multifamily. It’s just how the industry grew up.

They’re starting to wake up to the fact that they’re underallocated to the alternatives and there’s probably 20 alternative property types we could talk about. It’s going to be a really long-term trend because it takes you a while to get to an allocation. If you’re a major pension plan or even a large endowment, you can’t just move things overnight, especially not in real estate, which is such an illiquid asset class. It’s a very, very long-term trend.

I put together a pie chart last year around this time that basically showed the allocation to real estate alternatives in the next decade would move to 40 or 50 percent of an investor’s portfolio. And there’ll be more and more demand for it. Part of the problem may just be the amount of stock that’s available. There’s not as much stock of something like life sciences or, say, a mall, but I also think new alternatives will come into view as we move through the next decade.

I’ve heard less talk about the senior housing sector lately as one of those niche sectors attracting a lot of attention, but it’s still one that has all the fundamentals going for it. Can we expect to see more investment and development in that industry?

Historically, the industry’s struggled with oversupply. That’s always been the industry’s problem—it’s always been building with not enough demand. That’s going to change. We know, with the Baby Boomers aging, there’s going to be a huge amount of demand. According to our analytics, there’s going to be more demand than supply of senior housing starting in 2026. But I do think there’s a void there, because if you were to go shop around a lot of the senior housing today, a lot of it is expensive for what you’re getting, and what you’re getting is older-quality stock that’s just not good-quality stock.

With the next generation of what’s going to be built, there’s a real opportunity to create something that doesn’t exist right now in senior housing. They need to realize the Baby Boomers are going to be the next generation moving into senior housing, and they are a lot more tech savvy than the Silent Generation that would have been in all the senior housing to date. They are a lot more tech savvy and a lot more active. For the next generation of senior housing, there’s an opportunity to really capitalize on what Baby Boomers want and not build what we’ve been building for the last 20 to 30 years.

What can share about Nuveen’s investment strategy going forward? Where do you see the most opportunity?

I still think these real estate alternatives will comprise a large portion of our portfolio. To the extent there is opportunity—there’s a lot of talk around the challenged assets, retail and office—is there any opportunity once those sectors reprice? That’s always on the table. That would be true of any sector that reprices.

We run a huge book of business. Our business in the U.S. is $103 billion. We invest across all property types—industrial, multifamily, office, retail. The strategy is trying to find where the best relative value is, and that changes over time. For several years it was apartments, and that may change to single-family rentals. The strategy is always changing, based on where pricing is relative to fundamentals across each of those property types.

For now, the real estate alternative property types still offer really good value just in terms of their forward returns relative to where they’re pricing today, especially relative to the traditional property types. So there’s a long runway in the real estate alternatives—and there are 20 of them. So that’s a broad statement, but in general it does hold.

You mentioned in a recent webinar that you were bearish about the office sector. What do you think would have to happen to change your mind?

It would have to dramatically reprice, which I don’t know that it’s going to. There will be overall less demand for office. People are going to come back to the office. We know that. I don’t think they’ll come back five days a week. I don’t even know that they’ll come back four days a week. So that’s my view. But even pre-COVID-19 I was not overly optimistic on that sector because it has such a high amount of CapEx. Even if you put work from home aside for a second, the amount of CapEx you put into office is one of the highest. It’s just below hotels. When you’re putting in that much CapEx for the elevators and lobbies and the this-and-that, it eats into your returns. Your risk-adjusted returns for office are pretty dismal and have been historically. It’s going to get worse going forward.

The only thing that could really change my view is if the sector dramatically reprices. Maybe then you’re getting compensated for the lackluster historical returns and the not returning to work. But barring that, there’s probably not too much that could change my mind on it. I was never really optimistic on the sector to begin with.

Read the December 2021 issue of CPE.

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