ULI Special Report: Good Time to Buy—or Lend

Despite higher interest rates and economic uncertainty, commercial real estate remains attractive.

It’s a good time to be a buyer—and a good time to be a credit investor, according to Sara Queen, head of U.S. real estate for Oxford Properties, during the general session on the second day of the ULI Fall Meeting in Miami.

But selectivity and astute asset management are critical, Queen said. “If you’re disciplined about it, you can find opportunities.”

Moderated by PwC Partner Andrew Alperstein, co-chair of the Emerging Trends in Real Estate publication, the panel discussion was focused on the results of the most recent edition—which was themed “You Have to Work For It”—and providing context for its findings.

The move toward asset-by-asset analysis over blanket sector or submarket plays and the need to realize returns through income growth rather than exit cap rate compression were among this year’s eight trends.

Alperstein noted that the survey respondents’ desire to buy real estate was the strongest it has been in years even though sentiment was more cautious. Last year, survey respondents were hoping for a drop in rates. Instead, The 10-year Treasury is currently hovering around 5 percent. But the panelists were generally optimistic—at least on the commercial side.

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The last few years have been a “slog,” remarked Mary Ludgin, senior advisor to Heitman. But real estate has been repriced, and the U.S. economy is holding up pretty well. “Yes, not thrilled about the 10-year Treasuries at 5 or above, but income growth’s pretty good,” she said. “Real estate income is strong and supply is managed.”

Higher rates are not as much of a problem as rate volatility, noted Hessam Nadji, president & CEO of Marcus & Millichap. Waiting to see how AI will change the real estate business model is also creating unpredictability. He agreed real estate has been repriced but said the “true” repricing will come when lenders start moving assets off their books and into the market. “So it’s more confusing than ever but more optimistic,” Nadji said.

Queen agreed that higher rates are making deals harder to pencil, and they are also forcing investors to focus on working their existing assets. “Cap rate compression is not going to solve your problems,” Queen said. “Cheap debt doesn’t.”

On the residential side, things are more “uncertain,” said Ken Perlman, managing principal of John Burns Research and Consulting. Higher rates and inflation are cutting into purchases and new construction. The K-shaped economy has created a “bifurcation,” with wealthier buyers feeling confident and buyers lower on the spectrum feeling uneasy.

“You’re right,” Perlman said, “the economy is good overall, but I think the consumer is very concerned about mortgage rates, about oil prices and wars abroad.”

Picking your spots

While Heitman is “pretty bullish,” Ludgin said, the firm is placing its bets carefully, having recently raised a fund exclusively focused on self storage, for example. “Selective is the word of the day,” she said. “It’s not a market-wide phenomena. It’s a sub-market and asset-specific investment environment.”

For Marcus & Millichap’s clients, retail is in “a whole different dimension” than it was 15 years ago, Nadji said. Buoyed by strength in consumer spending, it has not only recovered but is attracting new capital. Office, meanwhile, has been the most important opportunistic part of the market, and its recovery appears to be “sustainable.”

Adding to the confusion in the market, Nadji noted, are the rent struggles in multifamily, which has long been commercial real estate’s “darling.”

The report’s top markets to watch were: Dallas, Nashville, Miami, Raleigh-Durham, San Francisco, Houston, Manhattan, Jersey City, Tampa/St. Petersburg and Charlotte. San Francisco has benefited immensely from AI growth, Queen noted, while Oxford just leased the top two floors (30,000 square feet each) at 70 Hudson Yards in Manhattan for $324 a square foot.

Policy as a guidepost

Another trend in the report that spoke to the panelists was “policy is the new geography.” Investors are taking a closer look today at how existing and pending regulations impact investment viability.

“We can make money in environments in which there is rent control, for example,” Queen said, “but not when it’s been imposed since you did your underwriting.”