Where Real Estate Investors Can Find the Best Gains Post-COVID

Douglas Eisner, Co-Founder and Managing Director of property developer and operator The Calida Group, on where future value will be found in real estate

What changes have you seen in the real estate market in 2020?
It depends on the month. In the first 75 days of the year we saw debt and equity liquidity continue to pour into the market. Then, like a flash, debt markets for the most part froze up, with mortgage REITs pushed to the brink. During the next 75 days the world was just clamoring for information. We saw equity activity and transaction volume grind to a halt as underlying asset performance collapsed in hospitality/retail and owners prepared for a collapse in other sectors. By June most people had taken a breath, formed a view – good, bad, or indifferent – and started to march forward.

Now, eight months into the year, people are as or more focused on the US presidential election and the resulting policies than they are on the pandemic and the underlying performance. In some respects, the first eight months of 2020 resemble eight years of a 10-year cycle.

Do you see valuations being impacted by the pandemic?
For sure. How could they not be? The valuations in real estate are, for the most part, down 3-7% from the start of the year; though that, of course, is very dependent upon asset class and geography. The challenging part is that valuations seem to have decoupled from the underlying performance. Investors that are closing deals right now are betting that performance recovers to justify their price.

This is different from 2008-2011. In the GFC performance suffered as well, but buyers were able to pick up assets at prices that reflected the underlying performance. The difference this time around is the stimulus in the system that is propping up asset values. This is true of most equity investments, not just real estate.

How will the performance of real estate strategies be affected?
All real estate strategies have been affected by the pandemic. But I also think this whole situation is moving so quickly and the pandemic is largely baked in already. The more pertinent question moving forward is: Will the performance of various real estate strategies be affected by the federal, state, and local government response to the pandemic?

The answer is undeniably yes. Will there be rolling regional shutdowns? What happens to the public transportation infrastructure? What will economic stimulus measures look like? How will Main Street programs vs. Wall Street programs play out? When will eviction and foreclosure moratoria end? These are going to keep having new and unexpected impacts on real estate. That is why everyone is watching the polls and waiting for the election to get some guidance on where to go from here.

Do you see institutional demand for real estate changing?
It depends on how macro or micro your point of view is. At 30,000ft I anticipate the allocations to real estate, or alternatives in general, will increase. Even quarter- or half-point allocation increases are massive inflows in terms of absolute dollars. With fixed income yields at all-time lows there must be a push into equities and alternatives to meet funding obligations. 

At 10,000ft I see capital flows following migration patterns and moving from the super-dense gateway markets into lower-density suburban or second-tier cities. And then at 1,000ft I see institutions layering in longer-term debt, even on core assets, which will only increase their buying power and amplify the capital flows into these locations.

Which sectors or areas do you think will be in demand over the next 12 months?
The obvious winners thus far are industrial and multi-family. That’s no secret. I do think, however, that office has more to offer than most of my peers do. Remote – or, as I prefer to say, ‘distributed’ – work is here to stay for at least some portion of the workforce. But most people I know are clamoring to get back into the office – and for their kids to go back to school! 

When they come back though, their offices will be configured differently. Twenty years ago the rule of thumb was 275ft² per employee. With open floor plans, bullpens, trading floors, and the tech boom, office footprints shrunk to 175ft²/employee. Our office actually reached 135ft²/employee for a while. I think a socially distanced and spacious office will replace a foosball table as the office ‘amenity’ top employees want, and the footprints will expand again, absorbing the excess space that distributed workers leave behind.

What will make for a successful real estate investment strategy in H2 2020/2021?
Everyone is focusing on new transactions. I think you need to focus on operations now more than ever. The best buys during the GFC were not in 2008 and 2009. They were in 2010, 2011, and 2012. I think we have a little time on this one. I am encouraging our team to be patient and let the opportunities present themselves.

Instead, I think some of the best investments right now are inside our own portfolio: really focusing on operations, maybe doing those capital improvements we have been putting off, or refinancing to increase monthly cash flow. It’s about really squeezing every last drop of juice from the lemon. Those will be some of the highest IRR dollars you can put out in the next 12 months.

About The Calida Group
Founded in 2007 by Douglas Eisner and Eric Cohen, The Calida Group is a leading developer, investor, and operator of multifamily real estate properties in the western US. The founders have developed or acquired more than 16,000 multifamily units, and the company’s senior management has more than 100 years of combined real estate experience. Calida invests roughly $1bn annually across three primary strategies (Development, Value-Add Acquisitions, and Core-Plus Acquisitions) through a series of discretionary commingled funds serving the family office and ultra-high-net-worth communities and partnerships with many of the nation’s largest financial institutions.

This article is the fifth in a series analyzing the impact of COVID-19 on the private real estate market, produced in collaboration with our partner EisnerAmper. We discuss deals, fundraising, and other key trends in the industry.

To ensure you don’t miss more from EisnerAmper and Preqin, sign up for Preqin’s weekly newsletter.

For more insights and analysis on the impact of the pandemic on alternative assets, take a look at our COVID-19 Knowledge Hub.