Why Commercial Real Estate's Pullback Means 'Opportunity': Fund Manager

There are two ways to do it.

There's the public market, which is REITs. Buying REITs is [like] buying your real estate from 7-Eleven, versus private real estate, which is typically [like] buying your real estate at Costco.

With the public sector, you're paying a higher price for daily liquidity.

The financial advisor has to make the decision: Are they going to put their client in public REITs at a premium but which have daily liquidity? Or are they going to invest with private investment managers and private real estate, which usually has a lockout period of three to five years [when you can request a refund]? But typically, it has much better returns.

To be sure, the individual investor needs to conduct due diligence. Can financial advisors help with that?

Absolutely. What I've found throughout my career is that real estate investors are usually equipped with a financial advisor.

The advisor is going to help pre-screen and perform due diligence on real estate investment managers and make sure they're upholding their business plan as well as the real estate principles that they invest with.

That allows individual investors to avoid bad apples and bad operators.

What's the key concern that advisors should focus on right now?

Look at a balanced approach of both income and growth. In particular, do the real estate investment managers that they're investing with have adequate levels of cash reserve and low enough debt?

The most important thing for a financial advisor is not to be taken advantage of by a "yield trap" — solely looking for the highest possible returns and upside.

What's your longer-term outlook for the future of investing in CRE?

Commercial real estate has lots of different shades of possible outcomes.

For the future, the key is to find sectors that can withstand inflationary pressures and also have good long-term growth trends.

Often people associate real estate with a bond and what's going on with interest rates. Rates are important, but unlike bonds, real estate has the ability to grow its income and revenue.

Interest rates only [really] matter if you're overleveraged. So people who are buying real estate or own it should be careful not to overly focus on interest rates.

What about inflation risk?

Many commercial real estate properties have a net lease, meaning that any expense increase is passed through and shared with all the tenants of the property. So if inflation impacts a building, the tenants share that increased cost. [Therefore], the landlord and investors are ultimately less impacted by it.

Also, real estate is typically financed with fixed interest payments despite inflation. When you have rising revenues and income due to inflation, your debt payments stay fixed, yet your income stream is growing.

The office sector isn't doing well, I'm sure you'll agree. How large is that component of CRE?

It's a medium-sized part of commercial real estate. Office is the most challenging of all the real estate assets to own. So you're better off [looking] at apartments, industrial warehouses and even retail shopping centers.

Office is an OK investment if bought heavily distressed. There are pockets of office declining because [many] people are working from home. However, the best office buildings are seeing somewhat more rent growth.

So it's really a have-and-have-not for office buildings. If you've got an old, dilapidated building, you're in trouble. But if you have a high-quality desirable office building, you're going to be just fine.

For high-quality buildings, occupancy remains strong for office, and they're seeing strong rent growth. Rents per foot have gone up.

I'm not advocating that office is the best spot to put your money, but it's not as dire, maybe, as every publication says it is.

Can CRE be a haven in the way that gold is? It's a tangible asset and holds value, and also, low prices offer opportunity to invest. Your thoughts?

Absolutely. Real estate has the ability to generate income from the rent it can charge tenants. Also, as inflation takes hold, it allows commercial real estate landlords to charge higher rent and build their income.

Do you expect artificial intelligence to play a role in the CRE scenario?

Real estate typically is the last industry to implement heavy technology changes.

Artificial intelligence will likely impact the operations for running buildings, like integrating smart doorbells and smartphones.

But it likely won't impact the leasing of buildings or other parts of real estate in the short term.

Pictured: Andy Sinclair