Real estate investors are investing in riskier properties while accepting lower returns and longer periods of illiquidity or lockup periods, said speakers Wednesday at IMN's 12th Annual Winter Forum on Real Estate Opportunity & Private Fund Investing Conference in Laguna Beach, Calif.
Paul Fuhrman, principal at real estate money management firm Colony Capital, said that investors in the U.S. should bring down their return expectations. As a result, Colony executives are actively investing in debt.
“We are shifting to a Europe focus,” Mr. Fuhrman said. “Seventy-seven percent of our deal flow is out of Europe.”
“Investors are accepting lower returns, even in value-add,” said John Murray, executive vice president in the real estate unit of Pacific Investment Management Co.
Meanwhile, larger investors that can are continuing to prefer direct investments and separate accounts over commingled funds.
Greg Spick, portfolio manager, real estate and real assets at UPS Investments, Atlanta, said pension fund officials are moving away from the commingled fund model. The $29 billion UPS pension fund has a total of $3 billion in real estate and real assets.
It's the opposite of 2008 and 2009 when investors did not want to invest, said Rodgers Harshbarger, director, private investments at UNC Management Co.
“Real estate should be an interesting thing to invest in but real estate managers' products are not interesting right now,” Mr. Harshbarger said.
Real estate managers are offering investment products that are designed to be big pools of properties that produce higher fees for the manager when real estate is really “a cottage business that should be invested on a bespoked basis,” Mr. Harshbarger said.
What's more, plummeting oil prices are expected to produce winners and losers among real estate investors.
Benefiting from a drop in oil prices, if prices stay low for a year, are U.S. consumers who are expected to spend the savings, which would benefit the retail real estate sector, said Kim Hourihan, senior managing director and portfolio manager, CBRE Global Investors.
“There could be a 3% or greater increase in retail sales based on the savings,” Ms. Hourihan said.
At the same time, investors are already giving second thoughts to investing in Dallas and Houston where a large part of the local economy is from the oil industry, Ms. Hourihan said.
Ms. Hourihan spoke on a panel titled the “State of the CRE Industry and Fund Update 2015” moderated by David Kessler, partner, national director of commercial real estate industry at accounting and consulting firm, CohnReznick.
In the long-term, energy companies would stop spending and start cutting jobs, which would negatively impact the housing that has been built near areas that were booming from shale exploration such as North and South Dakota, said panelist Stephen Sotoloff, principal at real estate money management firm Walton Street Capital.
And there are signs of possible trouble ahead.
Ms. Hourihan and Mr. Sotoloff said giving investors pause is the amount of investment capital pouring into value-added real estate. This is especially the case since the line between value-added and opportunistic has blurred, Mr. Sotoloff said.
