Pandemic highlights cyclical nature of real estate, conference attendees hear

The COVID-19 pandemic is a reminder that real estate is not immune to cycles and that underwriting and risk management is "super important," said A.J. Agarwal, a senior managing director on the real estate team of Blackstone Group, to an online audience attending the ULI Fall Conference on Tuesday.

"You literally cannot identify all the risks," Mr. Agarwal said during a panel discussion on the state of the real estate industry.

Real estate executives have to fall back on "generic preparations" such as asset level reserves, Mr. Agarwal said. And he warned against unintentional consequences of the pandemic such as new regulations and taxes that would negatively impact real estate investment.

Speaking on the same panel, Francois Trausch, CEO of Allianz Real Estate, said the pandemic has taught him that "you have to remain humble."

Fifty percent of Allianz's portfolio is office properties, which he said is typical for insurance companies. Allianz executives had viewed offices as a stable asset class and had not foreseen the impact of a pandemic, Mr. Trausch said. Fifteen percent of the portfolio is in retail, which Allianz executives expected to be core properties but is not value added. Mr. Trausch said he has doubts whether there will be enough retailers to fill malls. The one bright spot in retail is that malls are being repurposed, especially in China.

Allianz executives favor student housing because even with online learning, students are renting apartments near the campus so they can be close to their classmates. However, the students and universities are putting pressure on landlords to reduce rents, Mr. Trausch said.

At the same time, the jump to technology everyone anticipated in the Y2K frenzy into the year 2000, occurred 20 years later, he said.

Mr. Trusch added his team can feel the impact of technology now in even the most traditional real estate sectors.

Before the COVID-19 pandemic, institutional investors focused on properties in coastal markets, which were in high demand and were expensive, said Hilary Spann, managing director, head of Americas, real estate investments for CPP Investments, which invests the assets of the C$434 billion ($326 billion) Canada Pension Plan Investment Board, Toronto, speaking on the same panel.

The pandemic opened asset owners' eyes to other markets, Ms. Spann said. The crisis also brought on an acceleration in the use of online services in real estate.

But Ms. Spann said she is not counting out the big cities, which won't suffer from a loss of occupancy forever. Young families might go to the suburbs and stay there, but other young people want to be in cities, near their friends and near cultural centers.

"Once there is a vaccine, the impact of the pandemic (on cities) will be muted," Ms. Spann said. "I'm a big believer long term in our vibrant cities."

CPP executives are looking at value-added investment strategies in the office sector, particularly upgrading offices where there has been a temporary dislocation. They are also interested in building new multifamily and logistics projects in the current economic downturn that would be ready to be occupied as the market recovers, Ms. Spann said.

CPP is short on U.S. regional malls. Although CPP executives think open-air shopping centers and grocery-anchored centers will fare better than most other retail properties, they are not actively looking at those potential investment opportunities. She said CPP's real estate investment strategy is to be long on multifamily and logistics and short on regional malls.

Mr. Agarwal said Blackstone is interested in investing in hospitality properties related to global leisure travel. Blackstone executives expect to see "meaningful discounts to 2019," which were already discounts to replacement costs, which is the amount of money it would take to replace the asset, he said.

Blackstone is also pursuing investments on the core-plus side in affordable suburban rental housing, either garden-style apartments, age-restricted housing or single-family housing for rental properties, Mr. Agarwal said.