Impressive return on investment strategies and market insights for investing in real estate
For high net worth families and individuals, investing in real estate can be an important part of the overall strategy for investment return. But in a real estate market that seems to change by the day and an economic climate plagued with inflation, how can investors know if they have a winning strategy for the long-haul? That’s where a team of experts, such as Whittier Trust, can make all the difference because it’s their job to closely monitor market dynamics and offer valuable insights to their clients.
“Returns on commercial real estate (CRE) are fluid even in the best of economic times, and in today’s recessionary climate are even more so. Broadly speaking a return on investment is subject to factors such as product type, location, interest rates and the overall economy,” says Whittier Trust Vice President, Real Estate, Andrew J. Paulson, who regularly reviews real estate outlook reports. He notes that his team and the investors they serve use Gross Rent Multiple (GRM) and Cap Rates to help guide pricing and Internal Rate of Return (IRR), Cash-on-Cash Return and Equity Multiple to evaluate returns.
Investing in Real Estate: Possible to succeed in a downturn?
Paulson says that the consensus is that inflation is close to peaking but real estate pricing has not yet reached the bottom. Still, the team’s long-term strategy is working, having focused its equity investments over the past 3 - 5 years on value-add multifamily assets. “We believe that is the most attractive of the main real estate product types,” Paulson explains.
“We have a lot of information from our own underwriting and investment performance to compare to today’s metrics. We have seen that GRM has declined and Cap Rates have risen for Core, Core-Plus and Value-Add investments,” he says. Whittier Trust’s broker and sponsor resources have provided information on Core, Core-Plus and Value-Add multifamily sales from April 2021 to April 2023 that show an average GRM for deals was 12.7 in April of 2021, peaking in April of 2022 at 14.52 and are now averaging 11.2 in April of 2023. The market information is also showing that average Cap Rates were 4.2% in April of 2021, peaked at 4.02% in April of 2022 and have now risen to 5.15% as of April 2023.
Paulson offers a real-life example of the team’s return on investment expectations over the same time period: the value-add MHW Las Vegas deal which was acquired at a 3.87% Cap Rate and underwritten to an IRR of 21.0% and a 2.39 Equity Multiple over a 5-year hold. “We can compare this information to a recent value-add multifamily deal in Irving, TX that we were unsuccessful in acquiring,” he says. “Our deal metrics for that opportunity were a going-in Cap Rate of 5.3% and the deal underwritten to an IRR of 18.8% and a 2.30 Equity Multiple over a 6-year hold.”
Investing in Real Estate: Investment return projections for the future
“Projecting out in 2023 and beyond, our team believes the real estate market, like the overall economy, will present a mixed picture as Multifamily and Industrial properties will outperform Retail and Office for the foreseeable future,” Paulson says. “For the Multifamily and Industrial deals that we pursue, we also believe that the factors of relatively high inflation and the Fed’s tightening policy which has significantly increased cost of debt will continue to depress pricing and decrease deal velocity across the country. The effects of these issues is making it harder to locate and underwrite the same number of quality real estate investment opportunities that we can bring to Whittier’s clients.”
While the uncertainty surrounding the Fed’s future interest rate increases and ambiguity regarding growth in the overall economy are real concerns, Whittier Trust’s real estate team always takes a long-term view of real estate investing and employs conservative underwriting. As the Fed’s pace of interest rate increases inevitably slows, investors will face fewer unknowns when valuing assets and underwriting transactions, which is expected to lead to an uptick in capital market activity through 2023 and beyond. “As a result, the mood among the real estate team at Whittier Trust is cautiously optimistic that the market will ride out the current headwinds and Whittier Trust will be well-prepared for another period of sustained growth and strong returns,” Paulson says.