Special Episode: 2024 Real Estate Investing Outlook with Brian Kingston and Lowell Baron

Summary

In this Brookfield Perspectives podcast, Lauren Stephy discusses the current real estate investment environment with Brian Kingston and L Baron from Brookfield's real estate division. They explore the cyclical nature of real estate, the impact of the pandemic, and the potential for a favorable investment period due to market volatility and high occupancies. The conversation also covers the future of office spaces, the importance of demographics and deglobalization, and strategies for navigating interest rate changes. The guests emphasize the opportunities in distressed real estate and the appeal of real estate as a hedge against inflation, suggesting now is a great time to invest in the sector.

Takeaways

• 🌐 Brookfield Perspectives podcast discusses how Brookfield invests in critical assets that support global economic progress.
• 🏢 Real estate is a familiar investment touching daily life aspects like living, working, shopping, and vacationing.
• 📈 Despite recent volatility, Brookfield sees the next couple of years as potentially the best investment period since the financial crisis.
• 💹 Current real estate fundamentals are strong with high occupancies and rent growth, but over-leveraged investments may lead to forced sales and more attractive pricing.
• 🔄 Real estate operates on two cycles: the operational cycle based on supply, demand, and occupancy, and the capital market cycle influenced by economic factors.
• 🏗️ The pandemic disrupted the real estate cycle, but the market has since stabilized with a surge of cash and cautious optimism for growth.
• 🏦 Concerns about distress debt in commercial real estate are mitigated by the strong position of banks and lenders compared to the 2008 financial crisis.
• 📊 The office sector is bifurcated, with high-quality and non-US offices performing well, while lower-quality US offices face challenges.
• 💲 Rising interest rates impact real estate investments, but historically, they are not high, and real estate can still offer strong returns, especially with quality assets.
• 🌟 Brookfield identifies three key themes for growth in real estate: demographics driving affordable housing, deglobalization affecting supply chains and manufacturing, and lasting trends from COVID-19 impacting hotel and leisure sectors.

Q & A

What does the podcast 'Brookfield Perspectives' focus on?

The podcast 'Brookfield Perspectives' focuses on exploring how Brookfield invests in the backbone of the global economy, such as solar panels, warehouses, shipping containers, and data centers.

What is the current investment environment in real estate according to Brian Kingston?

Brian Kingston suggests that the current investment environment in real estate is one of the most exciting since the financial crisis, with high occupancies, good rents, and potential for rent growth, despite some market participants having over-leveraged or overpaid for assets.

How does the cyclical nature of real estate impact investment decisions?

The cyclical nature of real estate means that investors must consider both the operating cycle, which includes supply and demand, and the capital market cycle, which involves the availability and cost of capital. The intersection of these cycles can create opportunities for value creation.

What was the impact of the pandemic on the real estate cycle?

The pandemic interrupted the normal real estate cycle by initially causing a slowdown in the economy and business activities, followed by an influx of cash and stabilization measures that led to a quick recovery and even a surge in some sectors.

How does the current state of distress debt in commercial real estate affect banks and lenders?

Brian Kingston believes that while there may be some distress in certain real estate sectors, the banking system is in a much stronger position than in 2008, with better capital ratios and credit standards, meaning potential losses would be small relative to the size of the banking system.

What are the key themes driving growth in real estate according to L Baron?

L Baron identifies three main themes driving growth in real estate: demographics impacting the need for affordable housing, deglobalization and supply chain diversification, and lasting trends from the COVID-19 pandemic affecting preferences for flexibility and quality of life.

How does the current interest rate environment affect real estate underwriting?

Higher interest rates mean that real estate investors need to focus on higher yields and generating growth through operational improvements. Unlevered returns become more important in this environment as leveraged returns are more challenging to achieve.

What opportunities does the current market present for private real estate credit?

With increased regulation and pressure on banks to reduce risk, private real estate credit has opportunities to originate attractive loans with high returns, filling the gap left by more conservative banking practices.

What are Brian Kingston's thoughts on whether it's a good time to invest in real estate?

Brian Kingston believes it's a good time to invest in real estate due to the bifurcation in ownership and the opportunity to buy high-quality assets at attractive prices, especially with the potential for a future with healthier capital markets.

How do individual investors view alternative assets and real estate investments?

Individual investors and wealth advisors are increasingly looking towards alternative assets and real estate to hedge against inflation and create long-term predictable cash flows, following a similar journey to that of institutional investors over the past decades.