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Perspective Spotlight

By: Joseph Penner, Founder, Hill Street Realty | March 2022

 

The real estate investment world is a wide array of strategies and opportunities but all are subject to the same underlying tides of global interest rates and capital flows. I left the securities business in 1990 and entered the real estate market at a time when the capital markets were reeling from the combination of the S&L crisis, the Japanese financial collapse, and the aftermath of the 1986 tax law change. Since then, interest rates have marched steadily toward zero and the adoption of technology has freed capital movement around the globe. During this time yields on all investments have moved in synch and cap rates on all

real estate asset classes are hovering around historic lows.


While there are many contributing factors to the state of the investment world today, the largest – by far – has been the coordinated takeover of the global fixed income markets, estimated at approximately $120 trillion. Global stock markets are estimated at less than

40 trillion.


Over the last decade the governments of Japan, Europe and the United States have systematically purchased a majority of the global fixed income markets in an effort to keep interest rates at a minimum. This massive injection of liquidity has displaced trillions of dollars of existing private fixed income investment, and disincentivized further investment by keeping rates artificially low. All of this capital moving from the fixed income markets has expressed itself in other investment opportunities, such as stocks, real estate, and a plethora of alternative investment categories. This tsunami of liquidity flowing out of the fixed income

markets looking for return has pushed asset values up around the world.


Over the past twenty years, HSR has grown from a nonproperty type specific deal shop to a sponsor of a series of discretionary funds in the value-add multifamily space. Today, multifamily is one of the top sectors in the real estate market for capital allocation from institutional, individuals and 1031 DST investors. With so much capital directed at real estate, and multifamily in particular, it's hard not to ask, “Is this the top?”, and more importantly “How long can it last?”


In my career spanning almost four decades I have been fortunate enough to have met and had access to many smart people in the finance and real estate world and many different opinions abound. The one consistent theme I have heard is that we are in uncharted territory.

The US federal debt is currently in excess of $23 trillion and growing fast while global debt is approaching $300 trillion and neither account for unfunded liabilities. It is hard to imagine interest rates increasing in this environment as the governments of the world, the biggest borrowers, would be adversely impacted.


As the governments of the world are coordinated in the effort to keep rates low, it is unlikely that cap rates will climb. Of course, there is always the “Black Swan Event” that disrupts the global capital markets for a period of time and creates opportunity for investment, but these

events are not predictable. What is clear is that while a bottom-up analysis of each acquisition and market is important, the top-down analysis of government policy, both global, federal and local, has become more and more relevant in the medium to long term allocation of real estate investment capital.