Cadre Vantage: Our Mid-Year Views

As commercial real estate begins to emerge from the pandemic, we share our outlook for the remainder of 2021.

Published on May 14, 2021
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A year after the pandemic descended on the U.S., it appears that brighter days are on the horizon. We see a more promising economic environment emerging: interest rates are low, asset prices are rising, and pent-up demand is driving economic growth. Still, there are many nuances to this market — from macro trends to potential policy changes — for investors to consider.

We continue to gather data through our financial tech platform to refine our approach to the market. Post-pandemic, we developed convictions on segments across commercial real estate to help answer three key questions on investors’ minds: What sectors are in demand? Where are the headwinds? And how should we be positioned?

Multifamily: In Demand

With surging demand in housing, multifamily assets still offer attractive risk-adjusted returns.

In April, Freddie Mac shared estimates that the U.S. housing shortage amounted to nearly 4 million homes. The low inventory of supply has led to record single family home prices. Compared to a year ago, rents have increased after a slight decline during the pandemic. Looking ahead, we expect that construction and renovations will be necessary in this sector, potentially driving additional opportunities.

Investors should remain discerning in their multifamily investments, however, as competition continues to drive acquisition prices higher in hot markets.

Office Space: Some Pockets of Strength

The office segment is clearly still facing headwinds, though many knee-jerk reactions may be overly pessimistic.

Throughout the pandemic, we saw sentiment around the office shift dramatically. In August 2020, about 69% of global CEOs surveyed by the accounting firm KPMG said they expected to reduce their footprint. Outlooks have since moderated, with only 17% of CEOs currently expecting to downscale office space.

Uncertainty continues to cloud the outlook for demand in the sector. It seems likely that many investors will prize stronger credit quality and longer time horizons. We continue to evaluate the ways in which office layouts and hybrid schedules will impact long-term office demand. Real estate space per employee has been cut in half in the last decade, so there is probably room to grow, but remote working during the pandemic could still have a shrinking effect.

Luckily, real estate investment is a long game.

Elsewhere: Proximity Matters

Elsewhere, our outlook is largely shaped by proximity to the pandemic.
Industries that were better positioned for the economic impact of the pandemic, such as Information Technology (IT) and Health Care, have flourished, requiring more specialized office buildings. We expect companies looking to build upon their recent successes to invest in niche markets that support these sectors, such as data centers, fulfilment warehouses, and lab spaces.

Performance in the Industrial asset class continues to be driven by the demand for e-commerce (and as a result, its warehouses). While we have seen a strong trend in industrial investments over recent years, the pandemic pushed even more consumers towards online shopping — a phenomena worth monitoring as consumers begin to venture beyond their homes more in the coming months.

Demand remains below pre-pandemic levels for service-oriented industries. Hotels and retail establishments, which continue to work with borrowers and developers, have produced relatively few financing-related distressed sales.
The pause in investment activity has made valuations difficult to gauge. From conversations on the ground, we gather that bid-ask spreads (the difference in price between the buyer’s bid and the seller’s ask) for hotels is very wide, highlighting a large variation in price expectations and the need to approach opportunities carefully.

Outlook: Enjoying the Recovery

We foresee inflation expectations rising as the economy recovers. Paired with commensurate growth, this could be a relatively positive environment for real estate. At the regional level, we believe that select opportunities exist in hot markets, like the Cadre 15 — our favorite metro areas in the U.S. These cities outperformed the national average throughout the first year of the pandemic. (1)

More broadly, despite the pandemic’s impact on real estate fundamentals, we continue to believe that a proprietary data mix and tech-enabled analysis combined with our experienced investment team can uncover uniquely bright opportunities for investors.

(1) To illustrate the market's ongoing bifurcation between metro areas with the necessary growth and capital and metro areas that lacked growth and capital, we looked at the 50 largest US metro areas. Then, we aggregated the haves and have nots (10 fastest/slowest or top/bottom quintile markets by 3-year growth) prior to March 2020, which marked the beginning of COVID-19 restrictions. Subsequently, we calculated the returns of the haves and the have nots for two periods—three years prior to the onset of COVID restrictions and in the year of the pandemic. The haves clearly continued to post solid growth, while the have nots downshifted from slow growth to slightly negative growth.


Educational Communication
Not AdviceThe views expressed above are presented only for educational and informational purposes and are subject to change in the future. No specific securities or services are being promoted or offered herein.

Not Advice
This communication is not to be construed as investment, tax, or legal advice in relation to the relevant subject matter; investors must seek their own legal or other professional advice.

Performance Not Guaranteed
Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are not guaranteed and may not reflect actual future performance.

Risk of Loss
All securities involve a high degree of risk and may result in partial or total loss of your investment.

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Investments offered by Cadre are illiquid and there is never any guarantee that you will be able to exit your investments on the Secondary Market or at what price an exit (if any) will be achieved.

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The Cadre Secondary Market is NOT a stock exchange or public securities exchange, there is no guarantee of liquidity and no guarantee that the Cadre Secondary Market will continue to operate or remain available to investors.

Opportunity Zones Disclosure
Any discussion regarding “Opportunity Zones” ⁠— including the viability of recycling proceeds from a sale or buyout ⁠— is based on advice received regarding the interpretation of provisions of the Tax Cut and Jobs Act of 2017 (the “Jobs Act”) and relevant guidances, including, among other things, two sets of proposed regulations and the final regulations issued by the IRS and Treasury Department in December of 2019. A number of unanswered questions still exist and various uncertainties remain as to the interpretation of the Jobs Act and the rules related to Opportunity Zones investments. We cannot predict what impact, if any, additional guidance, including future legislation, administrative rulings, or court decisions will have and there is risk that any investment marketed as an Opportunity Zone investment will not qualify for, and investors will not realize the benefits they expect from, an Opportunity Zone investment. We also cannot guarantee any specific benefit or outcome of any investment made in reliance upon the above.

Cadre makes no representations, express or implied, regarding the accuracy or completeness of this information, and the reader accepts all risks in relying on the above information for any purpose whatsoever. Any actual transactions described herein are for illustrative purposes only and, unless otherwise stated in the presentation, are presented as of underwriting and may not be indicative of actual performance. Transactions presented may have been selected based on a number of factors such as asset type, geography, or transaction date, among others. Certain information presented or relied upon in this presentation may have been obtained from third-party sources believed to be reliable, however, we do not guarantee the accuracy, completeness or fairness of the information presented.

No U.S. or foreign securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through us.

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