CRE’s Place in an Investment Portfolio

November 3, 20203 min read
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Yieldstreet’s Mitch Rosen, Senior Director of Real Estate, and Mike Taylor, CFA, Regional Sales Director at Counterpoint Mutual Funds, discuss the role of commercial real estate and the current state of the market amid a pandemic and upcoming election.

Below are a few highlights pulled directly from the webinar. 

Mike Taylor, CFA: We’re hearing about properties losing a quarter of their value, especially hotels and malls. How are you handling a very challenging environment?

Mitch Rosen: Headlines are misleading. While there is no doubt that values are likely lower and in some cases, particularly hotel and retail, way lower, the number cited reflects updated appraisals for loans in CMBS pools. Given the lack of market clarity on value, those can move materially.  

Mike Taylor, CFA: I hear from investment managers and advisors that one of the key difficulties is where to find yield and how to manage risk while seeking reasonable cash flows. With Treasuries and investment grade credit yielding nearly nothing, how should investors be considering their portfolio allocations in this environment?

Mitch Rosen: Investor specific, clearly, but the current low rate of inflation would eat away any return on government debt right now. Investors have to find somewhere to put their money and earn a return. I believe a balanced and diversified portfolio is the key and CRE with yield has a home there.

Mike Taylor, CFA: What are some of the crucial elements in your due diligence—what makes you confident a deal is worth taking the risk, and what are red flags?

Mitch Rosen: First and foremost, the sponsor, specifically their experience and track record, is key. Second, we look at the market the property exists in and the demographics that shape the narrative of the investment. Third, we examine the leverage and basis based on comparable sales and replacement costs.

Mike Taylor, CFA: Some investors are looking to get creative, especially in New York, where the city seems to be transforming before our eyes. What approaches to new uses of space are interesting to you? Which ones leave you more skeptical? I saw a rendering of the Neiman Marcus building in Hudson Yards as a giant office/co-working space and I’m wondering…

Mitch Rosen: Great question. You cannot convert every mall into a trampoline park the same way you cannot convert every hotel to an office or multifamily. Some of the older buildings that have inefficient floor plates or require significant capex are going to go away and be redeveloped. That cycle takes a long time though. I am skeptical of adding more office space. Affordable housing is a sector that clearly has a huge need. The ability to build that product has some strong tailwinds.

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