Lou Jacobsohn, Strategic Account Director at Juniper Square, recently led an iREOC-hosted discussion on multifamily investments with a panel of industry experts—Cecelia Chen, Senior Investment Officer at Seattle City Employees Retirement System; Scott Stuckman, Executive Managing Director of the Global Investors Group for USAA Real Estate; and Russell Dixon, President and CEO of RedHill Realty Investment Management and its related companies—representing the perspectives of an investor, investment manager, and operator, respectively.
Managing the unknown
“The risk of a prolonged downturn is real—but our major concern is excessive unemployment,” Dixon said. “We’re seeing some default surging on the business front and a lot of corporate debt accumulating. We don’t see inflation risks. Perhaps there’s some deflationary risk. But all of that is counterbalanced by extraordinary amounts of capital and interest in acquiring this particular asset class.”
Chen emphasizes that as long-term investors, while recent events are important and can exacerbate certain trends, it is more important to carefully perform due diligence the investment managers’ character and process before investing, and then monitor but also trust them. Part of Chen’s due diligence process in risk mitigation is making sure that managers consider different risk scenarios, and model their portfolios based on how different sectors and geographies interact. “Some of our managers are using third-party climate assessment companies to analyze, for every asset that they hold, the risks in terms of fires, flooding, and other extreme weather events. That awareness also leads to better portfolio construction.”
An evolving market
Stuckman recommended looking to recent history for guidance on how the market could evolve. “There was a time following the LA earthquakes when no one was buying anything in LA, certainly not in the San Fernando Valley. Well, fast forward a few years and it became one of the hottest markets in the country again. People get over it. People adjust. Now, everything has to be seismically retrofitted. Everything has to be inspected and up to snuff to be investible and insurable. I think the same sorts of adjustments will happen with the virus, and “pandemic retrofitted” or “pandemic ready” will become a new investment-worthy standard for institutional investors.
“People will start asking, is this a pandemic-resistant building? What does that mean? I think there’s going to be a boom in the industry that provides air handling systems and air purification. All of these factors will become a part of our day-to-day life going forward, just as seismically retrofitted buildings are in Southern California. People will find new ways to get comfortable.”
Good communication is key
Expanding on the topic of transformation in the industry, Chen highlighted technology adoption and the importance of good communication from investment managers.
Chen shared, “A lot of it comes down to how managers track, report, and respond to all the events hitting the industry. Ideally, they have a good system internally that communicates both with the operators and with us, the investors. As an investor, I really want to know more details, especially at a time like this. I want to know the concessions that are being given out now, the pricing trends, and the terms of new leases. All of this up-to-date information will give me a better picture of our current portfolio, where it’s going, and how managers are handling the situation.
“But I don’t have that data for the most part. I only have the headline rent collection percentage that the fund managers choose to show me, presented in a PDF ” Chen adds.
The technology imperative
Chen recognizes that if investors are asking for more data that needs to be processed manually, it takes more resources and places a burden on smaller managers and operating partners who could otherwise be sourcing deals.
“It underscores the need for technology,” Chen said. “I’m very much for platforms like Juniper Square that help enable transparency, and make it easier for both managers and investors like us.”
Moving into the future
Stuckman sees a bright, if altered, future ahead. “We’re all seeing this as temporary. The industry has always been adaptable. In terms of remote officing, virtual meetings and technology—I think the future has been fast-forwarded five years.”
Dixon added, “I’m extraordinarily confident in the sector based on the demand and the continued growth we see in the markets we invest in. That said, with the impact of some challenging economic conditions it will be a little bumpy in a number of markets and classes in the coming year. But we, and our partners remain optimistic and will continue to invest aggressively.
Chen closed out the discussion on an equally positive note. “We’re all in this together. At the end of the day, it’s still a people and relationship business. We really appreciate everything our managers have done, and especially the operators right now, seeing how most investors and even managers can’t travel. After doing our pre-investment diligence and being enabled to properly monitor the ongoing process, it’s about trusting our partners. Together we’ll get through this.”