To provide further insight to our clients & partners, on a quarterly basis we will provide highlights from our various investment sectors, offering specific examples of our holdings and significant characteristics/changes that we are seeing. Though we do not believe we are able to fully “time” market cycles, we pride ourselves on the ability to focus on their trends and what we feel a reasonable, conservative approach might be.
Continued value in multi-family investments
HN Co. continues to believe strongly that the multi-family investment market will present opportunities for both stable income and potential upside, relative to asset appreciation. The American housing market continues to display a level of disconnection, which is causing folks to either rent multi-family units for longer, or in some cases, are choosing to make rentals a full-time, lifestyle option. Until we see a significant drop in cost related to single-family home construction/development costs, first-time home-buyers especially will be in a position where renting remains a more feasible option for several more years than maybe it previously would have. This continued demand should act a primer for increased supply on the new construction front and also allow asset owners to continue to charge a moderate escalator on annual rents, as we see current, inflationary pressures remain.
A TIME TO PAUSE AND ALLOW INTEREST RATE INCREASES TO MATERIALLY IMPACT COMMERCIAL REAL ESTATE VALUES
HN Co. continues to remain bullish on the near to mid-term opportunities which may present themselves in the commercial real estate space, specifically as it applies to rental housing and industrial real estate. We do though want to allow the Federal Reserve to finish their cycle of interest rate increases and allow 4-6 months beyond their last hike, before we feel comfortable in understanding what that interest rate impact may be on rates of capitalization with regard to commercial real estate values.
Since the last recession roughly 15 years ago, we have seen very favorable conditions for debt utilization by commercial real estate developers and sponsors, which over time, greatly inflated the underlying asset valuations. The impact to investors such as ourselves was reasonable cash on cash returns, but lower terminal returns upon exit. Much of this can be tied to the fact that during that uber-low interest rate time, investors were looking towards private placements such as real estate as a fixed-income replacement. For a period of time, investor demand was insatiable, especially as they were seeing outsized growth on their investment capital principal.
As asset values reset to more historical levels, investors may well see their cash on cash returns shrink, as the cost of servicing debt has become more expense and leverage ratios will be trimmed back. There is however an upside case to be made where assets purchase points may well reach a place where the ultimate disposition can achieve upside in a fashion we have not seen in quite some time, given the entry point of investment. For now we preach patience to both our internal team, as well as the outside investors we seek to counsel. Take advantage of investment opportunities such as short duration treasuries, while we wait for the Federal Reserve to finish setting the table for what is yet to come.
