Embrace necessity-based CRE
By: J. David Chapman/July 20, 2023
The commercial real estate industry has been in a challenging environment. Successful real estate investors anticipate and analyze economic cycles when riding out booms, busts, and even unexpected random events, such as pandemics and weather-related phenomena. The results of this anticipation and analysis may justify an adjustment in investment portfolios. Considering this, I have been advising clients to investigate something called necessity-based commercial real estate.
Necessity-based commercial real estate is defined as properties focused on providing goods and services essential to everyday living. Coming out of the pandemic, we have seen market volatility and changes in nearly every aspect of life. What hasn’t changed is the dependence of the products and services that we consider fundamental to our existence. Remember, the friction we are currently experiencing is primarily focused on certain property sectors, such as office or perhaps the broader capital markets environment, driven by interest-rate pressures, but it’s not a problem with demand for products and services.
Retail, multifamily and industrial assets are historically some of the best-performing asset classes, with a four-decade pattern of generating the highest returns among real estate asset classes. Neighborhood and community retail, garden-style apartments, warehouse, and mini-storage properties have been some of the strongest subsector performers.
Location also will be important, and the key is predicting the trends in migration of population. I would propose that secondary cities away from the coasts will continue to see migration and record-setting population increases, creating significant demand for the products and services delivered in necessity-based commercial real estate. In the end, we measure our performance with occupancy and rent. Small retail, multifamily and warehouse properties will experience the highest occupancy and rents in our industry.
Because of good historic returns to investors, these assets have been difficult to purchase in the last decade. The increase in interest rates and capital market disruptions could be changing this and putting intense pressure on some leveraged investors. Not able to refinance, they might finally be in a position they will consider selling. As a result, this may be a rare opportunity to actually purchase these sought-after assets. You need to take advantage of these buying and investing opportunities.
Necessity retail, like grocery anchors and multifamily workforce housing, tend to be more stable during disruptions. Everyone needs a place to eat and a place to live regardless of market conditions.
J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).