Given your assessment of the current and near-term market environment, which trend in CRE has the most upside that is mostly overlooked?
Whats the contrarian play with the most upside in 2022 and beyond given the fundamental market dynamics and where they are headed?
[{"id": "i0bpzja", "text": "Class B office. Buy at 50% occupancy. Value add and bump to 90%. \n\nReal risk. Most people will disagree.", "replies": [{"id": "i0bqhso", "text": "What kinda of value would bring it that much higher? I feel like office space demand will continue to decline. \nJust genuinely curious", "replies": [{"id": "i0brfdk", "text": "I think more flexible office space and coworking spaces. There\u2019s a big chunk of people that like to separate work/home life. Lots of jobs have permanently switched to WFH and a percentage of those people actually liked the separation they got from going into the office.", "replies": [{"id": "i0e564d", "text": "Can attest to that. People getting mad at going back to the office are those workers who aren\u2019t given a choice. As a full time WFH employee, there are days I want nothing more than to have some distance from my home office. Offices will persist, the design and policies that govern their use will change.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "i0bshpn", "text": "I agree it\u2019s a risk. Companies that are coming back to the office want to lure their workers back with Class A facilities.", "replies": [{"id": "i0byduh", "text": "Right, we are seeing many office plays adding value and encouraging worker return by adding luxury amenities.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i0c1kam", "text": "Or buy with some near term roll. Discounted heavily due to fear/uncertainty but it's a trend that's been around since the earliest libraries in Rome. There's real utility to the space that you can't replicate with a laptop and a Starbucks cappuccino.\n\nWhen you're looking at opportunity, cash flow vs. purchase price should be your ruler. And you get the most mileage IMO in this space right now and long term.\n\nJust my biased opinion of course.", "replies": [{"id": "i0c72k6", "text": "The issue with B and even C office is the amount of A space up for grabs at discounts due to companies downsizing and subleasing their space.  Firmly believe that office will always be a use, but discounted rents affect all product types and tenants are naturally going to go to better space if there\u2019s a deal. In addition, if I own class B space, what is my leverage in lease negotiations with a potential tenant when they have so many options? \n\nThen again that\u2019s all thoughts from a multifamily professional that has the thesis that its better to overpay for an asset that you can cycle through a rent roll of 200 tenants in 12-15 months with zero negotiation vs banking on uncertainty to reposition an  assets historical profile to meet current demands. Not knocking office, but definitely feel like it\u2019s a huge roll of the dice. Not comforting when you have half of mega institutional investors exiting the sector with the other half all in on its return to pre COVID performance.", "replies": [{"id": "i0dltdu", "text": "It may depends on local markets. But class A office is doing just fine in Texas. Bi modal distribution, haves and have nots. \n\nSame for retail. If you\u2019re a good location, plenty of demand. Otherwise it just falls off a cliff.", "replies": [], "depth": 4}, {"id": "i0mzd08", "text": "Yeah there's some nuance to it to be sure. If you think about the tenants, lots of users of class B space are small/local businesses that want to be close to home vs. driving into the big city. Class A sublease vacancy doesn't necessarily appeal to them.\n\nIt's not necessarily a \"mark to market\" play in the same way multifamily is. Using my example, you buy a class B property with some roll at call it an 8.5% or 9% cap, then shore up the credit and WALT to users that have a strong business reason to prefer the location. You pretty much move rents to just below your competitive set's quoted rate so you're still marking 20-30% of your rent roll to market over a 5-year hold.\n\nYou're stabilizing into any post-COVID office rebound and your unlevered yield is so strong that you have the luxury of sitting back and waiting for the market to come back.\n\nAdmittedly that's easier said than done. You've got to really understand the ins and outs of the asset class to execute on something like that and lots of people view class B/C office as commodity when it's not *exactly* the case. Versus multifamily which is a simpler playbook but you're exposed to more interest rate risk on your exit.", "replies": [], "depth": 4}], "depth": 3}, {"id": "i0c79fg", "text": "What\u2019s \u2018near term roll\u2019?\nCash flow vs PP. yes.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i0e4mm3", "text": "My favorite kind of asset.\n\nVery nominal expense to upgrade (unless it's a wreck) and you can get 85% of class A rents in some markets.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i0bqxhs", "text": "CBD Office Repositions to MF. In my market everyone wants adaptive reuse SSO now. Towers are emptying out.", "replies": [{"id": "i0h1aou", "text": "I've heard its quite a challenge to take on a project like that. Plumbing comes to mind... not an expert but would like to kno the cost for something like that.", "replies": [{"id": "i0k8cp6", "text": "Right after college I was involved in a construction project that converted a shitty 20 story office building from the 1970's into a hotel.  It was a full gut.  Only the structure remained, but everything - the skin, mechanical, electrical, plumbing, fls, etc was new.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i0btqi1", "text": "Low Building Coverage Industrial. Basically outdoor storage.", "replies": [{"id": "i0ca7o0", "text": "Would agree with this 9-10 months ago, but you now have strong institutional capital being deployed here. Is also about as low barrier to entry as it gets in CRE and is entirely dependent on location (which you\u2019ll pay for). In addition, there\u2019s virtually no control via business plans to differentiate your asset.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i0bz55n", "text": "CBD Hospitality.", "replies": [], "depth": 1}, {"id": "i0c4rk4", "text": "Flex office/industrial if your willing to deal with the small tenants. Would say JV equity in sunbelt multifamily has to feel good with supply so low and  most institutional grade deals trading at 115%-130% or replacement cost. Problem is every equity partner under the sun is lined up trying to get in that space", "replies": [{"id": "i0c9b8d", "text": "And meant JV development equity", "replies": [], "depth": 2}], "depth": 1}, {"id": "i0cpz28", "text": "Unpopular opinion, but retail. Rents are bottoming out, in my area at least, and once lenders get comfortable lending against retail assets again liquidity will likely open back up and yields could come in significantly", "replies": [{"id": "i0dh6ch", "text": "Already seeing this trend in Canada, don\u2019t think it\u2019s contrarian. Good luck buying a necessity anchored asset at a steal right now.", "replies": [{"id": "i0f7r7b", "text": "Yeah I mean it depends where you are really. In the UK retail is absolutely fucked right now, no one would touch it with a stick really, apart from some early opportunistic investors. \n\nRetail is definitely holding up better in some areas vs others", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i0e4c8c", "text": "All of it.", "replies": [], "depth": 1}]