Private Real Estate Risk and Opportunity in a Turbulent Market
With the recent market turbulence and changes in the business environment worldwide, it’s becoming more likely every day that we are heading into a recession of some magnitude. The equity markets are down close to 20% and public REIT’s, a forward-looking indicator for private real estate, are down considerably as well.
When markets declined 15% in December of 2018, there was a sell off with no corresponding news. But now there is a catalyst: recent market declines are accompanied by Coronavirus fears and the collapse in oil prices. Consumption and activities have plummeted as business and personal travel is canceled.
In short, this market drop is different.
The good news is that real estate is neither the cause nor the epicenter of the problem as it was in 2008. However, we’re still taking the necessary measures below to ensure we continue to preserve and grow the wealth that our private real estate investors have entrusted to us:
Many of our more than 1,000 investment partners have chosen to invest with us because of our meticulous focus on risk management. We also invest significant personal capital alongside of our investors to ensure that we are aligned in all that we do. Origin was founded at the tail end of the last recession and we know that proactive risk management practices are key to protecting and growing capital in times of uncertainty. We believe the choices we’ve made, such as investing in high growth markets, focusing on quality assets, using low leverage, and buying right, will pay off if fundamentals deteriorate during a recession.
Pausing New Property Acquisitions
We have indefinitely postponed the acquisition of deals we had in late stages of the pipeline that were earmarked for Origin Fund III, the Origin QOZ Fund and our IncomePlus Fund. These deals were valued at more than $241 million and represent 6-12 months of work at Origin. While not an easy decision, the choice was fully supported by our entire team, because they were negotiated in a more normalized market with growth expectations that aren’t likely to play out. The market has changed, and our pricing needs to reflect the new normal, because closing at these prices today would undoubtedly lead to lower performance than our initial projections. Origin bears the operational costs of our team’s time towards identifying, underwriting and negotiating these deals, but this is the best long-term decision we can make for our investors. In the short-term, our new acquisitions will be purely opportunistic, and we will monitor the market fundamentals daily to determine when we should re-enter the market.
Managing Our Current Portfolio
The global supply chain disruption will undoubtedly cause many ground-up projects to be delayed and we want to understand if any of our developments are in this camp. Our in-house asset management team is focused on maximizing operations at each of our properties and we are adapting business plans where appropriate, such as reducing the scope of the capital spend at certain projects in order to conserve cash and protect our basis. We believe this is a time to take risk off the table and we are fortunate to be in the latter stages of selling four properties in our closed funds.
Shifting from Quarterly to Monthly Updates
We will increase the performance reports that we provide to our investors from quarterly to monthly for the remainder of the year. Quarterly reporting works when the market is status quo, but information is changing too rapidly to maintain this standard today. We want our investors to have the same information we have and for them to understand how each property is performing.
The Road Ahead
We will continue to raise committed capital so that we can eventually play offense. Our goal is to position our firm to take advantage of a new pricing environment that is about to emerge, and our team will continue to look for deals that have outsized return potential. We believe there will be a softening of prices to come and a return to a more value-oriented environment, but this won’t look anything close to 2008. While the markets may have been slightly overpriced for the last year or two, both debt and equity players have been behaving responsibly for the last decade. Some of the supply and pricing issues we’ve witnessed in the last two years will take some time to clear the market, but they eventually will. The steps we have taken this week are more than prudent given the information at hand and will set us and our investment partners up for long-term success.