Bluerock’s Q3 2023 Market Insights Newsletter
In This Issue…
- New CLO Managers Eye $1.3 Trillion Market, Betting on Return
- $205B of Dry Powder Ready to Pounce on Distressed CRE Assets
- ‘Core’ Real Estate Definition Shifts as Investors Embrace Niche Sectors
- Why Mutual Funds and Interval Funds are More Different Than You Think (Liquidity Timelines are Just a Start)
- Morningstar: Multifamily Should Remain Strong Despite Uncertainty
- New Data: Going Forward, Traditional Asset Classes May Be Insufficient to Achieve Return Goals
- Research Report: KKR, Private Wealth Investment Playbook
New CLO Managers Eye $1.3 Trillion Market, Betting on Return
Tighter AAA spreads are good news for CLO equity investors: “A key metric — CLO spreads — is already starting to improve. Triple-A rated portions of CLOs in the US, which make up 60% of the bonds, have come in, with some recent deals pricing at around 170 basis points over the Secured Overnight Financing Rate or tighter, after extending to around 260 basis points in late 2022 amid a lack of demand.
Source: Yahoo Finance/Bloomberg
IN THE NEWS
$205B of Dry Powder Ready to Pounce on Distressed CRE Assets
The rise in Treasury yields has increased cap rates and decreased valuations, however plenty of capital is positioning to invest which could lead to a recovery bounce in values, another reason why the average investor shouldn’t try to time to the bottom.
‘Core’ Real Estate Definition Shifts as Investors Embrace Niche Sectors
Core real estate used to be the four main “food groups” – office, industrial, retail, and apartments. However, investors clinging to this historically narrow definition have missed out. Industry groups are rapidly adapting to expanding the definition to include several other non-traditional sectors.
Source: Fund Fire
Why Mutual Funds and Interval Funds are More Different Than You Think (Liquidity Timelines are Just a Start)
Interval funds and mutual funds have much in common, but some key differences including the level of illiquid investments, redemptions, and other differences.
Morningstar: Multifamily Should Remain Strong Despite Uncertainty
While Morningstar believes there could be a looming recession, they conclude “While single-family home inventory remains scarce, multifamily owners and investors can continue to expect relatively stable net operating income, which can help mitigate the effect of rising interest rates. If underlying performance remains stable, investor returns in the multifamily market should outperform other major real estate sectors.”
Going Forward, Traditional Asset Classes May Be Sufficient to Achieve Return Goals
Source: KKR, Private Wealth Investment Playbook | August 2023
KKR, Private Wealth Investment Playbook | August 2023
Read Full Report
Following the banking crisis and plans for increased regulation, there are more opportunities for private lenders to fill the financing gap left by traditional banks. Against this backdrop, we think Private Credit and Private Real Estate Credit are compelling. Investors should also consider higher quality, yielding opportunities available in Liquid Credit.
We believe Infrastructure and select Real Estate investments can provide attractive sources of return while protecting purchasing power in a higher inflation environment, particularly as rates begin to normalize. These asset classes generate upside potential if operators boost profitability of the underlying asset, especially in thematic areas that may benefit from sustainable, long-term industry tailwinds.
With the market bottom hopefully behind us, we think it could be an opportune time to begin to lean in given the compelling entry point. Investors have become more comfortable taking on risk since the start of the year. Market timing is likely to be less effective and waiting until the dislocation ends may prove long term costly.
QUOTES OF THE QUARTER
So, a predicted rise in the 10-year rate to 4.75% from 2.2% would cause a 150-basis-point increase in the average cap rate. Under this scenario, a prime asset trading at a 4.5% cap rate would now trade at a 6% cap rate, equivalent to an approximate 25% fall in capital values
Global Chief Economist for CBRE
At current ODCE weightings, the inclusion of alternative sectors contributes minimally to aggregate total returns. If the portfolio allocation to alternative sectors was increased to 40%, however, the NPI-ODCE would have seen an average additional 230 basis points of average annual total return outperformance from 2011 Q4 to 2023 Q1. With many of these sectors struggling from secular demand shifts, or facing correlated performance during downturns, core real estate is constrained without the inclusion of more alternatives.