The real estate market is not homogenous

Dear CPI Capital newsletter subscriber,

Experienced real estate investors and professionals know. Generally, most property market participants also know.

But it’s easy to forget that the real estate market in any given town, city or nationally is not homogenous. That is, certain market sectors and sub-sectors move independently from movements in the overall market; certain assets may rise in value in one location but decline in another.

At a macro level, the demand for and supply of real estate is driven by many different factors. These may include the state of the local or regional or national economy, changing demographics, new major infrastructure projects, or external factors such as a pandemic or political issues

At a more micro level, local issues or policies can also affect how a property market performs.

So, the temptation is to generalise and say that a certain market sector is performing well or not performing, as the case may be, without really examining the details “behind the headlines” .

Sub-markets and different asset classes

However, in reality, any property market is a series of sub-markets where prices and rentals in different asset sectors are driven by demand and supply (basic economics!), location, type of asset and so on, plus some of the macro factors mentioned above.

“Multi-family homes” have been the property asset class on the lips of, seemingly, every major investor for the past few years. Yet, in some locations, demand for “value-add deals” exceeds supply of suitable properties.

There is still definitely a compelling story to be investing in multi-family homes.... but when more and more investors are turning to the sector, seeking out and acquiring properties across the country, making "above-average returns" will naturally become harder, the opportunity to value-add will diminish.

Indeed,the rush to invest in multi-family assets has compressed cap rates and, going forward, investors will have to be nimbler and more alert to secure great, rewarding opportunities.

But there are alternative sectors or sub-sectors worthy of examination

However, when the investment focus is primarily on one market sector, it’s easy to overlook other less “crowded” sectors or markets or sub-markets that have been ignored by investors.

For example, some may say the hospitality or retail market sectors have been tough over the last 12-18 months, and will continue to suffer from lower rentals and depressed values. But this is just the sort of generalisation that overlooks the fact that the property market is not homogenous.

In fact, in some towns and cities or even locations within such towns or cities, due to local factors and, maybe a relatively, “insulated economy” (that is one which will perfume relatively well irrespective of the national economy due to special factors), the hospitality and retail sectors have been performing well. For example, the necessity based retail sector, such as pharmacies and supermarkets, has shown great resilience and delivered outstanding returns compared to much of retail.

Then there are speciality sectors within sectors such as self-storage or cold-storage facilities. Or those premises such as logistics or warehouse storage which benefit from the ever-increasing rise in on-line or home shopping or food delivery services and where demand is far-outpacing the supply in many areas

Here are CPI we truly understand the ways property markets work and are always looking out for new investment opportunities, irrespective of the sector or sub-sector. To us, it is the asset and the returns which it can generate which count the most!

Indeed, we are not afraid to be creative and consider new ways to “value-add” and create a higher and better use for any currently “unloved assets”.....

Yours sincerely,

- Ava Benesocky

CEO, Co-Founder CPI Capital

- August Biniaz

Chief Strategy Officer, Co-Founder CPI Capital