We talk to an investment firm and manager based in the US northeast about the commercial property sectors it likes – and those it prefers to keep away from.
Commercial real estate has been a mixed bag in recent months, as
the state of the property market shows. According to an article
(May 6) in Capital Economics, the US commercial property
market will not fully bounce back until 2024 because office
buildings are out of fashion.
That’s a 16-year wait, and might be a long time for some of those
looking to make money from commercial real estate (CRE).
Taking a more optimistic turn, US-based firm Hamilton
Point Investments reckons that there are returns to be
had, saying it has consistently made annualized returns of about
18 per cent since its inception in 2009. And it likes
multi-family properties as a source of returns.
HPI, located in Connecticut, is an investment owner and manager
whose investment portfolio spans multi-family properties, hotels,
student housing and manufactured housing communities. It raises
capital through closed-end private equity real estate funds via a
network of independent broker-dealers and registered investment
advisors. To invest, people must put in at least $50,000. The
average size is about $100,000.
“Multi-family has been HPI’s preferred asset class in the last
few years. Preferred since inception is more accurate. Our
first 50 or so properties were all conventional multi-family,”
Matthew Sharp, co-founder of HPI, told this publication in a
recent call. He spoke alongside fellow co-founder David Kelsey.
“We branched out a bit only in 2020-2022 when conventional
pricing was very high (peak-level high), and opportunities in
student [housing] and hotels were strong due to Covid responses.”
Industrial property did well for a period but there was a bit of
a pullback, Sharp said.
HPI is a real estate investment owner and manager whose
investment portfolio spans multi-family properties, hotels,
student housing and manufactured housing communities.
What the HPI story suggests is that commercial property
investment lends itself to the active approach, involving
hands-on understanding of specific markets. Surfing the property
market waves requires poise. After rising for more than 10
years with hardly a break, office real estate prices started to
decline in 2022, as a drop in occupier demand and tightening
credit conditions hit the market. Industrial real estate prices,
which had grown, also were hit in late 2022 (source: Statista).
The Green Street Commercial Property Price Index® increased by
0.7 per cent in May this year. The all-property index – a measure
of pricing for institutional-quality commercial real estate – has
increased 1 per cent in 2024 although it is 21 per cent below its
March 2022 peak.
Returns
HPI said its first seven funds ranged in net internal rates of
returns to investors from a low of 13 per cent to a high of 21
per cent. Weighted for fund size differences, average IRR net to
all investors is 18 per cent. However, its lowest fund IRR net to
investors was 13 per cent and highest was 21 per cent. It has
acquired more than 155 properties since being established.
The firm raises capital through closed-end private equity real
estate funds via a network of independent broker-dealers and
registered investment advisors. It focuses on managing and buying
properties in secondary and tertiary US markets – not big cities.
HPI is a full-service owner/operator and handles as much as
possible in-house – from due diligence and underwriting to
property management, leasing, maintenance, contracting, reporting
and disposition. It raised an average of $250 million per annum.
HPI’s typical leverage is around 55 per cent.
The firm has grown organically – it hasn’t been part of M&A
activity.
The firm favors “sunbelt” and “right-to-work” states (those that
don’t allow compulsory unionization of the workforce). Examples
include North Carolina, Ohio, Indiana, and Texas.
The firm changes its investment themes as times change. So far,
the firm has raised 13 funds. HPI said its funds allow
it to stay open for eight to 10 years, but 100 per cent of
communication and intention is that its funds last four to five
years. All funds to date that have liquated have done so in four
to five years and its current open funds are all under four years
old, except [fund] 8 which is just over four years old and will
be liquidated by year-end. Fund 8 is selling profitably
right now and HPI projects net IRRs of more than 14 per
cent.
Mistakes
Sharp said that in the “peak pricing” years of 2021 and 2022,
debt and equity conditions were easy, leading to syndicators
with “minimal experience” overpaying for multi-family [property]
and aggressive rental growth forecasts, and with floating-rate
debt of 3 per cent.
Instead, “Their debt is now 7.5 per cent and rent growth is flat
at best. Those investments are not going to end well. They barely
worked at their optimistic underwriting, but are just a mile
under water now. Syndicators always seem to go in huge at market
peaks,” Sharp said.
Since HPI’s inception, the multi-family asset class has been
HPI’s preferred holding.
“Our first 50 or so properties were all conventional
multi-family. We branched out a bit only in 2020-2022 when
conventional pricing was very high (peak-level high), and
opportunities in student [housing] and hotels were strong due to
Covid responses,” Sharp said. Industrial property did well for a
period but there was a bit of a pullback, he said.
Hotels and students
Kelsey said HPI had a small hotel fund, playing against fears
amid the pandemic that people would stop traveling.
“We also did a student housing fund during this period
– same opportunity, kids staying home from college and
student housing values declining significantly,” he said.
“We have considered office, strip retail and large retail as
well…we have owned these properties in the past we know the risk
and chose not to engage,” Kelsey continued.