Investment Panel Discussion: Transatlantic Trends Across US and European Real Estate

PineBridge Investments hosted a mix of UK asset owners and consultants who joined their discussions during the event “Beyond the Pitch: Alternative Credit Insight During Euro 2024”.

Moderator Hani Redha, PineBridge’s Multi-Asset Portfolio Manager, led the panel “Corner Kicks and Capital: Unlocking Real Estate Potential in the US and Europe,” a cross-Atlantic discussion between PineBridge Benson Elliot’s James Jakeman, Blue Vista’s Head of Real Estate Credit Strategy, Shawn Townsend, and Phoenix Group Senior Investment Manager, Kyle Audley.

Panelists noted that the outlook as well as key risks and opportunities showed some notable distinctions between the US and the UK. Here we share key takeaways from their discussion.

Easy liquidity in the US has ushered in risks

In the US, easy liquidity has opened the door to a range of risks.

Shawn Townsend explained, “I think it’s a perfect storm in the US, and one we’ve watched roll-in slowly, yet still everyone is shocked. I have a great deal of optimism in that the best time to be deploying debt capital is when we’ve hit bottom, because it can be viewed as a kind of filtering factor. When we have easy liquidity for a prolonged period, it invites a lot of inexperience, heavy leverage, and loose covenant structuring. That brings more risk into the sector. When you put some discipline back on the table – a lighter liquidity environment or a tougher liquidity environment – you get better assets, better structure, better sponsors.”

The US is still recovering from the effects of Covid on the market. Townsend commented, “As we recover from Covid, we’ve really been going through the seven stages of grief, but we’re finally at the period of acceptance – the market is no longer clicking its heels and hoping that the Fed bails it out. That means there will be a lot of impairments that need to be cleaned up, and as real estate is driven by debt, lender balance sheets will need to be fixed first, largely in the banking sector. Yes, we are going to see more bad news and realized losses as a result, but there is a ton of capital to take advantage of nonperforming loans and opportunistic debt that will then free up the transaction flow for traditional market rate deals, along with high yield transactions, which I think a lot of us are teed up for and excited about.”

In terms of specific areas of risk to be aware of in the US, Shawn noted segments to watch across asset classes. “Offices clearly are a risk, while retail can be approached surgically, and hospitality is very specific and specialized in the US,” he said.

A thoughtful approach to opportunities

In the UK, credit is more attractive than equity in real estate investing.

“I think on a risk-adjusted basis, in terms of investing in real estate, being in the credit space at the moment is far and away the best place to be in Europe,” James Jakeman said. “I think that if you can get an outsize relative return, great sponsorship, and really strong underwriting that lets you sleep at night, real estate credit is attractive.’’ ….”

Kyle Audley explained Phoenix Capital’s stance, “We're pretty defensive and focus on high credit quality, so we’re really looking at robust property value, really resilient business models – but potentially something that, in the wider narrative, is a little out of favor so still provides us with attractive relative value.”

An undersupply of rental housing versus demand in all subsegments in the US, including market rate, affordable, workforce, student, and build-to-rent units, exacerbated by the increasing cost of homeownership. Other areas of opportunity include storage, which he called “the best-performing asset class in the US during Covid,” and logistics, particularly more regional and service-oriented areas such as last-mile delivery, cold storage, and third-party logistics (versus multimillion-square-foot retail warehouses).

The panellists touched on the difference between the US and European markets in terms of constraints around historical preservation and other distinctions, and how they influenced investment opportunities.

“Our focus is in Europe, and for the last 15 years, European real estate and GDP performance have struggled to deliver against US counterparts. … I'm hoping that the gap in performance narrows, and while Europe always trails the States in terms of demand and GDP, I believe in a softer landing for Europe because we have tighter supply. We have land constraints, planning constraints, and heritage here – all underpinning a tightly supplied market,” commented James Jakeman.

Migration trends are a key force

Migration was another key topic in the real estate discussion, with panelists emphasizing that the US market is not a monolith but rather a multitude of distinct markets. Beneath the broad 1%-2% growth projection for multifamily rents over the next couple of years, for instance, lie stark differences among the various metropolitan statistical areas (MSAs).

“We underwrite at the city level and the MSA level, because there has been a profound demographic shift in the US over the past 30 years,” Shawn Townsend said. “It’s going to be an interesting adaptation for global capital, because unlike in Europe, we’re seeing movement out of gateway cities. Traditional states that are home to these cities like California, New York, Massachusetts, Illinois, and New Jersey have seen approximately 15 basis points of population loss year-over-year, and it’s gone to secondary markets like Texas, Florida, and the southeast, which have picked up around 2% year-over-year.”