Strategies for this Cycle

The last three years have been turbulent, and I could point to numerous events that have been unprecedented: a global pandemic, record-high inflation, geopolitical events and rising interest rates—all of these macroeconomic issues we have had to navigate. Yet, even with these headwinds, 2022 was another record year of investment activity for Peachtree Group. In addition, we solidified Peachtree’s foundation for our next growth phase and continued to expand our investment offerings. I feel confident in saying we are meeting the moment.

Another macroeconomic issue is looming, and that is the prospect of a recession. It is worth noting that no two are alike, and if a downturn does occur, I believe it will be shallow and short-lived.

As a member of the Real Estate Roundtable, which includes executives from the top publicly held and privately owned real estate ownership, development, lending and management firms in the U.S., we were recently asked about current market conditions and the future outlook in real estate. The consensus among these executives is that while uncertainty remains, there is optimism about future market conditions.

Of note from the survey: “This is not like the Global Financial Crisis of 2008 for a couple of reasons. First, more firms are not overleveraged. Second, firms still have capital to invest; there’s just a higher threshold required to invest than in the past few years.”

Further, the group also expressed that perceptions and outlooks differ across asset classes, as some sectors remain strong and others show concerns. While any recession has the potential to reduce demand, each sector has its own dynamics.

I have sung the praises of hospitality before and will continue to do so. The industry’s fundamentals remain strong, and the long-term growth trends outweigh near-term macroeconomic headwinds. The acquisition market for premium-branded hotels, which was slow last year, is improving. Also, higher interest rates make it compelling to be a lender as you can achieve equity-like returns.

By the sheer number of opportunities we are reviewing, transaction velocity will pick up for us. We are following our sound investment and underwriting decisions and recommendations that served us well these past few years – focus on the underlying asset’s investment basis with the right hotel brand in the right submarket with the right drivers of demand. These assets will outperform competitors on average and protect us from downside risk.

The opportunities we are experiencing in hospitality are happening across other sectors, and now we have the in-house capabilities to pivot to these investments. To date, we have deployed hundreds of millions of dollars in investments beyond hospitality with loan originations and mortgage loan purchases. Our CRE lending group, Stonehill CRE, started at a fortuitous time with volatile market conditions creating a dislocated lending environment.

The current Secured Overnight Financing Rate (SOFR) curve, a broad measure of the cost of borrowing, forecasts rates to remain elevated through the year with rates normalizing in 18-24 months. Short-term disruptions and uncertainty will not stop us from investing in the market and extending credit for the right deals.

For example, the CRE group has completed several transactions in the retail sector. The properties are five malls which have sound occupancy levels and debt service coverage ratios with strong sponsors who have solid plans to stabilize cash flow levels, which took a hit during the pandemic.

As quoted in the Commercial Observer, Daniel Siegel, president of Stonehill CRE, described the rationale for these investments: “The one thing that these transactions all have in common is the malls are all trading at 30% of the last trade value. So, all of these are situations where we feel that the headline risk associated with the asset class has become outpaced with the actual cash flow of the assets themselves.”

The cyclical nature of commercial real estate is well known, and as an experienced investor, we are well-prepared to take advantage of market disruptions. During an economic downturn, overleveraged owners will need to transact, which presents opportunities for us to acquire properties at a lower cost basis or provide financing.

We are prepared for slower GDP growth and continued volatility in asset pricing. Accordingly, we will balance risk and return, with a focus on properties and sectors that can weather economic volatility and stay prepared to take advantage of future opportunities that arise during this period.

I am confident in our ability to find opportunities in all market conditions.

Greg Friedman
Managing Principal, Chief Executive Officer

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