​​​The End of the Single-Asset Class CRE Investor

The End of the Single-Asset Class CRE Investor


Fluctuations in the real estate market can unsettle even the most seasoned investor. Historically, downturns in one sector eventually turn up as economic conditions stabilize while another industry might soften. Investors maneuver through these cycles by diversifying their portfolios — a practice that, perhaps now more than ever, remains key to riding out the current state of the commercial real estate market. 

The Situation 

Despite the macroeconomic recovery from the coronavirus pandemic, the slowdown in activity for commercial assets has lingered. Valuations and occupancy rates for office buildings have dropped to levels not seen since the dotcom bust, while retail properties face mixed projections as inflation remains high and spending on nonessential goods wavers.  

Over the past decade, many ultra-high-net-worth (UHNW) individuals and firms have begun buying into the multifamily residential asset classes as commercial real estate utilization and activity have ebbed. Though current market conditions are not unprecedented, new external factors are in play. 

Approximately 40% of the workforce that previously worked entirely on-site continues to work from home or in a hybrid arrangement, according to Gallup. The continuation of remote and hybrid work policies instituted during the pandemic has led to significant losses in the valuation of commercial office buildings. Since 2020, this sector has shed nearly 200 million square feet of occupied space and experienced, on average, nearly a 10% drop in asset value, according to Deloitte. In the third quarter of 2023, the national office vacancy rate hit an all-time high of 19.4%, according to Cushman & Wakefield, though the growth in vacancy rate has slowed from previous quarters. And about two-thirds of respondents in a recent Bloomberg Markets Live Pulse survey expect the U.S. office market won’t rebound until a severe collapse, while an even greater majority say commercial real estate prices won’t hit the bottom until at least the second half of 2024.  

On a brighter note, Deloitte believes the current office utilization of just under 50% of pre-pandemic levels will hold steady. Tenant demand and absorption remain steady or are even higher than 2020 levels for renovated Class A properties, which are typically situated in prime locations, have been renovated in the past decade and offer multiple amenities and services. However, the outlook for Class B and lower properties is grimmer, even for those in urban centers. “[T]here continues to be demand for the ‘right’ type of office space — new or renovated, high-quality buildings in the best locations and with an array of attractive amenities that drive employee experience,” states Cushman & Wakefield’s Q2 2023 MarketBeat report. “Space that does not meet these occupier requirements may become competitively obsolete and require investment or repurposing.”   

In the U.S., this translates to nearly 60% of existing office inventory needing reinvestment or upgrading, with another 20% requiring significant reimagining to be considered relevant, according to Cushman & Wakefield’s U.S. Macro Outlook: Mild Recession ≠ Pleasant report. 

Though 90% of companies anticipate implementing return-to-office work policies in 2024, according to a Resume Builder survey, many large and longtime private owners and investors have sold and moved away from the once reliable asset class of office properties. For example, Empire State Realty Trust, which historically focused on New York office and retail assets, entered the multifamily market for the first time ever in early 2022. This asset class, as reported in Bloomberg, has attracted other UHNW investors, including Zara founder Amancio Ortega and Ofer Global chairman Eyal Ofer. 

The country’s consistent and strong demand for housing coupled with high interest rates have contributed to multifamily’s emergence as a stable and reliable asset class. “COVID-19 highlighted to everyone that the home is one of the few things you can’t deal without,” Richard Valentine-Selsey, Savills’s head of European living research, told Bloomberg. “You can do remote working and get your shopping online, but you need somewhere to live.” 

The growing gap between supply and demand for housing — and affordable housing in particular — has been exacerbated by high interest rates that have pushed prospective homebuyers into the rental market, which includes single-family rentals, build-to-rent and multifamily housing. Even if housing supply can meet demand, the way people are choosing to live and work will continue to change. Many millennials, Generation Z and baby boomers prefer to rent instead of buy for a host of reasons, including lifestyle flexibility, job mobility, outstanding debt, lower upkeep costs and attraction to urban centers. 

As a result, demand for multifamily rental properties is expected to remain strong in both major and secondary cities. According to Deloitte, many U.S. markets have seen rent growth top 20% since 2019; a short supply of rental properties will likely lead to continued rent increases.  

At the same time, the high cost of borrowing has not only slowed overall real estate investment activity, but also lowered the cost of commercial properties, including apartment buildings; the Green Street Commercial Property Price Index is down 16% from its March 2022 peak. This means now can be a prime time for investors to make deals in multifamily assets. “If you’re a long-term real estate investor, this is an excellent time to be looking to deploy capital,” Ronald Dickerman, founder and president of Madison International Realty, told Bloomberg. “There is a cyclical buying opportunity.” 


More investors are catching on. In fall 2022, investors in New York office properties have begun shifting to multifamily assets, according to Bisnow; at the time, foreign buyers and local private operators were the biggest buyers, with less activity from institutional investors and REITs. Fast forward to Q3 2023 and multifamily was the most preferred sector nationwide with 35.4% of market share in investment volume, followed by industrial (24.6%), retail (18.1%) and office (12.4%), according to CBRE. 

While office properties were once valued for their long-term leases and reliable customer bases, the multifamily asset class has emerged as a consistent investment for many investors looking forward. Though lease terms are shorter, the risk in multifamily assets can be mitigated by buying larger buildings or simply more buildings. Due to their steady demand, multifamily properties can be a useful asset class for investors seeking to diversify their portfolios. 

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For over ten years, redIQ has provided a comprehensive and dependable underwriting service for multifamily acquisition teams, brokers, and lenders focused on mid and large-size assets. redIQ’s solutions lead the industry and support the full underwriting process, from standardizing financial documents to producing a final valuation. With our system, analysis takes less time and decision makers can move forward with greater confidence. redIQ users can close more deals, produce better returns, and spend less time worrying about downside. 

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