Sep 20, 2023
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While the highest interest rates since 2001 have spooked many would-be homebuyers and real estate investors, experienced firms are once again proving that dislocation creates opportunity.
Rather than wait for commercial markets to bottom out or for conditions to return to normal, investment firm First National Realty Partners remains active — and moves fast when the right deals emerge.
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Times of market stress have shown FNRP that it can buy higher-quality properties, otherwise unattainable in normal markets, at a discount. When looking at how today’s uncertainty fits into longer-term trends, accredited investors who see the wisdom in — as Warren Buffett put it — being “greedy when others are fearful” may have a rare buying opportunity indeed.
Navigating volatility with confidence
FNRP favors “necessity-based investing.” In challenging times, consumers will cut back on just about everything but food, housing and discount staples. That’s why FNRP specializes in shopping centers anchored by big grocery chains as well as industrial commercial properties and multi-family apartment buildings close to where people shop and work.
Its strategy has a proven track record of helping investors preserve their capital and grow their wealth throughout volatile times. With the arrival of COVID in March 2020, FNRP acquired essential operating properties yielding 125 to 200 basis points above normal pricing. When markets normalized in 2022, the company was able to sell close to $120 million in real estate at stabilized yields that produced gross internal rates of return of more than 19%.
The company sees a cyclical pattern in buying opportunities. FNRP states that in addition to 2020, the years 1991, 2001 and 2009 all gave buyers the chance to profit handsomely — ’09 in particular marked the height of the Great Recession and a time when investors of all kinds failed to capitalize on the deals available.
To that end, FNRP actively searches the country every day for the best retail and multi-family properties. They acquire them either directly or through partnerships with what the company considers best-in-class local sponsors.
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Retail real estate’s returns
Another reason commercial real estate is so compelling right now: Very few shopping centers have been built since 2007, according to FNRP research. Considering recent spikes in the cost of building materials, labor and land, you've got a situation in which FNRP has a lot of pricing power when negotiating with tenants.
FNRP’s team has leased more than 500,000 sq. ft. over the past 12 months at close to double-digit rent increases over expiring rents. Meanwhile, high interest rates have pushed purchase prices lower — allowing heavy hitters like FNRP to buy better-quality properties at a bargain.
Across the spectrum of retail — from simple single-tenant properties to super regional malls spanning hundreds of thousands of square feet with multiple anchor tenants — FNRP points to solid total annualized returns. Looking at data from the National Real Estate Council of Fiduciaries, retail income and appreciation add up to 5.4% over the last 10 years; 8.0% over the last 20 years and 8.6% dating back to 1977.
Multi-family market strength
When you look at multi-family housing in 2023, an entirely different set of dynamics demands notice.
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FNRP’s research highlights the glaring imbalance between household formation and the lack of housing supply. Indeed, the firm points out this situation has persisted for more than 15 years, creating a lasting population of “renters by necessity” who lack other affordable housing options.
Broken down by income and appreciation, the National Real Estate Council of Fiduciaries has calculated total annualized returns on apartment investments of 7.1% over five years, 8.1% over 10 years, 8.2% over 20 years and 8.6% going back to 1984.
Statistics collected by FNRP that date to 1990 tell a compelling story. Over that period, the total number of U.S. households has jumped more than 40% to roughly 130 million last year. By contrast, single-family home construction plummeted during the Great Recession and has never fully recovered. Housing starts suffered another 20% drop since the onset of the pandemic.
With no change in sight, FNRP expects growing demand for rental apartments will permit significant rent increases that will keep pace with and often exceed inflation.
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Don’t flinch
To navigate today’s challenging markets, First National Realty Partners stresses the importance of looking beyond intimidating headlines about inflation, corporate job cuts and the prospect of a recession.
Dire forecasts demand attention but they can also distract from opportunities that pop up despite — and sometimes because of — market turmoil. And no matter what happens, you can expect continuing demand for necessity-based real estate, which FNRP watches closely in the multi-family and retail sectors.
Accredited investors who see merit in this strategy and the company’s historical performance can take a look at its portfolio of properties, anchored by giants like Walmart and Whole Foods. Today’s buying opportunities, FNRP concludes, are robust — perhaps even unprecedented — so make sure you’re keeping your eyes open, too.
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Lou Carlozo is a freelance contributor to Moneywise.
