Where commercial real estate opportunity is emerging across property types

Commercial real estate investors have spent the past several years adjusting to higher interest rates, changing valuations, and a more constrained capital environment. The next challenge is deciding where growth can support investment when a lower price alone may not create a compelling opportunity.

Chris Lee, Partner and President of KKR Real Estate, joined Walker & Dunlop Chairman and CEO Willy Walker on the Walker Webcast to discuss where KKR is finding opportunities across commercial real estate and what the firm looks for before putting capital to work.

Chris described the economic shift underway as a “regime change.” The unusually low interest rates, monetary stimulus, and relatively benign globalization environment that characterized much of the period following the global financial crisis have given way to greater inflation concerns, higher interest rates, higher capital costs, more leveraged government balance sheets, and geopolitical complexity.

KKR remains active in both credit and equity, although Chris said the firm is more selective with equity investments. The process starts with consumer, corporate, and demographic trends that can create durable demand. From there, KKR considers replacement cost, location, supply, and its ability to operate the asset effectively.

The opportunities vary considerably by property type.

Capital markets require a sharper focus on investment basis and growth

A significant volume of loans originated five years ago is reaching maturity. Higher debt-service costs and lower property values can make capital structures that worked at origination difficult to sustain today.

Properties may need refinancing or recapitalization. Owners may need to contribute additional capital. In some cases, owners may need to sell assets. Each scenario can create a need for new capital.

Chris said KKR’s lending pipeline has been particularly robust, including in the multifamily sector. The lending basis is an important part of the opportunity. When a property trades at a reset value and new financing comes in below the new valuation, a lender can enter at a more attractive lending basis than may have been available several years ago. KKR evaluates the opportunity using measures including debt yield and replacement cost.

Chris described KKR’s lending business as highly sponsor-driven. The firm considers the collateral, but it also evaluates the people and organizations behind an investment, including their financial capacity, business strength, and reputation.

On the equity side, higher rates put more pressure on investors to underwrite growth. Chris called the current environment a “stock picker’s market.” Lower prices alone are not enough. Investors need to find assets with a credible growth profile and a manageable supply outlook.

Multifamily: Start with demand, then get specific

Chris considers shelter a resilient category, but he does not view every multifamily market or property the same way.

KKR’s recent multifamily investments reflect several strategies. In some cases, the firm has acquired newly developed properties at a significant discount to replacement cost. Other investments have focused on markets where KKR sees strong employment growth and other sources of housing demand.

Chris pointed to the Bay Area, Puget Sound, and Dallas as examples. In expensive homeownership markets such as the Bay Area, the cost of renting compared with owning can also support apartment demand. Meanwhile, multifamily construction starts have fallen, potentially reducing future supply.

KKR begins with market-level demand, then evaluates the individual property, location, resident profile, supply, investment basis, and sponsor strength. Chris noted more challenges among some B properties, where middle-income residents are more exposed to inflation and rising household expenses.

Seniors Housing: Demographics meet operating expertise

Seniors Housing has been one of KKR’s highest-conviction areas. Chris said the firm has deployed more than $1 billion of equity across its strategies into the sector over the previous three years, including independent living and full-continuum properties.

Demographics are a major reason. The population aged 80 and older is reaching the stage when more people become consumers of Seniors Housing. Chris believes the sector is still early in the demographic tailwinds associated with the growing population of older adults.

KKR began deploying heavily into Seniors Housing in 2023, following the pandemic. Chris said the firm has since seen strong growth and demand.

Seniors Housing also requires more than a sound real estate strategy. Owners operate a business, deliver services, and, in many properties, provide care. Chris views the operational complexity as an area where KKR can draw on its private equity experience and resources across the firm.

For investors, the operating platform can be as important as the underlying real estate. Demographic demand may create an opportunity, but execution determines how well an owner captures it.

Student housing and Build-to-Rent: Housing demand crosses borders

Housing is also a focus for KKR in Europe, including student housing and Build-to-Rent (BTR). Chris cautioned against viewing Europe as a single market. Economic growth, government finances, policy, supply, and population trends vary widely by country.

Student housing offers a good example. Europe, particularly the United Kingdom, remains an important destination for students seeking an international education. Student flows can support housing demand, but supply still requires careful underwriting.

Investors also need to consider alternatives to purpose-built student housing. Chris noted the potential for “shadow supply” if rents rise enough to push students toward other housing options. Pricing power depends partly on the cost and availability of competing accommodations.

BTR fits within KKR’s broader European housing strategy. Chris’ larger point was to follow population and capital flows while avoiding a single investment thesis across very different markets.

Industrial and logistics: Follow the economic activity

Industrial and logistics remain part of KKR’s investment focus, with Europe offering an example of the demand drivers Chris watches.

Reindustrialization and infrastructure investment across Europe could increase demand for logistics space over time. KKR is looking beyond the property itself to the economic activity likely to require warehouses, distribution facilities, and other industrial real estate.

Acquisition  basis also matters. Chris discussed buying existing assets below replacement cost to create a buffer while investing in long-term demand driven by manufacturing, logistics, infrastructure, and other economic activity.

Office: One sector, increasingly different outcomes

Chris considers office investable, but he sees a sharply bifurcated market. High-quality buildings that can attract premium-rent tenants have very different cash flow, valuation, and liquidity characteristics than commoditized properties in markets with significant vacancy.

KKR has lent on office but had not been buying office equity at the time of the conversation. Chris’ comments suggest investors need to look beyond broad office-market statistics and consider where an individual property sits within the widening divide.

Employers’ competition for talent may help support demand at the upper end of the market. Companies that depend on highly skilled employees still need to recruit and retain them. Compensation, culture, and interesting work matter, and Chris believes the workplace itself can play a role. High-quality offices with strong amenities can help employers create an environment where people want to spend time.

Retail: Opportunities outside the core playbook

Retail received less attention in the conversation, but Willy noted KKR’s investments in retail properties across several U.S. markets and later referenced a mall investment in Portland, Oregon.

Chris did not lay out a broad retail thesis comparable to his views on multifamily or Seniors Housing. Instead, the investments illustrate KKR’s willingness to pursue attractive assets or transactions outside its highest-conviction sectors.

Hospitality: Daily pricing does not eliminate operating risk

Hotels can reset room rates daily, an apparent advantage when prices are rising. Chris pointed out that hotel expenses can rise just as quickly.

Strong revenue per available room does not necessarily translate into equally high net operating income when labor and other operating expenses increase. Hotels also require ongoing capital investment to remain competitive, often beyond standard furniture, fixtures, and equipment reserves.

KKR has historically been selective in hospitality. Chris said pricing has not always offered the risk-adjusted return the firm seeks compared with opportunities in other property types.

Experiential real estate: Follow consumer spending

Chris also identified experiential real estate as an area receiving attention at KKR. KKR has invested for nearly a decade around the idea of “experiences over things.” Chris said consumers are spending more on services, a trend he believes accelerated after the pandemic.

KKR’s acquisition of Arctos, which includes a sports investment business, gives the firm another avenue into the experiential landscape. The real estate opportunity comes from identifying the physical spaces needed to support how consumers want to spend their time and money.

The approach is consistent with KKR’s strategy across other property types: Start with consumer behavior and consider how changes in behavior translate into demand for real estate.

Europe: Follow people, policy, and capital

The European discussion also showed why geography can matter as much as property type. Willy raised the movement of professionals and capital among cities, including London, Madrid, and Milan, and Chris noted that government policy can influence those flows.

Conditions vary materially across European markets, reinforcing the importance of diversification and investment pacing. Real estate may be fixed in place, but the people, companies, and capital creating demand can move.

Look for stress without assuming distress

One of Chris’ most important distinctions was between distressed real estate and opportunities created by stress elsewhere in the system.

KKR is not necessarily looking for broken properties. Chris described situations where an external catalyst creates a transaction that otherwise might not occur.

A fund may need to liquidate a portfolio at an unfavorable time. An investor may need to sell an interest in a strong operating business because of challenges elsewhere in its portfolio. A developer may own a good building but lack the incentive or capital to optimize cash flow.

None of those scenarios requires a distressed asset. Understanding why a transaction needs to happen can be as important as understanding the property itself.

Where to look next

Chris returned throughout the conversation to a consistent framework: Start with demand, understand supply, replacement cost, and investment basis, and assess whether the operator can execute.

The combination matters more than any broad call on a property type. Opportunities and challenges can exist side by side within multifamily, office, industrial, or nearly any other sector. The same selectivity applies when owners evaluate refinancing, recapitalization, or a sale.

Walker & Dunlop works with commercial real estate owners, developers, and investors across capital markets and investment sales to evaluate those options and determine the path that best fits their objectives.

Watch the full Walker Webcast conversation with Willy Walker and Chris Lee to learn more.