Real Estate

Finance & Economy

What the future of CRE investing holds with Chris Lee

February 8, 2023

What the future of CRE investing holds with Chris Lee

Chris Lee

KKR’s Head of Real Estate in the America

In a recent Walker Webcast, Chris Lee discusses everything from work-from-home trends to the best investments today.

Kohlberg Kravis Roberts and Co. (KKR) is an American investment firm with nearly half a trillion dollars of assets under management. The firm invests in many assets, from private equity and energy to credit and real estate. I recently had the pleasure of chatting with Chris Lee, KKR’s Head of Real Estate in the Americas, who oversees all of the credit and equity investments that KKR makes in North and South America. Chris is a veteran of the real estate investing industry with decades of experience.

Is now the time to invest, or should you wait?

While there were plenty of uncertainties in the back half of last year, going forward, important factors like interest rates seem to be more range-bound. Given a clearer outlook for 2023 and beyond, KKR has begun to re-accelerate the rate at which it is employing capital.

Although many individuals and firms purchased real estate at the top of the market in 2021 and early 2022, many are apprehensive about jumping back into the market. Many of those same entities purchasing at the top of the market are now trying to time the bottom of the market perfectly. However, KKR is not trying to play that game. Instead, the company looks at key metrics like inflation, yields, and replacement costs to make informed purchasing decisions.

What’s happening in commercial office space?

The commercial office space is certainly a much more challenging space than it was before the pandemic. Everyone went home one weekend in March of 2020, and many people simply haven’t come back yet. Workers still have the power to demand the ability to work from home, and they are exercising it.

Although many companies are trying to transition from a work-from-home model to a hybrid model, workers are often unreceptive. If workers don’t return to the office, companies will have to right-size their office spaces and trade down to smaller spaces.

Building out positions in logistics and industrial spaces

Since the Great Financial Crisis, the way consumers purchase things has shifted tremendously. Online ordering is much more prevalent, which has created a huge demand for industrial spaces and logistics. With the supply chain issues that have arisen due to the COVID-19 pandemic, there is more demand now than ever for solutions to logistical problems. Companies are beginning to move from just-in-time to just-in-case inventory models.

There has also been a shift in terms of which ports are receiving shipments. A couple of years ago, most freight shipped from Asia arrived at West Coast ports. Today, more and more freight liners show up in East Coast ports like Savannah, GA, for instance. This increase in shipments has driven a need to further build infrastructure at East Coast ports.

Financial landscape in 2023 and beyond

Although many economists and analysts are worried about what the Fed is doing regarding interest rate hikes and the potential for a recession, most large corporations don’t seem to have the same worries. Companies are still hiring at an incredible rate, with seemingly no end in sight. Although there have been a lot of layoffs in big tech over the past couple of months, job growth has been stronger than ever, which has led to a very tight labor market.

Chris believes we won’t see many changes to the labor market in the short term. This is because the country is growing GDP at around two to three percent per year, and the country’s population is only growing at around one percent per year. Unless the US finds a way to increase its population in line with GDP, we likely won’t see a solution to the job market problem anytime soon.

Investing in residential real estate

KKR is heavily invested in residential real estate through both credit and equity. Although the company invests in class A, B, and C real estate, the investments are spread across only a few key cities. KKR focuses on buying quality properties in primary markets and tends to shy away from secondary or tertiary markets because the primary markets in which KKR buys still have huge potential for future growth. The cities where KKR is buying tend to have large, established airports as well as plenty of universities either in the city or in close proximity to the city.

KKR does hold a large number of class-A properties, although remaining cognizant of the fact that builders are pumping out huge quantities of class-A properties. If supply growth outpaces demand growth in an area, rental rates are bound to decrease until demand meets back up with supply.

Is the United States still a premier place to invest in real estate?

Although KKR has substantial real estate holdings in the United States, it also has funds that purchase real estate in other areas of the world, such as Europe, Asia, and Japan. Given the ability to invest in real estate anywhere in the world, many investors are trying to figure out which markets will offer the best returns.

The answer isn’t as clear cut as many would think. With interest rates changing at various rates worldwide, the best area for investors to invest will depend heavily on their home currency. It might not make much sense for those who live in an area with a strong currency to invest in areas with weaker currencies subject to massive swings in value.

Read Transcript

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