In this edition of Alpha Insights, we would like to invite a deeper discussion on the broader economic and commercial real estate landscape through our updated CRE whitepaper. We are also providing a brief update on our portfolio, including recent transactions.
The Current Commercial Real Estate Landscape
In a course reversal, in the third quarter, the Federal Reserve (the “Fed”) started decreasing the Fed funds target rate for the first time in over a decade, after increasing rates four times in 2018. The US economy is still expanding, continuing the longest streak in US history, supported by a healthy labor market, low unemployment, rising wages and strong consumer spending. However, a global economic slowdown and uncertainty surrounding Brexit and US trade polices threaten to dampen US economic growth.
Although it is difficult to predict if and when a recession will occur, economists have typically used a few indicators to evaluate the health of the economy, including the unemployment rate, wage growth, consumer sentiment, the manufacturing index and the yield curve. Presently the indicators are mixed. The Fed’s rate cuts are perceived to be a preventative countermeasure in an effort to stave off a possible recession and keep the economy growing in an environment overshadowed by uncertainty.
When evaluating investment opportunities, Alpha Investing focuses on asset fundamentals and looks for quality properties in the hands of the “wrong owners.” We seek solvable physical and operational issues that our sponsor partners can improve, conservative capital structures, and we guard against the downside, maintaining focus on risk-adjusted returns relative to current economic or market conditions.
While there is uncertainty about the future economic trajectory, we believe commercial real estate continues to provide opportunities to generate attractive risk-adjusted returns. The two time-bombs that plagued the industry last cycle, over-building and over-leveraging, have been relatively muted this time around with new supply largely concentrated in a few major metros and lenders not overextending themselves. Asset pricing however, is at an all-time high, driven by continually compressing cap rates.
With an understanding of the current commercial real estate landscape and preparing for an environment of slower growth ahead, Alpha Investing is seeking upside potential, but remains focused on downside protection. Our strategy is to target recession-resilient asset classes in markets with strong employment and population growth. Our preferred asset classes include multifamily, senior housing and student housing. We view these as need-based asset classes that should have a more inelastic demand. We will stay disciplined in pricing and seek fundamentally sound investments with actionable business plans to create value and actively generate returns.
The Alpha Investing Portfolio
To date, Alpha Investing has invested in 41 properties across the United States, as well as a commercial real estate debt fund. The total capitalization of the 41 properties in our portfolio is ~$1.42 billion.
- 170-unit garden-style multifamily property in Fremont, CA in the East Bay of San Francisco.
- Fremont, CA is the fourth largest city in the Bay Area and second largest in Alameda County. With easy access to the BART and the freeway, there are over 2.4 million jobs within a 25-mile radius of the property. Fremont itself boats prominent employers such as Stryker, Tesla Motors, Lam Research, Seagate and Boston Scientific.
- With lower office and apartment rents compared to neighboring cities and Silicon Valley submarkets, Fremont represents a more affordable alternative while maintaining convenient access to major employment centers.
- The sponsor will implement a strategic value-add program by adding washers and dryers in-unit, updating kitchens and bathrooms, and enhancing the property’s common areas.
- 366-unit multifamily property located in Colton, CA, in the Inland Empire of Southern California.
- Inland Empire is recognized as one of the highest-performing multifamily markets in the country. Since 2013, average effective rents have grown ~5.4% annually, while occupancy rates have averaged ~96% in the Axiometrics-defined submarket of Fontana/Rialto/Colton.
- Colton offers housing affordability and proximity to retail and job opportunities, including Amazon and Loma Linda University, and convenient access to prominent employers in San Bernardino (~5 mins), Redlands (~10 mins) and Riverside (~10 mins).
- The sponsor will rebrand the property through a $6 million strategic value-add renovation program.
As always, we appreciate your interest in Alpha Investing. Please feel free to reach out to us at any time.