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bove Midtown Manhattan, New York City, lies a challenging landscape for real estate investors like the State of Wisconsin Investment Board (SWIB). In a recent podcast, Jason Rothenberg, head of real estate at SWIB, outlined the difficulties. With a $12 billion portfolio overseen by seven team members, only 5% is invested outside the US due to tax, legal, and currency risks.
The allocation is diversified across types, geographies, and structures, with residential and industrial exposures making up two-thirds of the balance. However, office space remains a significant challenge. Leases for office buildings are typically long-term, protecting investors from initial pandemic impacts. Yet, as leases mature, companies are rethinking their space needs.
Rothenberg noted an uptick in companies requiring employees to spend more days in the office or work full-time. This has driven a "flight to quality" in the office sector, creating winners and losers. Investors must identify top-performing buildings or risk investing in underperforming properties. The market is characterized by pockets of opportunity rather than broad trends.
New York City's office market has rebounded quickly, while central business districts have regained vitality in cities like Seattle, San Francisco, and Denver. However, small retailers remain vulnerable, and other areas within these cities may be less vibrant. This requires investors to adopt a building-by-building approach, avoiding underperforming properties.
The pandemic's impact is still felt in other sectors, such as warehouse space, apartments in sunbelt cities, and self-storage. Developers overbuilt during the surge in demand, leaving excess capacity. Higher interest rates, another pandemic fallout, are impeding returns by increasing borrowing costs and reducing market values.
Despite these challenges, Rothenberg remains optimistic about real estate investing. He prioritizes accessing top research and local knowledge to evaluate long-term assets. The vibrant debt market and competition between lenders will help reduce borrowing costs. Construction costs have risen, but supply could be crimped in the future once the current pipeline is absorbed.
The current policy environment also presents challenges, with corporates delaying decision-making due to uncertainty. Tariffs haven't boosted demand for stockpiling or warehouse space, and the US administration's plans to onshore manufacturing may impact real estate demand in several years' time.
