After a two-year hiatus, the Graaskamp Center was thrilled to host its Spring Board Conference at the Ritz Carlton Chicago on April 7th and 8th. Featuring a theme of “These Times They are a-Changin,” keynote presenters and panelists took a deep dive into the pressing issues of our times, including the war in Ukraine, inflation, and post-COVID supply chain issues. Over 140 board members, graduate students, faculty and guests attended the event and we’ve received great feedback overall. Below you’ll find a recap of the dinner keynote.
Mary Ludgin on the Past, Present and Future of the CRE Industry
At the Graaskamp Center’s 2022 Spring Board Conference in Chicago, Mary Ludgin, Head of Global Investment Research at Heitman, spoke on several current topics such as the pandemic, the war in Ukraine, the Federal Reserve and inflationary pressures, and overall the current state of the CRE industry.
She began with the ostracizing effect the Ukraine invasion has had between Russia, its own allies, and less surprisingly the western world. She then continued to discuss the stress COVID has caused on nations and companies to re-shore and near-shore their supply chain systems, predicting these two events to cause friction between Western and Eastern economies and trade. Ludgin continued on to discuss the economy. The Federal Reserve is trying to thread the needle in its inflation reaction with some economists on both political sides predicting a 2.5-3% federal funds rate at least.
In terms of the effects of all of this on Real Estate, Ludgin reflects on how real estate performed stronger during the COVID recession, especially for the industrial and apartment spaces, in comparison the global financial crisis because of public and fed policies. Cap rates compressed over the past few years as investor sentiment had grown for all facets of real estate as seen various risk levels and locations of assets within the debt, private equity, REIT markets. Ludgin predicts that in all the chaos, the US is a good place to be for capital and believes other countries that may be under more pressure will continue to recognize this.
Ludgin believes real estate will again perform as an inflation hedge for some sectors, such as urban apartments and industrial, assuming the Fed successfully threads the needle and we avoid a recession. While highly leveraged buyers will be wary of acquisitions with rates rising, firms looking purely for scale, not yield, such as Blackstone, will continue to provide the demand for copious supply that has developed. The question she poses is whether there is enough buyers with this mindset to keep the large supply of certain sectors in balance. She anticipates a narrowing of yields before repricing of real estate portfolios occurs.
On a sector specific level, Ludgin discussed the haves and have nots; the difficulties of traditional big box mall retail and strengths in mixed use neighborhoods, such as Fulton market. While Fulton market only accounts for 10% of Chicago’s Office stock, it has accounted for 60% of office leasing activity, due to its offering of live-work-play all in one location. She spoke on the overdevelopment of senior housing in the US versus the lack thereof in European markets and the counter cyclicality of student housing driven by domestic demand but hurt by international students inability to travel. Mary made a specific point to not to count out in-person retail, as it is the one sector that has not seen negative leverage as of late. Store openings outpaced store closings last year for the first time in five years and that retailers need to provide a fulfillment functionality for online purchases.
Lastly, Mary touched on the impact of climate change will have moving forward and how migration patterns from gateway to smaller markets will continue to make these secondary markets less affordable and that eventually we may see a reversal in this flow of people as they return to gateways for their infrastructure and culture.