Fiddich Review Centre
Alternative Investment

How Investors Can Gain Access


Jeffrey Schwaber is the Chief Executive Officer of Bluerock Capital Markets overseeing the company’s capital markets, securities sales and distribution operations.


Russ Alan Prince: Many advisors have moved away from the 60/40 portfolio model and welcomed alternatives as an inflation and recession hedge. How can retail investors gain access to these alternative investments and what benefits are asset managers seeking to deliver?


Jeffrey Schwaber: Advisors are rethinking the 60/40 portfolio model because it has faced significant challenges in recent periods. Notably, stocks and bonds have been highly correlated to each other this year with significant value declines. The good news is there has been widespread democratization of institutionally favored alternative investments underway for many years by quality asset managers to provide individual investors greater access to alternative asset classes. This includes real estate, private credit and debt, and many others, all with varying levels of risk. 


In the current environment, investors are seeking alternative investments for their ability to act as an inflation and interest rate uncertainty hedge, a challenging objective for stocks and bonds. Accordingly, meaningful allocations to alternatives of approximately 20% or more of investable assets are commonplace today. Bluerock offers ’40 Act interval mutual funds and common and preferred REIT securities meeting the growing investor demand for income, tax efficiency, growth, stability of NAV/principal, and low correlation to the stock and bond markets; the keys for higher risk-adjusted returns historically.


Prince: Expectations are that we may be headed toward a recession. Can real estate performance be sustained and what’s your outlook heading into 2023?


Schwaber: Certain economic indicators are pointing toward the possibility of a recession in 2023. However, real estate market fundamentals remain very healthy. For perspective, during the 2020 recession in which real estate fundamentals were healthy going into the pandemic, real estate generated a positive return of 1.6% according to the National Council of Real Estate Investment Fiduciaries which tracks all major real estate sectors, with all major commercial real estate sectors generating positive returns other than retail due to the impact on retail from the COVID-19 pandemic. 


Prior to the 2020 recession, the Global Financial Crisis of 2007-09 was a period in which real estate was incredibly overbuilt and overleveraged leading to real estate returns of negative 17%. Today, the three key factors that previously negatively impacted real estate returns are healthy—supply, leverage, and jobs. 


Real estate supply as a percentage of total inventory is the lowest it has been in the trailing 10-year period compared to previous periods and is forecasted to remain at lower levels. The use of leverage in the post Global Financial Crisis recovery from 2009-2022 has been the lowest of any real estate/economic recovery in the last 40+ years due to lessons learned. On the jobs front, the unemployment rate was 3.7% as of November, near the lowest level in 10 years. Over the course of the 44-year history of the National Council of Real Estate Investment Fiduciaries Property index there have only been four down years as a result of a combination of either overleverage, overbuilding, and/or high unemployment, none of which currently exists. 


We believe heading into 2023, real estate is well-positioned and poised to further accelerate economic recovery. Furthermore, private institutional real estate, Bluerock’s focus, has actually outperformed its long-term return average of 9.7% annually by between 20% and 50% during rising rate and inflationary periods, both of which exist today.


Prince: Are there any sectors within real estate or private credit that Bluerock is bullish on at the moment?


Schwaber: Bluerock’s focus is to provide investors with access to institutional asset classes that possess long-term structural tailwinds and the opportunity for asymmetrical high-risk-adjusted returns that favor the investor. Based on this premise, our bullish sectors in real estate include the industrial, life science, and single-family residential sectors.       


On the industrial side, one of the most significant drivers has been the growth of online retail—e-commerce—which is driving outsized demand for warehouse and distribution centers. By one estimate, every additional $1 billion of e-commerce sales requires 1.2 million square feet of new warehouse space and with $830 billion of projected e-commerce sales by 2026, approximately one billion square feet of additional industrial space will be needed by 2026. We simply cannot build that fast, especially with inflated commodity prices and a disrupted supply chain. And this new demand isn’t cyclical, it is structural. E-commerce is expected to more than double as a percentage of total retail sales over the next 20 years providing a great opportunity for investors as this increase in demand has already boosted rents by record levels, pushed occupancy rates to record highs, and is expected to result in rising rents and property values in the future.


We believe life science real estate offers an attractive long-term investment opportunity based on the significant growth in biotech research, coupled with physical requirements that make tenant movement prohibitively expensive and geographic concentration with only a few hubs nationally due to specialized human capital. These systemic underpinnings will continue to drive rents and property values in this specialty sector. 


The most fueling force in today’s residential housing market is the significant undersupply of apartments, single-family rental, and for-sale housing which is currently estimated at a combined 3.8 million households. The for-sale market has slowed substantially due to much higher borrowing rates and high prices creating undeniable affordability issues. The lack of housing coupled with a substantial increase in ownership costs is expected to spur even greater demand for single-family rentals and multifamily for many years to come.


In the private credit sector, we are bullish on senior secured loans which are secured as first-lien positions to corporate assets and cash flows. Bluerock’s ‘40 Act institutional credit fund provides access to SSLs through actively managed portfolios of collateralized loan obligations. Collateralized loan obligations have delivered both high income—14.8% annual average since 2003—and very strong total returns through several market cycles, including periods with rising rates and inflation such as the current environment. They also have required structural safeguards such as ongoing diversification and collateral tests for the benefit of the investor.   


RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals. 

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