“With the U.S. adding 30 million people a decade, it costs too much in infrastructure, fuel and time to continue sprawl-inducing development practices. As a result, new suburbs today are denser and the re-use and repurposing of existing communities have become a key element of land-use policy.”
VICTOR MACFARLANE, Managing Principal, Chairman and CEO
MacFarlane Partners looks to capitalize on the burgeoning smart-growth movement and other socioeconomic trends that favor higher-density, urban-style living over decentralized sprawl. Our investments are concentrated in U.S. “Gateway Cities” — leading U.S. metro areas with dynamic economies, favorable demographics, strong real estate fundamentals and vibrant cultural communities.
Different real estate cycles call for different investment tactics. During periods of economic growth, rising tenant demand and intense investor interest, development-related investments typically provide the most attractive risk-adjusted returns. In those cycles, investors price existing assets dearly, while property supply/demand fundamentals support new additions to market space inventories.
Opportunities can abound for deep-pocketed investors in down markets as well, but recognizing them requires a shift in thinking. With property values low, tenant demand sluggish and capital often difficult to obtain, investors should focus on existing buildings—buying an operating property, providing equity and/or debt to a liquidity-seeking property owner, or making a “loan-to-own” purchase of a note from a discouraged property lender.
A useful tool for gauging market cycles is the trailing one-year total return for the NCREIF Property Index, the long-time benchmark for privately held, institutional-grade real estate assets in the U.S.
When the NCREIF-to-Treasury spread falls below the long-term average, the market cycle has shifted, and investments in existing properties should provide more attractive risk-adjusted returns.
When the spread between one-year NCREIF total returns and 10-year Treasury bond yields exceeds the long-term average (approximately 291 basis points.), the time is likely right to build new properties rather than buy existing buildings.