Jerome H. Powell’s recent announcement that the Federal Reserve is set to cut rates on September 18 signals a pivotal moment in the central bank’s ongoing efforts to tame inflation. While this move brings a general sense of relief and optimism across the commercial real estate industry, the implications for the construction of real estate investment portfolios are more complex.
At Kingbird, our investment philosophy has always been anchored in a disciplined, research-driven approach designed to optimize risk-adjusted returns, with a strong focus on income generation, capital preservation, and downside protection. We pay very close attention to the “top-down” macroeconomic signals like the Federal Open Market Committee interest rate decisions, but our strategy is further rooted in a deep understanding of the micro (“bottom-up”) dynamics at the property and market levels. We believe that an unlevered yield-focused strategy ultimately drives portfolio performance.
For example, New York is a market where Kingbird pivoted its focus to investing in 2021 having identified a supply-demand imbalance in a specific multifamily product type and in particular neighborhoods. At that point in the cycle, valuations indicated mispriced risk. We use a stabilized yield-on-cost metric to assess risk-adjusted return. This approach continues to be the most meaningful benchmark for us to offensively and tactically identify the strongest risk-adjusted returns available in the sector across the U.S – and diving into micro-market trends helps us to build a resilient portfolio that can withstand cyclical headwinds. Our methodical investment process prioritizes the development of durable income streams at the property level that can weather economic fluctuations. Our flexible participation in the capital stack further protects our downside.
As such, our strategy fundamentally involves closely monitoring the capital markets, particularly the status of maturing loans, and analyzing multifamily transaction volumes and valuations. Key indicators, such as the pace of U.S. apartment deliveries, the cost of home ownership vs. renting, and the home value-to-income ratio, for example, offer insights into the long-term fundamentals of the multifamily market, helping us understand the underlying health and potential pockets of inefficiency within the sector.
And, true to our risk management philosophy, we take a disciplined, hands-on asset management approach with an ownership perspective on each of our portfolio assets – overseeing all aspects of the administrative, financial, capital and marketing operations to enhance cash returns and exit value. We focus growing net operating income, irrespective of broader economic cycles.
As we look ahead to the anticipated rate cuts this month, our view is that relief for many properties may not be as forthcoming as some hope. Despite the Federal Reserve’s efforts, Kingbird’s analysis indicates that a significant portion of the market will continue to face challenges. Unlike the foreclosure crisis of 2007-2009, today’s banks are exploring more creative solutions that align better with their balance sheets, as evidenced by recent coverage in industry publications like GlobeSt.com.
At Kingbird, we are well-positioned to capitalize on these market dynamics, leveraging our disciplined approach to identify and invest in properties that exhibit temporary stress in their capital structures and align with our long-term investment goals. Stay tuned for our upcoming piece in September, where we will dive deeper into these trends and explore how our strategy continues to be poised to navigate what lies ahead.
