How Private Alternatives Can Help You Weather the Storm in 2023 (January 2023 Insights)
Updated: 1 day ago
Closing the Books on 2022
2022 was a tumultuous year for investing.
Public equity markets moved into bear territory, and more unsettling was the strong correlation with bonds, which investors expect to provide relief from a slumping stock market.
Such harmonized moves and the prospect of a higher inflationary environment have called into question the long-term effectiveness of the traditional 60/40 portfolio, which was down close to 17% in 2022. This is the second worst year on record, eclipsed only by 2008 with a decline of 20%.
Unfortunately, REIT’s did not provide any relief for investors, as they were dragged down with the broader public market due to their strong correlation:
This market setup, and the search for uncorrelated returns, has created a stronger appetite for investors to increase their exposure to alternative investments, and in particular, private alternatives, with a focus on multifamily apartments, self-storage, and industrial leases.
Looking Forward to 2023
2023 presents an interesting environment for real estate syndication investors as higher interest rates have driven a reset in property values. There is a lot of risk in the system at the moment, which will need to be carefully navigated by experienced operators.
One of the advantages of investing in private real estate is that while your investment is passive, the property is being actively managed by skilled operators. Unlike stocks and other investment vehicles, there is more control and numerous value-add and cost cutting strategies that can be utilized to improve the performance of the asset.
The top-tier operators will also look to exploit this uncertain environment by acquiring quality assets, in high-demand markets, at discounted prices. As Warren Buffet famously remarked, investors should be “fearful when others are greedy, and greedy when others are fearful.”
As we evaluate investment opportunities for our Investment Club in 2023, there are three main criteria that will be top of mind:
Invest for Cash Flow: Predictable cash flow has always been the backbone of real estate’s economic resilience.
Leverage with Long-Term, Fixed Rate Debt: In a shifting environment with the potential of rents and revenue decline, fixed rate debt removes a large variable expense from the business, making it easier for investors to preserve capital and ride out the storm of an economic contraction.
Ensure Adequate Cash Reserves: It is vital to have enough cash reserves to cover unexpected expenses, and cover possible shortfalls caused by temporary declining rents.
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