Moody’s on Friday underscored the U.S.’ “very large” fiscal deficits and partisan gridlock in Washington as contributing factors for the cut. The ratings agency reaffirmed America’s credit rating at AAA, the highest level. This comes three months after Fitch lowered the U.S. long-term foreign currency issuer default rating to AA+ from AAA, also citing expected fiscal deterioration, an increasing debt burden and political standoffs on fiscal and debt issues.
Treasury yields were flat despite the negative outlook, helping traders also look past the downgrade in the equity market. Stocks fell on the news earlier Monday morning before recovering.
“We’re seeing investor reaction to the Moody’s downgrade, but we’re also seeing skittishness around some big developments pending this week. We think all eyes are focused on this week’s inflation data and the resulting Fed policy,” said Greg Bassuk, CEO of AXS Investments.
With that in mind, Bassuk expects market volatility to continue through the end of the year, especially given the ongoing wars overseas. That, combined with mixed economic data, “have resulted in the Grinch fueling the Christmas rally this year.”
Investors are awaiting the release of fresh U.S. inflation data this week, with the latest reading on the consumer price index slated for release Tuesday.
As the market reassesses the value of office properties, investors have been steering clear of many commercial real estate stocks. But there are some healthier spots that could be worth a second look. Greg Kuhl, a portfolio manager at Janus Henderson, said he likes the outlook for Alexandria Real Estate Equities , a pure-play owner of life sciences centers. Even though its stock has been under pressure, Kuhl expects the accelerating pace of health care innovation to stoke demand for laboratory space in years to come. According to Kuhl, the U.S. Food and Drug Administration has been working to speed up the drug approval process, and this has helped drive research and development investment. “We are told that 2023 is on track to be equal to, or maybe the best year ever, in terms of new medicines being approved,” Kuhl said, “so that’s a positive from the innovation perspective and the speed of innovation.” An aging population also will have more medical needs, which will need to be served, he said. The market dynamics Alexandria Real Estate Equities enjoys very high occupancy levels of about 95%, and Kuhl anticipates many of the leases in its portfolio are priced about 20% below market rates. That will provide the company with upside potential as leases mature and renew. The dynamic also provides investors with some cushion should market rental rates come down a bit, Kuhl said, adding there haven’t been any signs of that being the case yet. ARE YTD mountain Alexandria recently hit a 52-week low of $110.64. Still, there is a risk rents could be under pressure as new supply comes online in the industry. Strong demand over the last five to seven years inspired developers to build new centers, he said. Some are being built from the ground up, but others were traditional office spaces being converted into life sciences centers. Kuhl said the conversions usually aren’t as desirable as spaces first developed as labs. “There are some characteristics that are hard to replicate for a real R & D life science user that you can’t really do in a conversion,” he said. Research facilities typically require a lot of specialized equipment, including ventilation systems and electric, and floors often are built to carry heavier loads, he explained. “But once they are up and running, the ongoing maintenance expense and the expense of re-tenanting, we think, is lower than traditional office,” he said, which makes for a much more profitable business. Typically, when office tenants move out of a building, landlords are asked to reconfigure the space to suit the needs of the new tenant. “That happens every time an office turns over,” he said. But lab space is a little different, he continued, saying it’s “much more fungible” and the specialized needs tend to be handled by the tenants. While Alexandria Real Estate Equities has been an active developer, many of its projects already have tenants in place, according to Kuhl. Biotech funding cliff In recent research notes, Mizuho analyst Vikram Malhotra said the stocks of both Alexandria Real Estate Equities and its competitor Healthpeak have been hurt by concerns biotech companies, especially those that went public in 2020 and 2021, will be hitting a funding cliff in the coming months, which will lead to companies either going bankrupt or needing to be acquired. Either outcome could knock the demand for lab space and prove difficult for landlords. In April, Mizuho did an analysis of both companies’ tenant rosters to see what kind of cash runway the companies have. Following that work, Malhotra set buy ratings on both stocks, saying any credit risks in the space are “manageable.” PEAK YTD mountain Healthpeak share are trading near the lower end of its 52-week range. According to his research, about 84% of Alexandria Real Estate Equities’ square footage is leased by public health care companies that have more than eight quarters of funding in hand, while 3% is leased to those that have less than four quarters of funds. For Healthpeak, 72% of its square footage is leased to tenants that are public health care companies with more than eight quarters of funding and only 6% of its space is leased to ones with less than four quarters of funds, he said. Malhotra said he sees lab REITs as a “lower-beta way to play the volatile Life Sciences environment.” His $145 price target on Alexandria Real Estate Equities implies 25% upside from Monday’s close. However, the average analyst price target is even higher, $164, according to FactSet. Alexandria Real Estate Equities’ shares are down 19% so far this year, underperforming both the iShares Biotechnology ETF (IBB) and the S & P 500 , which have lost 1.7% and gained about 12% year to date, respectively. As for Healthpeak, Malhotra has a $25 price target, which is 22% above where the stock closed Monday. Healthpeak’s shares are down about 16% year to date. Other stocks with exposure to the sector include Ventas , Boston Properties and Kilroy Realty . But each of these companies are more broadly diversified and have exposure to other types of commercial real estate. Kilroy, for example, had been focused on properties in the tech hubs, but it now has a growing life sciences portfolio. As for Kuhl, in the short term, he said it will be difficult for Alexandria Real Estate Equities to find a catalyst to move its stock. However, over time, he expects the story to be proven out. “We do think on a longer-term basis, this is deeply discounted, but it’s going to take time to prove to the market,” he said.
Cedric Bobo discusses a new program for Black student-athletes to transition into the commercial real estate market.
Diana Olick | CNBC
When Darius Livingston graduated from the University of California, Davis, two years ago, he knew his football career was over. Like most of his former teammates — and the majority of college athletes — he wasn’t going pro.
Instead, Livingston went into commercial real estate, thanks to lessons he learned from a paid internship program that teaches young students of color the fundamentals of finance, with a particular focus on real estate investing.
The program, Project Destined, is a nonprofit founded by former Carlyle Group principal Cedric Bobo.
Bobo made a name for himself in real estate investing and then decided to pay it forward. He launched the finance program in 2016 primarily for high school students. Then he broadened it to colleges, seeing the opportunity for both internships and jobs before and after graduation.
Eager to diversify their workforces, some of the largest real estate development, finance and management firms have signed on to fund the internships and mentor the students. That includes names like Boston Properties, Greystar, Brookfield, CBRE, Equity Residential, Fifth Wall, JLL, Skanska, Vornado and Walker & Dunlop.
The program has trained more than 5,000 participants from over 350 universities worldwide and has partnered with over 250 real estate firms.
And now, it’s gearing some of its efforts specifically toward Black student-athletes.
After doing a pilot program recently with student-athletes from UC Davis, Bobo has announced a partnership with the Black Student-Athlete Summit, a professional and academic support organization, to offer paid, virtual internships to 100 student-athletes from nine Division I schools. It includes 25 hours of training.
“Program participants will also join executives to evaluate real-time commercial real estate transactions in their community and compete in pitch competitions to senior industry leaders,” according to a release announcing the partnership. “The internship includes opportunities for scholarships and networking.”
Livingston went through the UC Davis pilot in his last semester of college, then got internships with Eastdil and Eden Housing. He is now an acquisitions and development associate at Catalyst Housing Group, a California-based real estate development firm and a financial backer of the new partnership.
“I think, for me, it was really a realization that I probably won’t be a first-round draft pick, and that’s OK,” explained Livingston. “It’s really being exposed to other opportunities. That’s why I’m so blessed to have Project Destined come along and expose me to the commercial real estate industry and the mindset that I deserve to be an owner in the communities that I live in.”
That right of ownership has long been Bobo’s mantra and was the crux of his pitch as he announced the new arm of his program to hundreds of students at the Black Student-Athletes Summit at USC. He wants them to understand that they can create change in their own neighborhoods by owning and managing real estate. More important, he wants them to know that ownership is possible.
“Our program is not just about how we see you all,” Bobo said of the real estate executives who were on hand for the announcement. “It’s how you see yourselves.”
While the graduation rate for Black student-athletes is improving slowly, a lot of students who were showered with resources in school find themselves struggling once they finish their athletic endeavors and get out in the workforce.
“A lot of these kids may think they’re a first-round draft pick, and that is a percent of a percent of a percent of a percent, so it’s really being real with yourself and knowing that you deserve much more than what you’re simply exposed to, and that’s just sports,” Livingston said.
Financial support for the program comes from real estate firms including BGO, Brookfield, Catalyst Housing Group, Dune Real Estate Partners, Jemcor Development Partners, Landspire Group, Marcus & Millichap, Virtu Investments and The Vistria Group, among others.
“The expansion of this platform is a natural evolution of this collective effort and will provide tangible pathways for thousands of Black student-athletes to pursue future careers in commercial real estate,” said Jordan Moss, who is also a former student-athlete at UC Davis and the founder and CEO of Catalyst.
Project Destined also has been working with the NBA and the WNBA to give professional athletes more options after they’re finished with their athletic careers.
Livingston said he thinks athletes make the best employees.
“We play to win,” he explained. “It’s the competitive nature. We want to outwork our opportunities.”
