Real Assets

The Real Estate Neighborhood

February 14, 2022
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Let me set the scene for you. It’s New Year’s Eve in Portland. I live on a small street; there are six homes including mine. Lucky for me all my neighbors are in real estate and each of them specializes in a different property type. This year we decided to have a progressive house-to-house celebration to ring in the new year.1 

 

The first home on the circuit was the retail property type specialist. I expected a modestly upbeat tone with mandated store closures and a reasonably good holiday season in the rear-view mirror, but there were not a lot of decorations. The hosts looked simply exhausted. NCREIF NPI retail performance for calendar year 2021 was 4.22% (4.71% income offset by -0.47% appreciation). Topics of discussion included retail registering its fifth consecutive quarter (Q4 2021) of positive net tenant demand (translation: more openings than store closings), vacancy dropping to its lowest level in history, and rent growth posting positive change in the range of +2%. Retail fund managers are fielding unsolicited incoming queries from investors looking for relative value.   

 

We then walked over to the home owned by the warehouse property specialist. As we approached the home, the garage door was open and it was overflowing with Amazon boxes. Inside, the punch was flowing, a disco ball was spinning from the ceiling and there was no shortage of caviar. NCREIF NPI 2021 performance was an eye-popping 43.3%, made up of 38% appreciation and 4% income. Including 2021, average annual performance for this property type (going back 30+ years) is around 10%, meaning four years of average annual performance was captured in a single year. Record-breaking tenant demand translates into new developments (running at a pace of over 100M square feet a quarter) that are almost 70% preleased when completed, rents up 7% or more relative to a year earlier, and vacancy in the low-single digits. No one wanted to leave this house! 

 

The office specialist. Unfortunately, this house was dark with a sign on the front door that said they decided to relocate to South Carolina and work from home. The warehouse specialist mentioned interest in buying the home, which would make his two houses adjacent to the retail house, potentially allowing for the creation of a retail/warehouse compound in the future. NCREIF NPI performance for office space in 2021 was reported to be positive, with 6.12% total return, which breaks down to 1.57% appreciation and 4.49% income. Uncertainty related to tenant and investor demand, work-from-home and retrofit costs for aged building stock were all topics of discussion while we walked to the multi-family house.  

 

At the multi-family house, a similar but smaller punchbowl restored the celebratory New Year’s Eve mood – but without the caviar and disco ball. NCREIF NPI total return for 2021 was 19.9% with 15.7% appreciation and 3.8% income -- a solid year of performance. With home prices reportedly up 20%, multi-family landlords were able to drive rent increases across garden style, low-rise and high-rise apartments increasing values for all the multi-family sub-types tracked by NCREIF. Vacancy across single family rental and multi-family dropped to the lowest national average in over 30 years. Population migration, a shortage of inventory and supply chain complications slowing delivery of new homes and multi-family appears to set the stage for continued positive momentum.  

 

The last house, where we planned to end the night, was that of the hotel specialist. Given this person owned city center conference/convention hotels, and wanting to close out the night on a high note, the party ended with discussions about the impending recovery and conferences scheduled for 2022, and how next year we should include the cruise line family, a block over 

 

Endnotes 

 

NCREIF Property Index – The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market f or investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors – the great majority being pension funds. As such, all properties are held in a fiduciary environment. Source: Bloomberg


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The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future. 

All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable, but the accuracy of such information cannot be guaranteed. 

This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein. 

Certain of the performance results included herein do not reflect the deduction of any applicable advisory or management fees, since it is not possible to allocate such fees accurately in a vintage year presentation or in a composite measured at different points in time. A client’s rate of return will be reduced by any applicable advisory or management fees, carried interest and any expenses incurred. Hamilton Lane’s fees are described in Part 2 of our Form ADV, a copy of which is available upon request. 

The following hypothetical example illustrates the effect of fees on earned returns for both separate accounts and fund-of funds investment vehicles. The example is solely for illustration purposes and is not intended as a guarantee or prediction of the actual returns that would be earned by similar investment vehicles having comparable features. The example is as follows: The hypothetical separate account or fund-of-funds consisted of $100 million in commitments with a fee structure of 1.0% on committed capital during the first four years of the term of the investment and then declining by 10% per year thereafter for the 12-year life of the account. The commitments were made during the first three years in relatively equal increments and the assumption of returns was based on cash flow assumptions derived from a historical database of actual private equity cash flows. Hamilton Lane modeled the impact of fees on four different return streams over a 12- year time period. In these examples, the effect of the fees reduced returns by approximately 2%. This does not include performance fees, since the performance of the account would determine the effect such fees would have on returns. Expenses also vary based on the particular investment vehicle and, therefore, were not included in this hypothetical example. Both performance fees and expenses would further decrease the return. Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. 

Hamilton Lane (UK) Limited is authorized and regulated by the Financial Conducts Authority. In the UK this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients. 

Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws. 

Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision. 

The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein. 

The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners. 

As of February 14, 2022

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