We recently had the opportunity to speak with Keith Lampi, CEO of Inland Private Capital Corp (IPC). Keith was present at the creation of DST nearly 24 years ago. He was one of the “Young Turks” at Inland helping create new securitized real estate product. To say he knows his way around the block when it comes to commercial real estate and DSTs is an understatement.
Keith offered us great insight regarding the changing commercial real estate landscape. First and foremost, he believes the traditional institutional investment mix of; office, retail, industrial and multifamily is dead, gone, done, finished.
Institutional investors have been bailing out of office as fast as possible. In the last four years, institutional portfolio allocation to office has gone from just under 20% to around 2% (WSJ 3/21/23). We don’t have similar data for retail, but we believe it likely isn’t much different.
As such, fully 50% of the traditional institutional portfolio allocation to CRE has potentially become obsolete. Obviously, this creates a big hole in many portfolios.
Nature hates a vacuum and all that cash won’t sit on the sidelines forever. It’s Keith’s opinion and ours, that this will be filled with ‘alternative’ assets such as self-storage, senior living, medical, student housing, etc.
This only makes sense from the standpoint that unlike office and retail, these property types typically benefit from positive demographic and cultural trends rather than negative.
With so many people fleeing dystopian urban centers, high taxes and the office, the suburbs and exurbs may benefit.
This should create greater demand for housing, storage, attendant medical services and ultimately senior living. If these properties happen to be located in no – low tax red states, more the better.
As states like California, Oregon, Illinois and New York, etc. continue bleeding people money and business, Florida’s population is expected to grow by nearly 50% over the next decade from 23 million to 33 million (KGC Direct LLC, A Nation of Floridas). This should place a huge premium on housing and associated services of all types.
The early adopting, first wave of Baby Boomers have already arrived in places like Florida, Tennessee, Georgia, the Carolinas and Texas. However, the peak of the Boomers, born in 1957 – 1963, have yet to arrive. When they do, it’s “Katy bar the door.”
This confluence of technological change, its impact on work and shopping along with demographic change is changing the face of our nation.
In so doing, there is a chance that institutional CRE holdings may ultimately mirror it. Retail income property investors would be wise to keep this in mind when selecting replacement properties for 1031 exchange.