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A disciplined approach to valuations
How do Nuveen’s teams maintain a strict valuation discipline in this fast-paced market? We got answers from Nuveen real estate portfolio manager Rich Kimble.
Q: Which sectors are exhibiting high valuations, and how are you navigating those areas?
RK: Investors must be very careful if they attempt to time the market. That being said, it is important to understand when certain sectors and markets are fully priced.
For example, strong fundamentals in the industrial market are driven by increased reliance on e-commerce and changes in supply chain management. Our local teams of industrial specialists frequently see deals before they are offered to the market, so we can avoid competitive bidding processes. We understand the operational nuances in our target markets and recognize which tenants will desire a particular property.
Similarly, the multifamily sector faced compressed rent growth and increased leasing commissions in 2020, but now pricing seems to be underwritten at a full economic recovery. Sunbelt cities saw population growth in 2020, which is projected to continue over the medium term, promoting rent growth to support pricing in this sector.
Q: Where do you see undervalued opportunities?
RK: Certain segments of the retail sector are challenged due to oversupply, low demand for brick and mortar space and tenants with poor balance sheets. However, we see opportunity in well-located, grocery-anchored centers with a dominant anchor. This area has proven resilient during the pandemic, as the tenants cater to needs-based demand and are largely insulated from e-commerce threats. This speaks to the importance of asset selection. By picking assets that can fulfill a community’s needs, tenant interest will likely follow.
We are also watching boutique medical office and life science properties priced under $20 million. These assets may have strong fundamentals but fall under the radar of larger investors. Additionally, we believe these properties offer exit optionality. We can sell as individual assets or package as part of a larger portfolio, often including an attractive portfolio premium.
Q: How do you determine a price point for a new acquisition? And a sale target?
RK: We use a number of techniques to value new acquisitions, including analyses based on underwritten discounted cash flows, in-place and projected income yields, sales comparables and replacement costs. Gaining confidence in a new acquisition’s appropriate price requires a triangulation among these different measures, together with knowledge of the underlying assumptions. This is where local market expertise meets global macro views.
Regarding a sales target, core direct real estate is typically held long-term. Thus, we usually underwrite a 7- to 12-year hold. However, we complete a hold-sell analysis annually to determine whether the maximum value has been extracted from the asset, a sign that sale proceeds could be reallocated to more strategic opportunities.
Q: How do you find opportunities in promising market segments?
RK: Our structural advantage for deal flow in a competitive environment lies in our sector-based, boots-on-the-ground acquisitions teams across 26 global offices. This local focus mean the team has deep relationships with brokers, sellers, developers and tenants. This also improves pricing execution, increases transparency into an on-market deal and generates off-market acquisitions.
Q: What are the warning signs for downside scenarios?
RK: Our extensive underwriting process examines various downside scenarios that expose potential weak spots, including asset- and market-level risks. These scenarios help triangulate a maximum bid that we will not exceed. Our internal and third-party due diligence examines the physical, environmental, structural and legal aspects of the transaction to uncover, and typically mitigate risks. If a material risk cannot be mitigated, we will walk away from the deal.
In this issue
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
A word on risk
Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.
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