Navigating Uncertainty in CRE: Interview with Joshua Ungerecht of ExchangeRight
Facing an uncertain economic landscape amid sticky inflation, rising interest rates and ongoing geopolitical risk, the road for commercial real estate has been filled with potholes this year.
Despite the challenges, the market presents opportunities for growth and adaptation in 2024. Proper risk management, including a diversified portfolio with properties largely resilient to a downturn, is prudent.
Connect Money, in an email interview, asked Joshua Ungerecht, Managing Partner at ExchangeRight, a Pasadena, CA-based provider of diversified real estate DST and REIT investments, about his views on the direction of the US economy, how the firm is navigating the current volatile and uncertain environment, and more.
Although the US labor market is relatively strong, there are pockets of weakness in other sectors of the economy. Financial participants are increasingly concerned that the Federal Reserve has gone too far with rate hikes, causing the economy to enter a recession.
Q: Do you believe the US economy is heading toward a recession?
A: We believe we are headed toward a recession and are planning for its effects to be felt more broadly across the economy in the coming quarters. The economy and markets are cyclical, following a relatively predictable pattern over longer periods of time. The conditions we are seeing have been reliable, late-cycle indicators of nearly every past recession, and we believe it is prudent to prepare accordingly.
Given the significant market unpredictability, many financial professionals are focused on risk management as the most critical component of their business strategy.
Q: How is your firm navigating through current conditions from a risk management perspective?
A: To help investors bridge this challenging period, we provide diversified portfolios of net-leased properties backed primarily by investment-grade tenants successfully operating essential business in recession-resilient industries. By prioritizing national tenants with strong balance sheets in industries where people spend money regardless of economic conditions—such as grocery, necessity-retail, and healthcare—we are working to insulate investors from volatility and downturns as much as possible.
This platform historically has enabled us to meet or exceed projected distributions for all our net-leased portfolios, achieving the collection of 100% of rent payments across our entire net lease AUM since our 2012 inception. (Past performance does not guarantee future performance).
The commercial real estate downturn, which has coincided with a sharp rise in interest rates and resulted in a dramatic decrease in investment sales, is translating into operational changes for real estate investment managers.
Q: What are some of the changes ExchangeRight is making?
A: When economic indicators began to reflect that we were approaching the last phases of economic expansion, ExchangeRight sold our economically sensitive assets, represented primarily by multifamily portfolios, all of which we profitably exited prior to 2022, when cap rates were especially favorable for sellers.
As we move through the coming recession, we will stick to our discipline of providing diversified net-leased portfolios to meet investors’ needs for secure capital and stable income.
We are watching the market carefully. Once we get to the trough of the recession, we intend to acquire economically sensitive asset classes again at scale and at a significant discount to today’s prices.
The risk and return characteristics of various property sectors vary. However, these are the two issues that REIT investors should be concerned about as we enter a time of higher for longer interest rates.
Q: What types of REIT investments are you recommending given the current market landscape?
A: ExchangeRight was born out of a wealth management practice over a decade ago. Other sponsors in the market were not providing what our clients needed, so we had to create it ourselves. We then opened ExchangeRight’s offerings to the broader market.
Over 35% of the equity capital in our offerings comes from our own capital and that of long-term friends, family, and clients, which we’ve had the privilege of stewarding for over 20 years.
While we cannot make specific recommendations in this format since every investor’s situation is unique, we are encouraging our clients who need tax-deferred income to take a defensive approach and invest in diversified net-leased portfolios that fully cover their dividends with rent from recession-resilient tenants.
Since the market wasn’t providing this for us or our clients either, we created the ExchangeRight Essential Income REIT, which now pays one of the highest dividends in our industry at over 6.00% and is one of the only REITs in our industry that fully covers its dividend from adjusted funds from operations.
(This is not a solicitation to invest and you should consult with your advisor or representative, reading the full prospectus, including the risk section, before making any personal investment decision).
In 2024, the commercial real estate industry is projected to confront a variety of obstacles. As firms deal with economic downturns, shifting work habits, and geopolitical considerations, industry professionals must closely watch market developments and adjust their plans accordingly.
Q: What is your outlook for the real estate market in 2024?
A: We expect the cascading effects of the Fed’s tightening to be felt across the real estate market and beyond, potentially impacting net operating incomes for economically sensitive asset classes, eventually leading to great buying opportunities.
It could take anywhere from a few quarters to a few years for the full impact to manifest. We believe economically resilient asset classes will fare well as they have in past recessions and will benefit from lower interest rates that we believe will follow the economic distress caused by the lagged impact of the current high-rate regime.
