On Razor's Edge
- In the Press
- May 9
- 2 min read
Updated: May 28
"I would say today," Vik Uppal, founder and CEO of Mavik Capital Management, L.P., warned the Grant's audience, "it doesn't make any sense to be in real estate equities. If you look where valuations are, regardless of what large firms are saying, they have a higher probability to go down than up." Better to lend, Uppal said, in a market through which distress has only begun to percolate.
"One of the most striking things that exists today in commercial real estate," our speaker went on, "is the concept of negative leverage. For the past 11 quarters, real estate investors have been accepting yields that are lower than their financing costs. And if you think about that for a minute, it actually makes no sense."
Undiscriminating investors, with pockets full of easy money, are topping up the largest real estate funds. "The margin for safety is incredibly thin," said Uppal, "far thinner than many people realize." Consider the craze for data centers.
"When you think about a lot of these factors, the question that really gets asked is, 'Where is all the distress?' It's a fair question to ask, but I also think that it misunderstands how distress typically unfolds in private markets. Even during the Global Financial Crisis, it took nearly three years for the distress in commercial real estate to peak."
Cracks, though, are widening in apartment buildings. A lot of multifamily buildings have changed hands at 4% or 5% capitalization rates (net operating income divided by property value) versus a mid-cycle norm of 6%. "And so for all of those deals that were done over the past four or five years, unless there's massive growth or something dramatically changes, most of those deals are under water. So balance sheets now are really stretched to the brink."
"Patience," Uppal counseled, before adding that opportunities have begun to emerge, especially in multifamily and industrial properties. "Even in the past month, our pipeline has dramatically improved. Because of the volatility and uncertainty, capital has just pulled back so dramatically."
"There's a lot of workouts, a lot of stress in the multifamily space. I would say, as of late, we're seeing a lot of stuff in industrial. And about a few months ago, every investor was obsessed with industrial. Then, all of a sudden, everyone hates industrial."