The near-term market and industry conditions should not detract from retail alternative investment product launches that require multiple months of groundwork.
Today’s macroeconomic environment is plagued by uncertainty. Though the labor market appears healthy and stocks have enjoyed solid gains so far this year, elevated levels of inflation continue to pose significant challenges for families and businesses.
Meanwhile, even as the latest consumer price index report showed that inflation in June climbed at the slowest rate in over two years, costs for most goods and services remain high.
Indeed, the Federal Reserve, which has raised rates ten times since March 2022, seems poised to institute further continued increases, despite many economists increasingly worried about tighter borrowing conditions eventually leading to a recession.
A mixed bag
The unsettled outlook has created a mixed bag for alternatives. For some segments of the industry, it has been a boon. Hedge funds, for instance, have gained favor since stocks and bonds turned volatile near the beginning of 2022 as more and more investors sought protection from further losses.
Naturally, other segments of the alternatives space have not been as fortunate and face steep challenges. For example, outflows from non-traded REITs currently exceed inflows.
This is hardly surprising given the broader backdrop, but it is nonetheless concerning for real estate sponsors, especially with interest rates set to remain high for an extended period.
Many real estate product sponsors are hesitant to embark on new projects. But if they have the resources to do so, such hesitation isn’t justified.
Time to act now?
Here’s why: With the economy facing question marks, it’s important to remember that the industry and market landscape will almost certainly look different months from now.
Obviously, nobody knows for certain whether there will be a recession. However, what is clear is that markets are cyclical. Therefore, the time for commercial real estate sponsors to position themselves for the future is now.
Consider everything that goes into launching a new investment product: Identifying appropriate assets, structuring a competitive offering and assembling the broader retail capital markets team – including service providers. Additionally, the list of launch activities also includes getting the distribution team in place and obtaining the requisite independent due diligence.
All of this is, in a best-case scenario, at least a six-month process! That puts us near the end of the year, and at that point, conditions for commercial real estate could be on the mend, setting up a perfect opportunity to get a jump start on the competition.
Of course, attempting to get ahead of the market to gain a first-mover advantage is not necessarily a novel concept. Still, it has proved to be advantageous for sponsors coming out of previous cycles, including after the Great Recession.
An expanding market for alts
Alternatives have become more mainstream in recent years. Not only have financial advisor-facing platforms emerged that offer democratized access to alts investments, but the largest asset management companies in the world – which until recently have catered almost exclusively to institutional investors – have begun to shift some of their focus to the retail capital market.
Beyond that, consider that the decade preceding last year’s selloff was an outlier. Sustained gains like that may never happen again, especially with interest rates expected to revert closer to historical norms.
Going forward, therefore, it is reasonable to assume that we will experience more regular intervals of volatility than we have become accustomed to — which is another reason that the relatively recent trend of retail investors embracing alternative investments will continue over the long term, even as commercial real estate may struggle in the short-term.
Given the above dynamics, the recent outflows from commercial real estate-focused alternative funds could soon reverse themselves.
For alts product sponsors seeking to align their investment solutions with retail wealth management enterprises, the critical question then is, “When do we prepare for these likely eventualities?”
The ones that are preparing now may well be able to capture retail investor inflows during the next cycle.