Why Necessity-Based CRE is Poised to Outperform in Today’s Market

During his two decades investing in real estate, Mike Hazinski, chief investment officer of First National Realty Partners (FNRP), has made a career of anticipating and analyzing economic ups and downs in commercial real estate (CRE) investing  – through booms, busts and a pandemic. By leaning into these experiences, he’s considered a go-to expert who can identify investor opportunities in even the most challenging economic climates. He has executed over $4 billion in closed transactions encompassing acquisitions, dispositions, debt financing and joint venture equity through multiple market cycles.

He recently discussed why he believes now is the best time to embrace necessity-based CRE investments despite seemingly adverse conditions. 

You’ve said the current economic environment sets the stage for one of the most significant CRE investing opportunities you’ve seen in a long time. How did you reach that conclusion when others predict market doom and gloom?

If you asked the general public their impression of the CRE market, the overwhelming majority would probably say it’s a difficult environment. Now, I recognize the fact that certain CRE investments are struggling, however, our portfolio fundamentals such as occupancy and rent growth are very strong. It’s important to remember when we hear talk about trouble ahead, it’s primarily focused on certain property sectors such as office or perhaps the broader capital markets environment, driven by interest rate pressures. And that is not the entire CRE story.

In reality, it seems that post-pandemic market volatility and dislocation are creating unparalleled investment opportunities in necessity-based CRE. These are properties focused on providing goods and services essential to everyday living, like multifamily workforce housing and grocery-anchored retail.

Opportunities stem from multiple factors. For example, billions of dollars in short-term CRE loans that originated in 2020, 2021 and early 2022, when interest rates were historically low, are now coming due in a high interest rate climate. In recent memory, we have not seen rates rise this quickly before, and it’s putting intense pressure on these borrowers. They’re in a tough spot if they can’t afford to refinance at today’s rates.

As a result, distressed CRE properties are emerging for sale at “discount” prices. So, you don’t sit on your hands in a down market. You take advantage of these buying and investing opportunities.

Can you share some examples at FNRP? 

In the grocery-anchored sector during the pandemic, we bought two single-tenant grocery properties that have since resulted in a 33% average return for our investors – all because we bought and sold them at the right time. This example is just the tip of the iceberg. In the multifamily sector and retail sector, we are seeing properties selling for less than what we believe they would have sold for 18 months ago.

How has necessity-based CRE performed historically?

Retail, multifamily and industrial assets are historically some of the best performing asset classes, with a four-decade pattern of generating the highest returns among real estate asset classes, according to the National Association of Real Estate Investment Fiduciaries. Using that same data, the necessity-based categories we focus on including neighborhood and community retail, garden-style apartments, warehouse and other industrial properties have been some of the strongest subsector performers. We are confident this trend will continue. 

I believe necessity-based CRE is a battle-tested niche. Necessity retail like grocery anchors and multi-family workforce housing tend to be more stable during downturns. Everybody needs to eat and a place to live regardless of market conditions. 

How does First National Realty Partners help smaller investors access these CRE opportunities? 

Ours is a white-glove approach. We do the expert legwork so our investor-partners don’t have to. FNRP’s investment and underwriting teams leverage proprietary data and market analytics to curate what we believe are best-in-class prospects for our investors and institutional partners. Using our Dragnet Acquisitions Model technology, we cast a wide net across the country to identify and analyze a significant number of deals. The more deals we can look at, the greater the chance we have of finding an opportunity that meets our stringent criteria. In return, our investment partners have the potential to earn attractive risk-adjusted returns on their capital. 

FNRP’s current portfolio includes more than $2 billion in assets under management, 11.5 million square feet and 56 properties across 22 states. 

For investors, how does it work? 

We help accredited investors who want to diversify their portfolios with CRE and earn passive income. Investors begin by selecting an investment opportunity from our growing portfolio. They can access reviews and analytics, plus every investment launch features a live webinar presented by members of our investment committee. When individuals are ready to invest, they can make their investment online via our website. The minimum investment is $50,000.

After closing, we generally distribute cash distributions quarterly, generated by cash flow from the assets. Investors also have access to property performance reports, leasing updates and other asset-specific information.

What questions should investors ask before selecting a private equity firm to partner with? 

We encourage potential investors to start with these key questions: 

• What is the firm’s experience and track record? Also ask about their best and worst investments and what they learned from each. Firms like to advertise their big successes, but asking about the investments that didn’t go as planned can be illuminating. Don’t forget to request references, too. 
• Are they investing their own money? Sponsors who invest their own money demonstrate they have confidence in the outcome.
• What is their strategy? What research and criteria do they use to select investment projects?  
• How will they be compensated? Is it based on the property’s performance, or is the majority of the sponsor’s income derived from fees? The financial incentives of the sponsors and their investors should be aligned in all deals to encourage strong performance.

And always consult with a trusted legal and financial adviser.