“Real Estate Is Not Only For Solid Returns But Also To Create A Positive Social Impact”: Simon Russell
- Juan Allan
- 7 days ago
- 5 min read
The real estate investment landscape is constantly evolving, and investors are increasingly focused on finding new opportunities through emerging managers, niche strategies, and workforce housing to navigate the changing dynamics of the market.
Simon Russell, Founding Partner, Chief Operating Officer (COO), and Co-CIO of Allagash PERE Investment Management, LLC, provided The Daily Pulse with insights into the factors shaping current investment trends, the impact of interest rates and inflation, and the growing demand for socially responsible investment strategies.
Emerging Strategies: A Shift Towards Smaller Managers and Niche Approaches
As the market responds to higher interest rates and inflation, investors are seeking new opportunities to diversify their portfolios. Russell explains that small and mid-sized institutions, family offices, and high-net-worth individuals are increasingly interested in emerging managers and niche strategies to enhance returns and reduce risk.
“We’re seeing investors, especially smaller institutions and high-net-worth individuals, starting to seek out emerging managers and more niche strategies,” says Russell.
“A lot of research over the last 20 years has shown that smaller managers and non-core strategies can outperform in more liquid markets, but it has taken a long time for that belief to take hold in the real estate universe,” he commented.
“Now, with higher interest rates and large asset prices in primary markets still very high, investors seem to be trying to diversify some of their existing risks,” he added.
The shift towards emerging managers addresses the pricing challenges in primary markets, where large assets continue to demand high prices despite the economic landscape change. Emerging managers, on the other hand, offer a potential path to higher returns through specialized expertise and innovative strategies.
The Impact of Interest Rates and Inflation on Real Estate
Interest rates and inflation are two key factors influencing investor sentiment in the real estate market. While interest rate increases tend to slow down real estate price momentum, particularly for larger assets priced at lower capitalization rates, inflation has a more complex and long-term impact.
“Rate hikes always put the brakes on real estate price momentum,” says Russell. “For larger, more liquid assets that are priced with lower capitalization rates, these assets quickly lose their refinancing value, and leverage, even with rent growth, will no longer be cumulative.”
Despite the short-term pressure of higher interest rates, Russell highlights the resilience of the real estate sector during inflationary periods. Real estate, particularly multifamily housing, has historically outperformed financial assets during times of inflation. The reason for this, according to Russell, is the connection between rising rents, often driven by wage growth, and real estate’s ability to withstand the effects of inflation.
“The real estate sector has repeatedly proven to be superior to other classes of financial assets during inflationary periods,” he highlights. “The rising value of rents, often backed by wage growth, overcomes the negative effects of higher interest rates and operating costs. This is most evident in multifamily real estate, particularly in workforce housing.”
The multifamily sector, Russell explains, benefits from more frequent rent updates, a flexibility not available in other sectors like office or industrial properties. For workforce housing, the wage increase due to inflation is more significantly felt, offering additional support for rent growth in this subsector.
Challenges for Real Estate Operating Companies (REOCs)
The real estate landscape is not only determined by macroeconomic factors but also by the regulatory environment and landlord-tenant relationships.
Russell explains that although the principle of “location, location, location” remains key to determining real estate value, the regulatory environment plays an increasingly important role in the success or failure of real estate operating companies (REOCs).
“REOCs must become experts in local regulations and situations before venturing into any location,” advises Russell. “This has become a huge challenge for larger, geographically diversified REOCs as well as institutional investors.”
As federal regulators withdrew, the responsibility for navigating local laws fell to real estate operators, requiring a nuanced understanding of each market.
When it comes to landlord-tenant relationships, Russell stresses the importance of establishing a solid foundation of trust and commitment.
“Landlord-tenant relationships have become more volatile and fraught with risks,” he comments. “To mitigate these risks, landlords must commit to providing safe, comfortable, and affordable housing, ensure tenants understand this commitment, and hire a property manager to maintain it. Achieving these three goals drastically reduces risks related to tenant relationships.”
The Shift to Remote and Hybrid Work: Impact on Real Estate Demand
The shift towards remote and hybrid work models is reshaping demand for both commercial and residential real estate. While the most visible impact has been felt in office space demand, there is also a notable effect on the residential sector, as more people need dedicated space to work from home.
“As housing and the workplace merge, the demand for space within homes has increased, as has the demand for technological infrastructure,” observes Russell. “This is especially evident in higher-income households, but even in low- and moderate-income households, the need for larger homes and better technology is gaining relevance.”
For investors, this shift underscores the need to adapt to changing demands both in unit configurations and technology installations. The need for dedicated home office spaces is growing, especially as remote work becomes a more permanent feature in the labor market.
This is relevant considering that most of remote workers work from home, with at leat 82% having a home office. Only 5% use co-working spaces, and 2% uses coffee shops.
Investing in Workforce Housing: A Strategy for Stability and Impact
One investment strategy that Russell advocates is investing in workforce housing, particularly for low- and moderate-income (LMI) households. He asserts that such investments not only offer strong financial returns but also have a significant social impact.
“Investing in rental residential properties serving LMI households should outperform other strategies in several aspects, including downside risk and return generation,” explains Russell. “Rentals in workforce housing can benefit considerably from disproportionate wage growth, and in times of volatility, these lower-priced assets offer protection from price adjustments.”
The resilience of workforce housing during real estate market downturns is particularly noteworthy. Historically, LMI housing has experienced less depreciation in prices and has recovered faster than other segments of the real estate market.
The Growing Demand for ESG and Social Impact Considerations
Lastly, Russell touches on the growing interest in ESG (Environmental, Social, and Governance) considerations in real estate investments. Investors are increasingly demanding that REOCs adhere to ESG and social impact practices, and this trend is pushing real estate operators to adapt.
“Capital providers are becoming more demanding when it comes to ESG and social impact,” says Russell. “As a result, REOCs are looking for strategies that can more directly demonstrate their potential impact. Smaller REOCs are often better positioned to develop and manage these strategies, which explains why niche strategies are gaining traction.”
The real estate investment landscape is undergoing significant changes driven by the evolution of market dynamics, regulatory shifts, and growing demand for social impact.
As Simon Russell notes, “Real estate, particularly multifamily housing and workforce housing, offers opportunities not only for solid returns but also to create a positive social impact, making it an attractive long-term investment strategy.”
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