HWG Private Equity

KKR put out a paper last month with a strong pitch for multifamily investing, concluding: "The once-in-a-decade opportunity for real estate equity investors is complex, but also exciting." Watch for moves... Appears KKR is thinking like Blackstone signaled before announcing acquisition of AIR. We note that KKR recently announced acquisition of a student housing portfolio from (ironically) Blackstone, but this KKR report appears directed at conventional apartments. Some notables from report by KKR's global head of real estate?Ralph Rosenberg: - Current challenges of maturing debt and peaking supply are "cyclical rather than secular." "The secular trend is toward more demand, not less." - "Performance has traditionally remained stable through economic cycles." - "As owners come under more pressure to sell assets, we see an exciting opportunity coming to buy high-quality properties below replacement cost while achieving attractive long-term yields." - "A temporary period of oversupply may provide more attractive entry points." - "Owners who can carry their investments through the next two years are poised to benefit from sustained structural demand and a pronounced shortage of new supply starting in 2026." - "Scaled players will see opportunities first and have the freedom to deploy without much leverage, an essential component to success in this environment." My thoughts: Supply is the biggest headwind of 2024, but also the easiest variable to forecast, and we know it's going down, down, down. The demand outlook remains rosy for the next decade (barring a black swan event), and We'd argue more because of demographics/economics than because of for-sale affordability as KKR suggests. The obvious big question mark is rates / cost of debt. But as we note, if you're playing the long game here using less leverage and have more timing flexibility, you can potentially reduce that risk significantly. No one is suggesting now is the time to go heavy on short-term value-add plays again, like we saw in the last cycle. We will see how it plays out, but we suspect more and more institutions will begin to embrace this line of thinking in 2024...

Lately, we've been asked a lot about our opinion on AI ecosystems versus AI applications, and why I believe ecosystems hold long-term value for companies. AI applications are fantastic for specific tasks and quick solutions, but they can quickly become diluted with "copy-and-paste" clones, saturating the market. Chatbots and image recognition tools, for example, are easily replicated, making it hard for any single app to stand out. In contrast, an AI ecosystem offers a broad, interconnected network of technologies, platforms, and services working together seamlessly. This fosters innovation and scalability, which are crucial for sustained growth. Gartner projects the AI software market to reach $126 billion by 2025, largely driven by robust AI ecosystems. Companies like Google and Microsoft have built comprehensive ecosystems, driving significant AI revenue growth. Smaller firms like C3.ai and DataRobot are also developing impressive ecosystems that streamline AI workflows and facilitate rapid deployment across industries. I believe app developers should look at how they can evolve their apps into ecosystems—whether industry-specific or tool-specific—to create more adaptable and sustainable solutions. This approach not only ensures resilience as market demands evolve but also provides a solid foundation for continuous innovation.