Seth Klarman Eyes Real Estate As Next Big Opportunity Ahead of Recession
Seth Klarman is bracing for an economic slowdown as the Federal Reserve continues to tighten.
The value investor highlighted real estate as the next opportunity he is evaluating amid stresses in the commercial sector.
"We think real estate is an area that is full of so many challenges, but the challenges have caused urgent selling," Klarman said.
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Legendary value investor Seth Klarman is eyeing opportunities in real estate ahead of a potential economic slowdown, he said in a Tuesday interview with CNBC.
"We think real estate is an area that is full of so many fundamental challenges, but the fundamental challenges have caused urgent selling. You can see a pullback in lending, you can see vacancies in office, troubles in retail for years and years. And so that doesn't automatically make it interesting. But it may mean that as other people abandon it... there may be opportunities to buy," he said.
Klarman's Baupost Group, which manages about $25 billion in assets, is uniquely positioned to take advantage of the situation amid heightened volatility and a crisis in commercial real estate, according to Klarman.
"We hover around, looking for opportunity, trying to meet counterparties that are eager to transact. We think we're a great counterparty for them because we can move quickly, we can write any size check, we can hold assets of any form, we can structure flexibility to meet the needs of our counterparty," he said.
Buying distressed assets and debts tied to the commercial real estate market sounds incredibly risky right now given that lingering work-from-home trends have kept occupancy rates low more than three years after the COVID-19 pandemic, leading to some deeply discounted building sales recently.
But to Klarman and his value-investing ways, you want to buy distressed assets when everybody else wants nothing to do with them.
For instance, Baupost Group bought $456 million of Lehman Brothers' claims in 2012, four years after the firm went bankrupt during the 2008 Great Financial Crisis.
"You can find opportunities around the edges of what other people are doing, finding situations that other people are throwing out like the baby with the bathwater. And they exist. You have to be patient," Klarman said.
As for the economy, he said a slowdown could materialize in early 2024 as consumers spend down their excess savings and the Fed continues to tighten monetary policy.
"I think we will probably have a downturn. The economy is slowing. Many sides of the inflation equation are coming under better control. But the goal of the Fed is to reduce the heat in the economy, and one way to do that is to trigger some kind of recession," Klarman said.
The Fed said it expects to continue hiking interest rates between now and year-end, even though it skipped an interest rate hike at its June FOMC meeting. The next interest rate decision will come in July.
Source: Markets Insider
