Market Update and Investment Strategy in Q2 2023

As we enter the 2nd Quarter of 2023 a few areas have become clear for our investment strategies and new projects. The new normal will involve higher interest rates for longer and continued high levels of inflation. The Federal Reserve continues to raise interest rates into recessionary signals and it is clear they have an obsessive focus on beating inflation down to their target rate of 2%. Investors as a whole believe interest rate cuts could begin as soon as the end of the year, possibly in early 2024. While that will have to happen eventually, Pugh Management believes it seems this is looking for light at the end of the tunnel, which is a natural response to the bleak stagflationary environment we seem to be in.

Given the current economic situation, Pugh Management is looking to deploy capital into the warehouse and flex spaces in Tampa. By acquiring large amounts of well located industrial land at discounted prices, Pugh expects to generate significant alpha over the next 3-5 years. Our expectation is rents in urban, flex/small warehouse will remain high and will continue to grow due to supply and demand constraints. This is currently true in places like New York, Boston, etc. and will become the situation in high growth Sun Belt markets as density increases over the next 5-10 years.

Similarly, well located multifamily, from Class A to C shall benefit from continued inflows of people from the Northern states. Rent growth is anticipated to remain strong, though it will moderate from the historically high levels seen in the previous 3 years. Buying discounted, well located value add Class B/C properties will remain a priority as well as selectively identifying ground-up Class-A opportunities in urban Tampa and St Petersburg.

In New England, Pugh continues to look to identify opportunities for multifamily and transit-oriented mixed-use development. Working with strategic partners allows Pugh insights into construction cost escalation and enables them to find well-located sites. Pugh’s partnership with Howland development in Georgetown, MA on a 37-acre warehouse development continues its permitting phase. While in Malden/Melrose, Pugh’s partnership with DHPH on a ground-up 95,000 sf last mile warehouse looks to complete construction in late June. Leasing interest is strong for that asset and Newmark continues to lead those discussions.