Full Interview with HSR’s Chairman Ethan Penner

HSR's Chairman Ethan Penner and CEO Joseph Penner discuss critical aspects of the real estate market, sharing insights and experiences that have shaped HSR's strategies and successes.

Current Market Trends and Liquidity Cycles:

Ethan and Joseph discussed the crucial role of liquidity in driving real estate cycles. When there is an abundance of capital, the balance of power is in the hands of those with assets. Conversely, when liquidity is drained, it’s an excellent time to deploy capital. Ethan noted that the current down cycle, while not as severe as the 2008-2009 financial crisis, is distinct due to two key factors: physical obsolescence, particularly in office spaces, and locational obsolescence.

Joseph Penner's Career Journey and HSR's Internal Property Management:

Joseph shared insights from his career journey, which began at Citicorp in New York City. There, he learned about the intricacies of the securities and finance industry before shifting his focus after the economic crash of the late 1980s. In 1990, he joined one of the first real estate opportunity funds, where he quickly learned to manage distressed assets and started the firm's property management division. These experiences shaped HSR's decision to internally manage its properties for better control and alignment with investor interests.

Fiduciary Responsibility and Strategic Management: 

Joseph left the institutional real estate sector to establish HSR, focusing on becoming real estate operators rather than just dispensers of capital. By retaining control of day-to-day operations and timing of asset transactions, HSR maximizes returns for its investors. The company primarily serves individual investors, structuring its funds as REITs to optimize tax efficiency and meet investor needs. Joseph emphasized the importance of understanding investor needs and desires, noting that real estate remains one of America's last effective tax shelters.

Value-Add Strategies and Multifamily Segments: 

Ethan highlighted HSR's 22-year history of adapting to market changes and creating value through strategic property improvements. Joseph explained that HSR’s value-add strategies address properties with physical, operational, and/or financial distress, ranging from simple upgrades to extensive rebuilds. HSR focuses on mid-market properties, avoiding the super high-end and very low-end markets. Their goal is to provide exceptional value to renters by repositioning their properties in the A-minus to B-plus range. This strategy ensures their properties are more resilient, offering a compelling alternative to high-end products at a more affordable price point.

Renting Versus Owning Dynamics: 

Joseph explained that a significant number of outstanding home loans in the USA have historically low interest rates. This has led many homeowners to hold onto their homes rather than sell due to the substantially higher mortgage rates associated with new purchases. This reduced inventory, along with higher mortgage rates, has led to the widest gap since 1996 between the cost of owning and renting. It is anticipated that over time, as these costs normalize, there will be a reduction in home prices and a corresponding increase in rents. Additionally, the decline in new multifamily construction starts, driven by rising capital costs and slowing economic conditions, is expected to lead to significant rent growth by 2026 and 2027 as rental demand continues to outstrip supply.

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