Capital Markets Roundtable: Where Investors Say the Market Is Headed
The ULI/Allen Matkins Capital Markets Roundtable, now in its fifth year,
brings together investors, developers, lenders, managers, and
intermediaries to share insights and perspectives on the current and future outlook for real estate capital markets.
Mark Gibson, chief executive officer for capital markets, Americas, at JLL and a ULI trustee, led off a wide-ranging discussion, held this year at the 2019 Fall Meeting in Washington, D.C., in September.
Gibson said the real estate sector has been performing well, and institutional investors such as pension funds have allocated more of their portfolio to the asset class. Core real estate has broken the 10 percent target allocation barrier within the past year, he said, doubling the allocation level for 2010. Structurally, investors have been taking a longer-term view and are hoping to avoid the “start and stop” nature of past real estate cycles, Gibson said, citing as evidence the small impact the December 2018 equity market decline had on fund flows or allocations to commercial real estate.
Gibson also cited the 2016 change in the Global Industry Classification Standard, which made real estate investment trusts (REITs) and other listed real estate companies their own sector—trading on par with energy, health care, and other sectors—as having a positive effect on attracting investment.
“We thought it would be great in the public market to attract another $50 [billion] to $70 billion,
which it did, but it also attracted passive capital and algorithmic
trading vehicles into the space,” said Gibson. Some core investors are
now allocating more investment for private funds to avoid the volatility associated with programmatic trading.
Gibson cited Blackstone as one example of the shift. With its low-fee exchange-traded fund (ETF) approach to the industry, Blackstone is raising an average of $700 million per month for commercial real estate funds.
Gibson specifically sees selective weakness in the multifamily sector, where concessions weaken the sales case because of near-term oversupply in certain U.S. markets. This is leading some owners to rethink their holding strategy and consider recapitalizing their projects rather than selling because they can take advantage of readily available debt.
In addition to Gibson, the panel included Pamela Herbst, managing director and head of direct investments for AEW; Stuart Shiff, founder and chief executive officer of DivcoWest; Larry W. Lukanish, senior vice president of Sares-Regis Group; and Goodwin Gaw, chairman and managing principal of Gaw Capital. Bill Ahern, transactional real estate attorney at Allen Matkins, was moderator.
Herbst said AEW is looking for markets with employment growth and shifting demographics, which often leads the company to invest in multifamily properties in growing medium-sized markets.
“We are a huge believer in housing,” Herbst said. “We are looking at what I would call exurban areas—areas outside of Boston, Seattle, New York—because housing prices are too expensive, so young people finally are moving to the suburbs to form families and find good schools.” Empty nesters also constitute a potential market for multifamily properties, if they are in the right location, she said. Suburban locations can be harder to build in, she noted; senior housing represents some of the best risk-adjusted development.
AEW is shifting from investments in older office buildings that require a lot of capital expenditures to trying to buy new buildings.
DivcoWest is focused on the “innovation markets” that are tech-company heavy, said Shiff. “Whatever business you are in is tech,” he said. “There’s a reason these companies keep just getting bigger.”
Almost no one predicted after the dot-com boom how much real estate Microsoft, Amazon, Google, Salesforce, and Facebook would eventually absorb, Shiff said. He described a joint venture DivcoWest has set up with the California State Teachers’ Retirement System (CalSTRS). CalSTRS is open to investing in new models with longer-term horizons that involve holding a repositioned property rather than selling it, which is helpful in avoiding being forced to sell in a down market.
Sares-Regis is focused primarily on multifamily and industrial markets, Lukanish said, and he is more focused on industrial. Construction costs are a challenge, often coming in higher than anticipated, but rents have also been rising, he said. Sares-Regis’s industrial properties have hit $300 per square foot ($3,200 per sq m), a level previously unheard of, he said.
Gaw Capital likes the U.S. West Coast cities that have innovation-based economies, Gaw said. He also sees opportunity in the hospitality markets of southern Europe, such as Spain and Portugal, citing their history and culture, as well as their high-quality food and wine at attractive prices, which makes them an attractive tourist destination for the expanding Chinese middle class. He also likes industrial real estate in Vietnam, which stands to benefit as China’s rising wages drive low-end manufacturing to other countries.
During the question-and-answer session, Shiff said AEW is also contacting tenants to renovate their spaces before the lease has expired because those tenants are competing for employees with other tech companies in newer buildings, and his company wants to keep those tenants.
Lukanish added that Sares-Regis is focused on infill industrial investments located as close to ports as possible. Also, some former corporate headquarters are coming available that could be converted to industrial/warehouse use, including the former Toyota facility in Torrance, California, he said. SpaceX is creating spinoffs that need industrial space in Southern California, so his firm is seeing growth in aerospace, he added.
AEW is more data dependent than ever, Herbst said, with many investors asking a lot of data-driven questions. Herbst said she thinks this favors consolidation. “Our clients want answers,” she said, whether to address diversity issues; environmental, social, and governance (ESG) questions; or regulatory issues.
The partnership between ULI and Allen Matkins was created with the goal of providing key decision makers valuable foresight into capital market trends. Allen Matkins has been on the forefront of commercial real estate awareness and is looked upon by industry leaders for guidance and content that will impact future business endeavors.