As commercial real estate’s future becomes less clear, private equity players are shifting strategies and expectations to make the most of today’s market.
Real Estate Weekly and EisnerAmper gathered four top executives to discuss their outlook at the annual Women’s Forum, held at the New York City Bar Association on May 11.
While many investors are in the market right now given where we are in the cycle, Carnegie Corporation is not pursuing many new opportunities, director of investments Alisa Mall told moderator Lisa Knee, tax partner at EisnerAmper.
“Our perspective is that the market is fully priced right now, so we’re not doing a lot of investment,” she said of the private foundation’s real asset allocation, which includes real estate and accounts for 15 percent of its $3.5 billion endowment.
Mall noted that while Carnegie Foundation has thought of real estate as a return driver and diversifier for its portfolio, that thinking has shifted over the past few years.
Instead, it’s looking at liquidity planning and reserving capital for current and future commitments.
“Cash flow is increasingly important over time, and that shifts away from the equity piece of real estate,” she said.
It is also more difficult to buy, considering that other investors typically have a lower cost of capital than foundations and endowments, thus making it difficult to compete.
Globally, there are still many investors looking for opportunistic and core-plus deals, said Kathleen McCarthy, global COO for Blackstone’s real estate group, which manages $100 billion of capital for its LPs. “We’ve been spending a lot of time hiring and focusing on where we can add talent on our team,” she noted.
The financial market — namely securities — was greatly impacted this year by problems in China, the fear of commodity prices dropping, and decreasing oil and gas prices, noted TPG Real Estate Finance Trust CEO Greta Guggenheim.
“What it has done has made the U.S. a particular safe haven,” she said. “We saw $58 billion of net foreign investment in the U.S. in 2015, up dramatically from prior years.”
Brookfield Property Partners, the real estate division of Brookfield Asset Management, has found particular opportunity in refreshing its current portfolio, 50 million square feet of which is managed by senior vice president of asset management Sara Queen.
One of these properties is Lower Manhattan’s Brookfield Place — formerly known as World Financial Center — whose retail underwent a $250 million transformation to support Brookfield’s releasing efforts on the office side.
“For us, the World Financial Center was a finance center,” Queen explained. “Our largest tenant was Merrill Lynch, and we knew they were leaving three million square feet in 2013. We had a lot of brokers tell us, ‘Good luck, you’re never finding anyone to take that space. It will just sit there.’ But in 18 months, we were back to 95 percent leased.”
The renovation also helped Brookfield Place’s diversification efforts, attracting non-financial firms like Jones Day, The College Board, and Hudson’s Bay Company.
“Our retail redevelopment was an expression of really understanding what placemaking is about,” she continued, noting that Brookfield has found other opportunities for similar projects on a smaller scale in Houston, Los Angeles, and Denver.
Knee then asked what is keeping people coming to New York, given there are so many opportunities both domestically and internationally.
New York has been a huge beneficiary of the overall urbanization trend, and our supply-demand fundamentals have a gravitational pull, McCarthy replied. “It’s really hard to build [here] — it’s expensive and complicated, and assets we buy benefit from the fact there’s very little new supply.”
In fact, multifamily — in which Blackstone actively invests — has had a few years of negative net supply, she pointed out.
And while the market may be concerned about office overbuilding, given the activity Downtown and in Hudson Yards, the new buildings only represent three percent of Manhattan’s current supply.
One of the most important points to consider is New York City’s diversified demand drivers, which extend beyond finance and real estate. “It means if you’re an owner, things are going to go your way,” McCarthy asserted. “There are a lot of entry points for investors of all different varieties in New York.”
EisnerAmper recently held its West Coast Private Equity Summit in San Francisco, where Knee heard a new acronym to replace FOMO, or fear of missing out.
“It’s now FOOP, or fear of overpaying,” she reported. “Are assets priced to perfection, or are we seeing shades of 2008 all over again?”
Guggenheim replied that the gap between cap rate and Treasuries is still very high, “so we can argue that there’s room to go if you’re a buyer of real estate. I think it’s a reflection of major markets like New York and Los Angeles. If you look at historical increases in value, they have gone up over a consistently long period of time, and I don’t think that trend will reverse itself.”
However, she noted there are clear bubbles, such as luxury condos in Manhattan. “The market forces will be self-correcting,” she predicted. “If you look at Miami, all you see is cranes — but all of these projects are pre-sold after the last financial crisis. Lenders are now not providing construction loans unless they’re pre-sold.”
There are pockets of inefficiency all around the country where investors can find real value, Mall added, but the challenge for someone like her is to exploit these inefficiencies and create value for investors where others might not see it.
Brookfield has been both actively buying and selling, but on the sales side, recent pricing is not necessarily coming in where the firm first expected it to be, Queen said.
“Investors are looking for more return out of those assets than we’ve seen previously. It may be that there seems to be concern where the economy is going — we’re not necessarily where we were in 2008, but there’s certainly a feeling of uneasiness in the markets.”
McCarthy also pointed out that there is far less leverage in the system. “I don’t stay up at night and worry that it’s 2008 again,” she said.