Deploying Capital in Real Estate

before we dive in I want to ask you guys to get out your phones we have another poll question for you and you will see it in a second behind but we want to get your feedback on what you think the biggest opportunity and real estate is right now so while that's coming up on either side of the screens here let's ask you guys you're the experts so start with you Sarah what do you think is the biggest opportunity in real estate where you seeing appetite for investors in different strategies and geographies so I I am the co head of a multi manager platform so from that perspective I see capital flows across the world going into bigger funds going into small funds that focus on one property type one geography sometimes only one city and one property type in one city a couple of trends that we're seeing out there we still do see capital flowing into real estate last year it was over 140 billion dollars of capital raised in the space and we're seeing those flows go into the big funds and we're also seeing them go into some lower risk strategies like horrorcore plus and some debt strategies from our perspective we think the most interesting opportunities out there the ones that are driven by more demographic trends so opportunities that are really linked to the changing way in which people are using real estate yeah so I would say it's an interesting world it's a more challenging environment today to invest in real estate because we're deeper in the cycle and you know when you look at the world we're seeing slowing GDP growth and and you know yields are low valuations are generally quite full and so what we're focused on in terms of positives is the fact that new supply today in the US is actually quite moderate relative to prior cycles and technological disruption is happening all around us and so for us it's really focusing on places where we can see the benefit of technological disruption changing changes in the way that people use real estate changes in the way people live workshop that's what attracts us to asset classes like logistics where I'm sure we'll talk about this we're very big investors globally as well as places that benefit from technologies so you know cities that have healthy technology ecosystems places where talent wants to be those those are the places where we're investing heavily places like the west coast of the US like Boston and it's really a global phenomenon for us but today we're in a world where you really can't just bite the index you can't just buy the average piece of real estate across any sector it's really about picking your spots identifying the path of growth where we see tailwinds and I think sometimes people mistake real estate for a bond but the reality is that real estate actually can produce growth and for us it's all about identifying places where there's outside growth that's really where we focus our investing today right before we get to Hillary I just want to know the audience thinks adult healthcare and medical office is the largest opportunity ecommerce came in second 23% I would think maybe that would be a little bit higher but maybe I do too much Amazon so Hillary what do you think tell us where you see opportunities so I agree with much of what's already been said we're taking our investments in the United States at this point very much on a case by case basis and I think we're looking a lot at where jobs are being created and where the right kinds of jobs are being created so all jobs are obviously not created equal I heard someone say before I came out here that Manhattan is exhibiting some softness but we invested relatively recently in a project down on Houston in the West Side Highway which was a magnet for technology and Google ultimately took the entire building so there's an instance where despite broader weakness perhaps in the Manhattan market you can find opportunity if you're willing to sort of look granularly at what's out there I do agree that there's secular support for logistics and e-commerce we're also major investors and student housing for some of the same reasons and then you know in our traditional asset classes again markets and asset classes where we're taking a very close look at things one by one to find opportunities that make sense for us at this point in this cycle okay great let's talk about e-commerce a little bit more Nadeem we'll start with you since you guys did that huge GLP deal was that more than eighteen billion dollars you obviously believe in this space so tell us a little bit why yes so logistics is our highest conviction global theme we've acquired since 2010 over a billion square feet of logistics and today we're the largest owner globally and it's really a pretty simple thesis which is goods are moving online and delivery times are shrinking and really what that supports is that supports demand for last mile infill logistics in population centers and that's really where we've been focusing our investing so we've been very active in the US as well as the rest of the world but you know you referenced the GLP acquisition which was a 18 billion dollar acquisition earlier this year we also recently announced the acquisition of colonies six billion dollar US portfolio what both portfolios have in common is that the average population within 15 miles of the assets is 2 million people essentially we're close to rooftops were close to population not only is that important from a demand standpoint because the the supply chain is moving closer and closer to where people live but it's also important because in most major cities it's hard to deliver new industrial buildings because there's not vacant land and and it's hard to get it entitled it takes time and it's expensive costs are rising so both from a supply and demand standpoint our preference has been to be in infill last-mile locations really playing off of e-commerce and it's a global phenomenon for us so we're doing it in Europe where we have a business called mile way which is the largest urban logistics platform on the continent we're very big owners in Australia and and in China but it's essentially the same underlying thesis ok in Hillary I want to get your take on this as well because that you were a seller in the GOP deal but I know you're a big believer in logistics and your strategy just a little bit different yeah absolutely so we are large investors in logistics globally in the United States we are we have high conviction in the space as well we just maybe express it slightly differently and way we go about investing our program in the United States has focused around ground-up development and repositioning of assets that are under improved but like nadim said are very close to lots of rooftops so for us that means at the moment we're focused on port oriented markets like the Port of Los Angeles and Long Beach in the port of Elizabeth in northern New Jersey and we have a three billion dollar portfolio here in the United States that we have basically built from the ground up with a few assets in northern New Jersey is sort of hard to build from the ground up but there are assets there which were clearly underutilized which we've repositioned for tenants like Amazon and other third party logistics providers to Manhattan you know to Southern California where there's 50 million people rooftops that let's move on to retail so Sarah I want to come to you we talked a little bit about how investors have generally sort of soured on retail every couple days there's another headline about a company going through bankruptcy I think forever 21 was the latest the dying mall story but there can be opportunities to be found in retail right that's right so this is the flip side of the logistics story so you have the rise in e-commerce and what that means is that the bricks and mortar stores are being impacted but a couple of thoughts to share on it the first is that we're seeing almost a whole scale reduction in valuations across the board with these retail properties so even performing properties grocery anchor properties very good high quality properties the prices are coming down as well so whenever you see that type of a dislocation there is opportunity and we're looking that up at that opportunity in a couple of different ways partially very granular ly you have to pick your places and be very selective we like grocery anchored we like dominant stores so there I think there is an opportunity there if you're careful and cautious about what you're doing we are seeing many of our managers doing an element of D mulling so buying a big mall reducing the retail footprint making it into more of a 24/7 type of a setup perhaps selling off some of the parking for multifamily or hospitality pads so they're taking what was an obsolete mall and transforming that asset and the last place we are seeing opportunity is in the secondary market so we have seen an increase an increase in fund interests in retail focused funds come to the secondary market and those are acquired at a discount and that can be an interesting way to get into the space ok and a little bit less risky they tend to be less risky because you're buying a pre-specified pool of assets that are further along in their business plan and in the secondary market you tend to buy it in a discount so that can be attractive as well ok that makes sense Hilary I know you have a more creative retail strategy as he described it so let's hear about it so what what Heather and I were talking about that she's referring to as I've said that you know interesting retail will always thrive places that people want to walk around want to be in an interesting whether it's an urban landscape high street retail or just cool street retail some people call it or maybe it's a really great mall it can even be a really good grocery anchored shopping center but what doesn't work as well as just commodity retail that's undifferentiated from its competitors so like Sarah said we own a sizable retail portfolio the land that came along with those malls we basically got for free right it wasn't priced into the deal so we have acres and acres and acres of land that can be converted to multifamily can be converted to medical office can be converted to hotels and we're working through that pipeline in our own portfolio and we're also actively looking at other opportunities whether it be in the urban space or in the grocery anchored space and then I would just say about grocery anchored you know all grocers are not created equal so you have to be very careful about who you partner with in that space you know some will be able to withstand the onslaught of e-commerce and some won't so you have to be pretty careful about that consumer both right with Amazon now so an idiom I don't want to pick on you for being so big but you're so big and want to hear about whether or not you feel like that limits your opportunities when you're looking for properties to buy yeah I would actually say that scale is probably one of our biggest advantages okay you know it's a couple things one one is that just in terms of the way we're set up we have discretionary capital that our investors entrust us with so we can pick our moments in terms of when to invest which gives us flexibility but you know when you talk about our scale one if you're a private owner and you're looking for a solution and a short timeframe for your assets we're actually a pretty natural call because we can speak for very large transactions the other thing that we get though from our portfolio is that as the largest owner of real estate in the world we're able to spot trends and see patterns in our own portfolio that make us very nimble and actually make us smarter better investors so for example if we see that in our Seattle office buildings there's a really rapid tightening in the fundamentals that gives us on a real-time basis more conviction to buy more office in Seattle similarly if we see something work in one region we can often apply that to another because we run a global business so in 2017 we saw that despite the strength of our logistics business in the US and in Europe in Canada the industrial business was sort of lagging because e-commerce penetration was was only starting to really grow and and and and the asset class was accelerating but the market hadn't totally figured it out so we acquired the largest public industrial company in Canada today it's the best performing or arguably the best performing market in the world for industrials so I think the ability to draw connections and see patterns across geographies and across our portfolio actually enables us to be better investors and that's why I think it's a big advantage is it more challenging when you're trying to sell because there aren't as many buyers of large deals like that we talk about every time we invest in something exit liquidity and what how are we gonna solve this ultimately and what we like to do is buy businesses and assets that are high quality that give us optionality at exits that we've taken companies public think of Hilton and and and others we've sold assets privately and I think for us if you own the right assets and they're high enough quality there's there's gonna be an institutional bid for for those types of assets okay so Sarah we talked a little bit about the secondary markets but tell us a little bit more about what other trends you're seeing in buying and selling right now sure so the secondary market has grown a lot over the past ten years in 2008 it would have been less than a billion dollars and now it's about five to six billion dollars annually and at the time what it really came into being was the global financial crisis so at that point in the market most of the sellers were transaction transacting because they were distressed and the discounts were huge given that distress and the point we were in the market fast forward to today the stigma around selling because of that dress distress has dissipated sellers are really embracing the market as a portfolio management tool and so what we're seeing is that most of the transaction that take place today are done for a portfolio management reason so this is I think a very natural evolution in the market because private real estate is illiquid and the average fun life is ten years long so it's completely normal that an investor would want to change their portfolio during that ten year span and the secondary players are giving liquidity to those to those investors and those portfolio management sales are typically high-level strategic decisions that are taken they are a shift in strategy they are a rebalancing in some cases we see large institutions change their portfolios when new leadership joins and those institutions are not distressed in any way and what they're selling can actually be extremely high quality very good assets and I think that makes the buying opportunity interesting in the space there are the same roughly number of players that do it now that did it ten years ago so the numbers of players haven't really changed the dollars in the space have grown over time but I think the opportunity is continuing to expand that's great and Hillary student-housing so you guys have made a big bet on student housing yes tell us why and is there still opportunity there sure so in 2015 we began researching the space and what we discovered was that it was extremely fractured in terms of ownership with not very much institutional capital looking at the space at that moment and so we formed a venture to acquire student housing we began buying in early 2016 and we're now we have fifty thousand beds and so there's been a tremendous consolidation opportunity that we were able to take advantage of and one of the nice things about student housing is that while the returns on student housing on an unlevered basis are higher than traditional multifamily it finances much like traditional multifamily so the leverage returns can be really attractive in the space as more institutional capital has become interested in the space the returns have come down a bit over the succeeding year crowded but you know we have a we have a filter that we put all of our acquisitions through and I think as long as you're focused on the right universities with the right characteristics the ones that will ultimately be winners long term I do think there's still opportunity in the space I would caution against very small universities and secondary markets because some of those may ultimately not wind up being winners so our strategy is really to focus on the top tier of mostly public universities what more people yeah more beds so what about senior housing though there's a lot of trends and especially the medical housing as well there's a lot of trends within home care increasing and private equity especially is putting more money into this space does that makes real estate for senior housing kind of go the other way so I I think that we actually do have some exposure to seniors housing it's been a little bit of a mixed bag you referenced you know people having in-home care and a lot of people who have the money to go into assisted living also have the money to have in-home caring so where we've tried to focus our efforts in recent years is places that people want to live anyway instead of assuming that someone is going to for example move to Florida if they live in New York for retirement you know look for seniors housing in New York look for seniors housing in Boston in Seattle in San Francisco in these very vibrant places where people want to be anyway but you know we're taking that one on a very taste by case basis and our exposure to it is relatively small at this point okay no name is there a city or an area that you would avoid well you know I I would say a loaded question yeah I would say it the other way which is you know where we are investing is places where we see growth I mean if you talk to companies today that are growing fast their biggest struggles to find talent and so what that what that brings them to is two cities on the west coast of the US to places like Boston to Austin Texas to Nashville to Atlanta and and cities that have these vibrant tech ecosystems where talent wants to be those are the places where we're really focused on and it's it's not just in the u.s. it really is global but take Seattle we're one of the largest donors of office buildings in that market it's the cloud computing capital of the world you have Amazon you have Microsoft you have tons of demand drivers really strong office market Los Angeles were big investors in there you have billions of dollars being poured into content creation you have you know the Netflix's of the world Disney Amazon all all pouring capital into the market as as content and technology converge you know in life sciences were a big owner of lab office buildings we're one of the largest owners in the world and and through that we're big investors in Cambridge and Boston and you know that's one of the life science centers globally in terms of research and development if you looked at that market 15 years ago almost none of the top biopharma companies were doing research there but today fast-forward almost all the large biopharma companies are in Cambridge doing R&D and the reason for that is that that's where you find the best researchers professors gives the opportunity to collaborate and and as a result it's been one of the best performing office markets in the past five years and today rents in Cambridge are actually higher than in midtown Manhattan and so it's really about where we are investing which is the cities that have these dynamic growth patterns we're doing the same thing in Berlin Germany and Stockholm and Amsterdam India has been a really big market for us Bangalore and Pune driven by IT services but those are the places again in a world where growth is sort of slowing a little bit is finding these little pockets where you see the outside growth what about millenials are they driving any trends and real estate we should be aware of the millenials kind of play into the changing ways in which people are using real estate so they they do change things they buy things online they want to work in offices that are open floor plans with great coffee machines and collaboration spaces they're staying in the cities for longer they're getting married later but I think at the end of the day the Millennials are still people and we need to adhere and they will use real estate you know in the same kind of in a similar manner real estate as they aged will adapt to those needs but it's not a step function change I don't think I'm good - no I want to talk a little bit about any concerns you guys might be having anything that's looking frothy or anything that's keeping you up at night so why don't we start with you Hilary and kind of go down the line I'd say there are two answers to that question globally you know real estate is a long dated asset so when we underwrite we underwrite for 10 years and and the pace of change whether it be technological or geopolitical or what-have-you makes the underwriting landscape less certain than it has ever been before and so I think that you know that that just is it's the new normal and it's something that we have to deal with us we're looking at opportunity but it certainly is a change and something that we have to think hard about as we're underwriting new opportunities globally and then just more focused on the United States you know as we look at some of the the companies that are transitioning from private ownership to public ownership the effects of those valuations can have big implications knock-on implications for real estate so you know if a company's valuation doesn't hold up once it transitions to the public market that may mean that job cuts are on the way and if you multiply every employee by two hundred and fifty square feet or whatever the number is that can have real implications for office space and and for multifamily and other asset classes so I think those are the two things that I'm kind of keeping my eye on right now as we underwrite deals but again I even in in markets and in geographies where there's uncertainty uncertainty breeds opportunity like so you know for every problem there's a flip side of that which is opportunity okay yeah I would say very similar sentiments to Hillary which is you know as real estate investors especially as global real estate investors we look at geopolitics interest rates where we are in the economic cycle and and we do our best with that but what what I would say we spend a lot of time talking about and thinking about is technology and the way in which real estate is used and it does feel like there's so many disruptors today in terms of how real estate is used where people live how how they work and you got to be on top of that you've got to stay on your toes I think to be an effective investor today and it's it's not just in real estate it's across all you know asset types but it's something we talk a lot about we spend a lot of time talking about in our investment committee and being nimble around that I think is critical today to being a good investor so just looking nothing that you're doing because of any changes and well I mean I would I would just say that how technology impacts real estate whether it's our preference around investing in logistics or maybe being a little more cautious around retail or being thoughtful about changes in in the office space and how office buildings are at least and use all of that influences how we invest the only thing I would add to this and I really agree with what they both said is that the the pace of change is very fast today and and change can happen in some cases overnight with what's going on in different cities with different political changes with regulatory changes and so something that we think about a lot is how to keep up with the pace of change and how to think about that in investments going forward well you bring up a good point regulatory changes is there anything that's happened or anything that could happen that would have a huge impact on real estate moving forward depending what happens in Washington yeah I think from a big-picture perspective when you have changes in regulations its it is immediate and it can have a significant impact what about so we've talked a lot here and and outside of Bloomberg everyone's talking about companies increasingly staying private and one of the things you had mentioned in deme is being able to take companies public that grow very large it helped me is there is there gonna be a time when that might not be as viable an option well yeah the capital markets are cyclical as well and their moments of volatility where it might not make sense to take a company public and so for us it's always about you know maintaining optionality and and being opportunistic right we're opportunistic in terms of how we acquire assets were opportunistic and in terms of how we sell companies and assets and we found that over time both you know are viable and and it's all about maintaining optionality really and I would add to that prudent capitalization so you know being opportunistic on your buying and your selling and not over levering or making sure that you have the right capital structure to match what your business plan is so you know sometimes we need to do development unlevered because that's the right thing to do and sometimes we use more if there's something that looks like it's got a very stable income stream but but matching your assets and your liabilities as you're thinking about your business plan it's it's important tell us a little bit about what you're seeing in Manhattan you would mention some people are staying away from it but you're finding pockets of opportunity I think somebody else said that people were saying I'm sorry no we we just we have a we have a couple of very large investments in Manhattan right now some of them are legacy investments one of them is new it's actually under development right now it won't be completed for another couple of years look I think that to my previous comments job growth really underpins you know a lot of the activity that is attractive to us when it comes to investing in real estate and Manhattan came out of the gates really strongly in the initial part of the recovery and then it's plateaued a bit in terms of job creation and where there are jobs being created they tend to be in tech in data in media you know and those industries and so if you can find real estate that services those kinds of industries then I think there still is opportunity but again that requires looking at every deal very much on a case by case basis and we tend to invest in scale you know large five hundred million to a billion dollars at a time of equity and so matching up that scale with those you know opportunities that fit as is our challenge even in Manhattan are there any parts of the country that you would save or an unexpected surprise of where you have found a dealer an opportunity where you wouldn't have expected it's a very good question we this is that this is going back a couple of years but we took Parkway properties private in 2017 and Parkway was a houston-based office Reed and essentially it came to exist through a merger and then a spin of two of two public companies and so the the public markets had had sort of heavily penalized Houston because of what was going on in the oil industry but we were able to look at the the tenancy in that portfolio we already owned one of the buildings and and partnership with Parkway and we sort of figured out that there was really good downside protection and that you could pick up the assets at less than 50% of replacement cost and so we when the opportunity arose privatized that entire company and I think it's the first time that a pension foreign pension plan had privatized a public company in the real estate space in the US but it made a lot of sense to us because it was just a good value play that's a great example thanks for sharing that and thank you to all of you for sharing your insight appreciate having you thank you thank you [Applause]

Channel: Bloomberg Live

Views: 6,887

Keywords: Bloomberg

Id: c0Nl7jCd5No

Length: 29min 32sec (1772 seconds)

Published: Fri Oct 04 2019