Several of the speakers at the recent “Global Leaders in Real Estate Summit,” presented in early October by the global conference and event company iGlobal Forum, agreed that in the midst of economic turmoil, it is still possible to enjoy some of the strongest investment opportunities and deal execution since the great financial crisis.
At a time when the buying power of capital has decreased significantly, the majority of deals are being executed by private capital, according to Justin Pattner, Head of Real Estate Americas for KKR, and the event’s keynote speaker. Pattner was interviewed by Krystyna Blakeslee, Partner, Real Estate Department and Chair of the Real Estate Finance Practice Group at Willkie Farr & Gallagher.
“About 80% of the deal activity that's being generated by one of the top two real estate brokerage houses are being acquired by private groups,” said Pattner.
While Pattner said that capital formation is relatively strong on the equity side, that formation is “predominantly flowing into closed end opportunity-type funds.” Core funds and anything open-ended are struggling, said Pattner, because there’s “not a lot of visibility on values.”
On the lending side, the mass of capital currently lies with insurance companies, which have become a significantly larger component of the lending environment.
“The banks are 40% of transaction activity. They're out,” said Pattner. “The CMBS markets haven't mattered as much since the global financial crisis, but they’re still lending.”
Pattner makes the case that in a time of great uncertainty, the best strategy is to assess what you can control.
“You can control what you want to buy and you can control how much of it you're buying,” said Pattner. “And so we, right now, are stepping into the market and looking at higher-quality assets that we could buy at meaningful discounts to replacement cost.”
Pattner noted that opportunities exist with “folks that need liquidity now.”
“Maybe there’s a developer who started projects out of equity and expected a 70% loan, but can only get a 50% loan,” said Pattner. “They're going to look at their portfolio and sell something. In a market that's not awash with liquidity, you're going to sell your best stuff. So that's a world where you can buy core, high-quality assets from folks that need liquidity. That opportunity exists right now.”
Elizabeth Bell, Principal at Hamilton Lane, on a panel titled “Investor Perspectives – Assessing Opportunities in a Volatile Market,” notes that her firm is engaging in co-investments with greater frequency, and is currently finding promise in essential service retail.
“This is a sector that's very fragmented. It has been overlooked,” said Bell. “We are forming a joint venture with a local operating partner to acquire non-grocery-anchored strip centers.”
Bell said that the sector has maintained over 90% occupancy even throughout COVID, and that its tenants are “very sticky” in optimal physical locations.
“We call it the bread loaf phenomenon,” said Bell. “Keep it simple, keep it rectangular and with little slices, and it's easy to replace tenants if you need to.”
Robert Deckey, Managing Director at Invesco, drew some gasps from the crowd when he mentioned that his firm was beginning to see 6% cap rates on “quality multifamily in the New York metro area, including the five boroughs.”
“We’re starting to see quite a bit of repricing happening in the multifamily sector,” he said, “with senior loans coming due and the new interest rates at 6 1/2%. So we’re very focused on picking up some high-quality multifamily that's repriced, but the underlying assets are doing really well.”
Max Pastor, Executive Vice President & Director of Acquisitions for Time Equities, said on a panel concerning “Finding Opportunities Amid High Interest Rates, Recession Concerns and Economic Uncertainty” that his company’s contrarian investing has made this an opportunity-rich market for them.
“Transaction volumes are obviously way down, but where we have found opportunities is with certain joint venture partners on development deals that may have stalled,” said Pastor. “We've found several all-cash opportunities on the retail and industrial sides of things.”
Yorick Starr, Investment Officer and Managing Director of North Real Estate for Invesco Real Estate, called this “a very opportune time to be lenders and have capital.”
“It allows us to take some risk-adjusted returns that are pretty historic in the grand scheme of things,” said Starr. “We're typically lending plus or minus 65% of value. That value is today's value. So our view is plus or minus 20% below where it was maybe six months or a year ago in generating low-teen returns for investors predominately focused on multifamily and industrial right now.”
Tackling the subject of current sources of capital on a panel about capital providers, Michael Eglit, Senior Managing Director and Head of U.S. Originations in Blackstone's Real Estate Debt Strategies (“BREDS”) group, notes that the term “golden moment for credit” is frequently heard around his office, as the company broadens the buckets of capital they service.
“You've seen expansive growth of non-bank lenders,” said Eglit. “We have three buckets of capital, including insurance plans, that we now service. When I talk about how we built our lending business ten years ago, we’d go to a borrower and say, let us see your big deals. And they would show it to all the big banks and us and maybe one other. Now, there's ten more people on that list that have capital like we do - non-bank lenders. So there's significant capital that's grown. A lot of investors want to put money into this space. We could get nine or 10% unlevered yields or returns versus, those were 4% previously. Making the same loan today, we earn 500 to 550 basis points more. So right there is a good selling point to investors.”
The event also featured focused afternoon panels on Mezzanine & High Yield Debt Financing, Real Estate Joint Ventures and ESG & DEI topics.
There was also an afternoon “Think Tank” portion, where attendees participated in intimate conversations with industry leaders such as Thibault Adrien, Founder & CEO of Lafayette Real Estate, who spoke about the current success and future promise of the Single Family Rental (SFR) market, including some of the best tactics for success in the sector, and how to avoid the sector’s pitfalls.
In a separate Think Tank session titled "Maximizing Benefits in Real Estate Joint Ventures through Legal and Tax Strategies," Joseph Lanzkron, Partner at Cleary Gottlieb, underscored the essential elements for thriving joint ventures, emphasizing the significance of clear objectives, well-defined roles, flexible agreements, and effective dispute resolution mechanisms. His session provided attendees with valuable insights into real estate joint ventures, with a focus on crucial agreement components, legal and tax considerations, as well as strategies for successful terminations.
In the Think Tank titled "Pursuit for Affordability," Nina Tschinkel, Vice President at Catalyst Opportunity Funds, explored strategies for development in low- to moderate-income areas. Tschinkel highlighted the importance of overcoming market challenges, utilizing innovative financing, fostering community partnerships, and leveraging data-driven approaches to assess project impact and shape future housing initiatives.
In another Think Tank titled "Keeping JV Agreements Alive When Things Go Bad," Vivian C. de las Cuevas-Diaz, Partner and Deputy Section Leader at Holland & Knight, addressed the common challenge of partnerships deteriorating during economic downturns. She explored strategies for preventing such issues from the outset and provided practical guidance on how to navigate and salvage partnerships during challenging times, offering valuable insights for attendees facing adversity in their joint ventures.
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