Institutions Diving Deeper
Into Development Game
When you start seeing enough new development projects breaking ground, you realize that there is suddenly a significant volume of new construction slated to hit the US market over the
next few years. And it turns out that institutional investors are
driving much of the new development trend.
This increased interest makes perfect sense when you consider
the context of today’s market. Though traditional lenders have
loosened their underwriting standards a bit, they have not
returned to the crazy pre-recession practice of offering 90% to
95% debt, or more. To help bridge the present-day equity gap,
many institutional lenders are stepping into the fray in a more
Major institutions are still grabbing headlines with their commercial real estate asset purchases, primarily in major coastal
markets which offer better pricing transparency. But pricing has
risen to the point that it is off the charts
and nearing—and sometimes surpassing—pre-recession market peaks.
Still, institutions need to put out the money to generate the
type of significant returns required by their beneficiaries. That’s
where the development game comes into play, particularly in
those favored coastal markets, and there are plenty of examples
to prove the point.
In New York, the long-awaited $15-billion Hudson Yards project
on Manhattan’s West Side has officially kicked off and is being
funded by Oxford Properties Group, the Ontario Municipal
Employees Retirement System’s real estate investment unit and
Related Cos., a New York City-based real estate developer.
In Washington, DC, Oxford is also in a joint venture with local
firm Gould Property Co. to develop a 620,000-square-foot office
building. Meanwhile, local developer Akridge is teaming with
Mitsui Fudosan America to build an 11-story office building in
Dupont Circle, with law firm Pillsbury Winthrop Shaw Pittman
anchoring the project.
In San Francisco, Boston Properties and Houston-based developer Hines broke ground in late March on a 61-story office tower
that is part of a redevelopment of the city’s Transbay transit center. The much anticipated development will be the tallest office
tower west of the Mississippi River.
Other primary markets are also seeing growing development
pipelines. In Chicago, Ivanhoe Cambridge, the real estate arm of
Canada’s largest pension system, the Caisse de Depot et Placement
du Quebec, and Hines broke ground in January on a new 45-story
office tower and 1.5-acre public park in the West Loop. The deal
represents the first speculative office tower to be announced in
Chicago since the start of the recession.
In all, Ivanhoe Cambridge has allocated $3 billion to future US
commercial property development, and the firm’s stated target
markets include New York and other gateways such as Boston,
By Ben Johnson
Seattle, San Francisco, Los Angeles and Washington, DC.
Speaking of L.A., in February, Korean Air Lines Co. unveiled
plans to build a $1-billion, 73-story office and hotel tower in
Downtown Los Angeles, making it the tallest building in the western US when completed in 2017.
One recent development bet by a local pension fund has not
been the epitome of a shining success story, however. Dallas’
Museum Tower, a 42-story luxury condominium funded by the
Dallas Police and Fire Pension System, recently opened with only
a small fraction of its 100 units sold.
As a general trend, jumping on the development train is
indicative of an overall renewed interest in commercial real
estate as an asset class by institutional investors. A study by DLA
Piper in late April noted that 85% of executives it canvassed have
a “bullish” outlook on the commercial real estate markets. That is
a marked turnaround from what can only be described as a “pes-
The big question, which no one
seems capable of answering except
in hindsight, is what level of new
construction starts will yield an
simistic” view as recently as 2011, when only 30% of those same
executives described themselves as bullish.
Another recent study, conducted by Ernst & Young of private
equity fund managers, found that development was considered
one of the most lucrative strategies for deploying capital in 2013.
As market pundits such as Sam Zell have extolled over the past
few years, the lack of meaningful development, particularly in the
US office sector, has been the industry’s saving grace. The big
question, which no one seems capable of answering except in
hindsight, is what level of new construction starts will potentially
yield an imbalanced market.
In the face of continued record-low interest rates, is it any
wonder that institutions are beginning to favor development
these days? ◆