MICHAEL DESIATO: You’re all planning for your budgets and
goals for next year, if you haven’t done so already. Tell us
about the environment we’re in and how it’s impacted you.
BRIAN WATKINS: I suspect this is probably similar for everybody on
the panel as well as the investor universe in general in 2017, but the
year started off a little questionable after a fun election. We expected
deal flow to pick up in the summer months, which is usually a little
quiet. However, instead transaction volume gained momentum.
We’ll close $4 billion in volume this year, but the interesting
thing is that we did 60% of that in industrial assets. And for comparison, in 2015 we ended up doing about 25% industrial, a significant increase from a couple of years ago.
There is the type of product that all investors seem to be seeking
and is thus very competitive, and then everything else. This obviously has an impact on pricing. Industrial is going to continue to be
the favored product type. 2018 will be very similar to 2017.
DESIATO: Have you raised the targets year over year or are
you keeping it flat?
WATKINS: We invest in as much good product and good opportunity as we can find. So our typical capital deployment range is
anywhere between $2 billion and $4 or $5 billion annually. We’ve
gotten more selective in the assets we’re going after because it’s so
competitive from a valuation standpoint.
TIM MCGUIRE: At Brookfield, we’ve raised an absolutely enormous amount of capital over the past 12 to 24 months. In 2016
and ’ 17, we’ve raised about $30 billion for various strategies, and
that includes our series of equity funds, as well as the infrastructure and private equity funds that we manage.
In my business, we just completed and had the final closing on a
$3-billion vehicle two weeks ago. That will be deployed over the
next three years. We’re also in the process of raising an open ended
debt fund that is a new strategy for us, but it’s helping us be more
competitive on spreads as our market has also become extremely
competitive, over the past six to 12 months in particular.
STEVE PUMPER: Paul, what do you see for 2018? And talk a
little about what you accomplished in 2017.
PAUL BONEHAM: In the US on the equity side, we’ll end up with
$1.1 to $1.2 billion in deals, less than the past couple of years. We did
as many deals, but they were smaller. Our average deal size this year
was probably $45 million; it might have been $75 million last year.
WATKINS: Is that because you’re doing more industrial, which
tend to be smaller deal sizes, or is it similar to what we’re seeing?
BONEHAM: It’s a combination of things. The market is very
elongated right now. When you find product that is core, you’re
going to get 20 bidders, and it’s just going to run away from you.
So you’re trying to move out on that risk spectrum and find a
PUMPER: George, you play in a lot of different areas with a lot
of different caps.
GEORGE CARLETON: We have three vehicles to buy apartments,
so we’re active. It’s extremely competitive, though. Cap rates probably dropped by anywhere from a point to half-point, depending
on the market, to where a 5% cap for a B-grade apartment needing
rehab is normal. What we’re really trying to focus on is buying
below replacement cost, seeing what kind of discount we get to
replacement cost, because we do see a lot of construction.
In our institutional funds, we’ve been buying suburban office
buildings, but suburban office buildings that have occupancy.
We’re not a big buyer of vacancy. We’ve been able to buy a lot of
these assets through our special servicer with a fair value purchase
option. It has waned, but there’s still a fairly large amount of
assets within the special servicing portfolio.
With our apartment-specific REITs, it’s been hard. There’s
never a situation where you’re the high bidder. You’re one of the
high bidders, and you have to show that you can execute with
certainty of close and speed.
DESIATO: Doesn’t that sound like somewhat of an overheated
market at some point?
CARLETON: You end up chasing properties with a little bit more
story to them. They’re B to B+ multifamily assets.
MCGUIRE: What do you think is driving that? Is it that new supply
is coming to the market?
CARLETON: I just think they’ve had such large rent increases over
the prior two years. You’ve hit a level where your tenants can’t
afford more, and if you try to raise rents, you lose occupancy.
The market is very
elongated right now.
When you do find
core product, it’s
going to get 20
bidders and it’s
going to run away
This was the first year
that, on a trailing
12-month basis, was
a net divestment from
all the big core
open ended funds
in the NCREIF
TH Real Estate