WATKINS: You’ve got to manage it. You’ve got to make sure you
have the right entertainment component, the right food component, and this kind of retail is going to be successful. Retail is
adjusting. It’s not becoming extinct.
CARLETON: Of the 70 malls we’ve foreclosed upon in the past
five years, we probably have 20 malls in our special service
books right now that are basically dead, and there are firms out
there buying them.
PUMPER: So much capital has been raised within our
industry, probably more than ever before, and the investment opportunities seem to be dwindling because so much
has been acquired over the past two to three years. How
much do mergers & acquisitions play into your activities
BONEHAM: It’s definitely on our radar. Our growth objectives
cannot be satisfied simply by organic growth. We have to
acquire, and it has to be right. It has to be a cultural fit. It has
to be bolted on in a way that’s not duplicative to what we’re
MCGUIRE: You’ll see a lot of public-to-private transactions
over the next year or two. REIT shares have gotten hammered
in the past year, and that will probably continue as interest
rates tick up.
MORENO: You’ll likely see public-to-private in the retail space in
particular. As the values of companies decrease, it becomes an
opportunity to take them private.
MCGUIRE: The other thing is that in the private market, you
don’t have the pressure of reporting quarterly earnings and
doing quarterly valuations and getting on the phone to explain
yourself to the analyst who covers you. You can afford to take a
much longer-term view on the value of those assets.
GIRALDO: You may see a big upswing in overall REIT prices
next year. Why is it that, with the tax reform boost and a 20%
jump in the broad equity markets, REITs have been basically
flat? They’re bound to the same economy, aren’t they?
Corporations will do more leasing, theoretically, in this environment. So I could foresee a final catchup, especially when all
the different nuances of tax reform are laid out.
PUMPER: Let’s talk about foreign capital. There’s been a lot of
foreign capital coming into both the debt and equity space.
MCGUIRE: In the debt space specifically, there are some foreign
investors who have started to play in the mezzanine lending space
and maybe should tread a little more carefully than they are.
We’ve seen them doing deals where there’s real risk and pricing
those deals in the Libor plus 400s range. If you think about the
risk adjusted return for that, it’s probably not what they think it is.
There’s always real risk in the mezz portion of the capital structure and you need underwriting experience to properly price that
and operating capability to protect your downside. All that being
said, I think as a borrower, you’re probably thrilled to have those
guys in your deal. As a lender and specifically as a mezz lender, I
hate seeing them going after mezz because their cost to capital is
frankly significantly lower than others.
MORENO: On the equity side, we had some activity with foreign
buyers in 2015 and ‘ 16, but for us and some of our large office
buildings that we marketed, particularly in Chicago, they’ve just
gone away. We just haven’t seen them as much.
WATKINS: I would agree with that. There was a lot of 49% capital
from Korean investors in particular, and we had an investment
period that was a couple of years as they were building their portfolios. And now it’s stabilized. We still have that capital available to
us, but it’s certainly more reserved than it was in the recent past.
BONEHAM: We have a strong client base both Middle Eastern
and European. It’s both separate account, and our ODCE fund is
structured as a private REIT so that we can accept foreign capital.
PUMPER: What gives you pause as you think about 2018?
MORENO: I think some of the values may be high, and for 2018,
value appreciation could be flat or slightly decline.
GIRALDO: The only thing that would concern me would be
geopolitical and whether rates move up for some reason faster
than the economy is ready to absorb. That would be it, but
generally, I’m actually feeling pretty bullish on 2018 now after
the tax bill.
CARLETON: It seems like every time I hear a panel, every time
I’m at a meeting, everyone has raised a lot of money, and they
have a mandate to put it out over two years.
BONEHAM: Probably the same answer I gave last year, which is
that the biggest wild card is cybersecurity threat to our firm, but it
can mushroom. It’s a whack a mole. It can show up anywhere and
have a very disruptive impact on our economy.
MCGUIRE: I second what Randy and George were saying about
the amount of capital formation in our industry. We raised, for
example, $3 billion, and we have three years from now to put it
out. Blackstone has raised $4.5 billion with the exact same strategy, and we’re not the only two in the business. So how will we
deliver the risk adjusted returns that our investors are expecting?
WATKINS: We see 2018 and beyond as a modest strengthening of
values. The recovery that we’re in will probably go down on
record as the longest recovery period that we’ll see. It’s probably
poised to go through 2020 and beyond.
I think the biggest risk therefore is what the Federal Reserve
does. If the Fed moves too early on the rates, you kill the expansion. If the Fed doesn’t moderate enough and increases too
quickly, then you create a bubble or expand the bubble. From our
perspective, that’s the biggest risk to the continued expansion,
but underlying fundamentals are really strong. So we feel good
about 2018 and beyond. ◆
There must be a piece of
the deal you could live
with and someone
else won’t. We
have been able to
maneuver in that
space and take
that some others
UBS Global Asset Management.