REITs, to be able to help them establish market value. Those are
some interesting opportunities and it feels like a unique spot to
explore right now.
HALLIWELL: Over time, assets will flow to the cheapest cost of
capital. If that cost of capital is cheaper on the private side, there
will be more privatizations. If the cost is cheaper on the public side,
you will see more Initial Public Offerings. Right now, it is cheaper
on the private side. GGP is a perfect example, and I think we’re
going to see more privatizations in the retail sector where there are
larger discounts in a REIT’s share price to the underlying Net Asset
Value. So yes, I do think the public to private activity is going to be
a bigger piece of the investment pie going forward, assuming a
continuation of the public and private pricing disconnect.
PUMPER: On the topic of REITs, Joseph, your firm launched
one with foreign capital. What’s your strategy there?
SHAW: Three years ago we launched a REIT that was the first of its
kind to bring Singaporean money into US core markets and core-plus assets, and we’re continuing to execute on it. We have two
pending transactions, one in Atlanta and one in Washington, DC,
that will give us $500-$600 million worth of office assets.
That cross-border access to product is unique.
In the Singaporean market, we compete against
Maple Tree, which is doing the same sort of thing. They
entered Minneapolis last year in a $260-million deal,
and they’re going into to Cincinnati and Columbus.
That’s a remarkable feat for a Singaporean investor. We
actually had reservations about Minneapolis, but then
we saw Maple Tree go there; it demonstrates the need
for yield. In the Singaporean market, you need to generate a going-in cap rate above 6%, after expenses, in
order to make the REIT shares perform. You can’t get
that in most of the gateway markets today.
Yet we’re still hesitant to go down to the tier two and
three markets, if you consider spreads. Lenders have
very little spread differential—maybe 10 or 15 basis
points—between making a loan in an office building in
DC and a loan in a smaller city in the Midwest. So even
though this is a different cycle given the broader economy’s strength, I’m not sure that when the does end, the smaller
markets won’t feel pain.
BONEHAM: I fully agree with you in terms of liquidity in some of
the tier three markets. You really do have to look at yield projections and what you can truly expect to achieve on exit, both pricing
PHILIP McANDREWS: So how are you pacing your year-over-year return?
SHAW: Unfortunately, we aren’t doing as well this year as we’ve
hoped. I’ve been focused on selling down in markets that don’t
have a competitive advantage over the over-weighted ones. What
happened, as we’ve tried to build up our asset management business, is we’ve given away some of our best assets to our counterparts, and that’s created an overweighting in markets like Chicago.
We’re in the market now with a $350-million development in a
We’re selling down not because we think the market’s going
down, but because we’re trying to reestablish a business. So we’re
looking to build smaller buildings in tier one markets. Next year, I
think we’ll do about $1 billion of acquisitions, domestically.
McANDREWS: At Aegon, our program is tracking pretty well.
Typically, we’ll do about $4 billion a year in the real asset space,
which includes commercial mortgages, real estate equity, agricultural investments and natural resources private equity. What we’ve
been talking about here in this group, though, is the tailored
approach to market selection. I concur with Joe’s comment on
proceeding with care when investing in tier two and three markets.
It’s about the part of the market in which we want to operate and
where we want to put our capital to play. From an equity investment
point of view, the concern with tier two and three markets is often
exit risk—can we exit an asset with relative ease through most of a
market cycle? That’s critical.
DESIATO: So how and where do you put it into play?
McANDRE WS: We like workforce housing right now. It’s indisputable that there’s going to be a higher demand for residential space;
the National Multifamily Housing Council is predicting a need for
over 4. 6 million new residential units by 2030. It’s an extraordinary
amount of anticipated demand, a growth of about 25% over current levels. But can we keep building new product to meet this
demand, given the costs involved and the rent levels necessary to
justify these costs?
Meeting the demand for units that are affordable to people at
medium income levels is not just sensible from an economic standpoint; it’s also socially responsible, which is a core value for us.
We’re buying class B and C properties at a great price point far
below new construction costs and we can manufacture a solid economic arbitrage for our investors through rent increases achieved
through unit rehabs and common area upgrades.
As an industry, we are all quite aware of the emergence of the
millennial cohort in the changing dynamics of office and retail
space needs. Multifamily is equally impacted and we are focused on
this. By buying and rehabbing B and C properties in markets that
have strong job growth prospects and positive demographic trends,
we’re focusing on both this millennial population and traditional
workforce renters by necessity. And we’re accomplishing this by
offering attractive rehabbed units at price points that are approximately 20% below new class A projects.
BONEHAM: We also remain big believers in multifamily and have
developments across the U.S. We’re working on a gar-den apartment project on land we own in Florida, in a city with great amenities. We just successfully sold a high-rise in St. Pete that we developed with a joint venture partner and working on a transit-oriented
project outside of Miami, as well as a number of deals on the West
Every $1 billion of online sales
increases demand for industrial
space by about a million square
feet. By 2025, it’s expected that
online sales will account for 25%
of all retail sales. You can’t focus
solely on historical trends.
PGIM REAL ESTATE