Because the way we’re going to have to manage these buildings is
moving closer to the hospitality industry than it was before.
SHAW: You’re right. We’ve all undertaken to create the greater
amenities. But with the We Works—although they’re very successful and have been wonderful in terms of allowing us to fill vacancies we might not have been able to fill—I’d rather buy a building
without a We Work and bring them in later than buy a building
with too much We Work.
DESIATO: So there’s office and multifamily, and we discussed retail earlier. How about the other sectors, conventional and alternative? Industrial was huge, and continues to
be. Is it still a hard sector to plan in?
SHAH: Industrial has been incredibly sought after the past five
years, and there’s so much capital chasing it that it’s very difficult to
make core acquisitions in the sector. We’ve been trying to be active
on the development side, but even that’s been difficult. Also with
industrial, most of the deals out there are pretty bite-sized, which
makes it difficult to build scale.
In terms of runway, recent trends are really changing the landscape of industrial, too. In retail, online sales currently
account for only about 11% of total retail sales in the US,
excluding auto and gas sales. By 2025, it’s expected that
online sales will account for 25% of all retail sales. And if you
look at the numbers, every $1 billion dollars of incremental
online sales increases demand for physical industrial space
by about a million square feet. So while there’s supply in
certain markets, you can’t focus solely on historical trends, as
all these new variables are resulting in a massive long-term
paradigm shift for the industrial sector.
HALLIWELL: We’re having a challenging time finding core
industrial acquisitions. But we’ve been fortunate that we do
business with very good development companies in the sector. We have good relationships with firms like Trammell
Crow and Panattoni, both domestically and in Europe.
We’ve done quite a bit through development and some
through value-add projects. Fortunately, we haven’t been
selling too much industrial, therefore, our funds’ allocation
to the sector is greater than our benchmark, so we feel we’re in a
good spot. Given industrial growth through acquisitions right now
is challenging; we’re not doing much of it. Generally, with core
industrial acquisitions today, you’re paying a sizable spread over
reproduction cost which we prefer not to do.
BONEHAM: That’s the trick, isn’t it? You’re paying up in order to
grow through acquisition, and growth through development is
such an exercise in patience. We too, have a hard time making
sense of pricing for industrial product. We’re also partnering on
ground-up development, as well as forwards, where we buy a completed building and take on the leasing risk. We’ve been fortunate
enough to find some deals we would call value add as well, but
they’re not as large as we would like.
In terms of non-conventional assets, at Barings we have a number
of self-storage and student housing in-vestments. We have senior
housing exposure on the debt side and our hotel group has been
active. Hotels are a challenging place to play; you need the product
type expertise, as the success of hotels is very market specific.
McANDREWS: Like everyone else, we’ve been active in indus-
trial, and we continue to be interested in placing mortgages in
the sector. The deal size suits us because we’re not opposed to
doing smaller loan sizes and terms in excess of 10 years, which
distinguishes us from some other lenders. Another unique area
in which we’re engaged is manufactured housing. We’re active
there and I think it will, over the next 10 to 15 years, emerge as
another interesting complement to residential development.
PUMPER: Let’s talk about that. A lot of organizations bring
equity, but not debt, and vice versa. But many of you can
bring both to the table. Does that put you in a better position?
EKEROTH: Today the ability to bring both debt and equity to a
transaction is definitely a bonus. As you know, we have largely
employed a build-to-core strategy, but since banks have moderated
their appetite for new construction loans, our partners see immense
value in a one-handshake, deal-in-a-can type of transaction. It’s
been very successful.
CLARK: For the past five years, almost all rates were fixed in the
3.25% to 4% range. At the beginning of this year, spreads across all
asset classes came in pretty significantly. We’ve been watching as
other asset classes have seen spreads widen recently. We’re seeing
strong competition for mortgages and we’re having conversations
about relative value compared to publics.
Prior to the downturn, we were playing primarily in the 70% to
80% LTV slice, maybe not with bridge lending but perhaps a transitional asset. Fast forward to today, we’re playing below 65%. Coverage
is pretty strong with the low interest rates, and we’re really focused
on refinance risk. We’re doing mostly stabilized assets—structuring
around, say, a core-plus property that has some major tenant rollover
coming up, or has some capital improvements planned.
EKEROTH: Last year, we did just over $5 billion in debt and $1. 2
billion in equity, so our split was about 70%-30%. We price mortgage
debt to relative value—over what we call generic investment grade
corporate bond. Last year we were averaging approximately 50 basis
points of premium over corporates, but today we’re probably around
35 basis points. Last year, our hit rate was 25% to 30%, and despite
the current lower relative value our hit rates are probably half those
of last year. At what point do you cry uncle? We want the mortgage
exposure and we like the yield. It’s just not as attractive as a year ago.
On the equity side, we’ve also been living with lower returns.
Whereas last year we were looking at unleveraged returns of 6.5% to
almost 7.0% for new construction, this year returns have generally
declined. Plus, we have initiated an acquisition program, with unleveraged IRR targets in the mid 5% to 6% range. So debt appears to
be providing less value, but then so is equity. However, despite the
lower returns in real estate, we still feel that the returns are attractive compared to the alternatives.
Prior to the downturn, we were
playing primarily in the 70% to
80% LTV slice. Today, we’re
playing below the 65%.
Coverage is strong given the
low interest rate environment,
and we’re really focused on
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