ULI Equity Panel: It’s ‘Pencils Up’ for the Right Property Types
There is a growing sense that commercial real estate has turned the corner and transaction activity will soon normalize. That’s welcome news for equity investors who are eager to buy new assets and sell others.
“We are definitely closer to the bottom than we are from the top,” Robert Jue, CEO of Standard Real Estate Investments, said yesterday during the “Capital Markets: Raising Equity” panel at the ULI Spring conference. “Let’s get things done in 2024 rather than in 2025.”
The bid-ask spread is narrowing, noted Chris Aiken, head of acquisitions for MetLife Investment Management’s Real Estate Group. “Sellers are capitulating to where values are,” he observed. “(Some) may look to offload exposures to try to live another day.”
For buyers, yields will be thinner, Aiken added. But, if you have a long-term view, there is opportunity. Meanwhile, after a long bull run, he noted, “value creation is going to have to come from operations.”
The industry and the U.S. economy may not be out of the woods just yet, however, so the enthusiasm for transactions is tempered for some.
“There are more potential risks and not necessarily known risks,” said Dwight Stephenson, principal of Blue Vista Capital Management LLC.
Known risks include real estate losses for banks, geopolitical risk and election risk, with transaction activity to be significantly impacted from September through Nov. 4th, Stephenson noted.
“Our house view is cautiously optimistic,” he said. “We are still active, still pencils up. But we are going to be a little more on the conservative side.”
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Sector-specific outlooks
Starwood Capital Group Managing Director Bakari Adams said higher interest rates make the firm’s risk-reward threshold difficult to achieve. “We haven’t pulled the trigger on deals,” he said. “We need a higher hurdle to get there. But going forward, I think we will see opportunities.”
Of course, you can’t paint real estate with a broad brush. “It really depends on the sector,” said Adams, who also heads Starwood Impact Investors. “Data centers—you see vacancies go down there.”
Starwood has been a major investor in U.S. and European data center development through its various investment vehicles. Earlier this year the company launched Starwood Digital Ventures, a platform dedicated to the company’s $8 billion-plus data center investment strategy.
The other panelists also identified the pockets of CRE that they are eyeing for equity positions.
Blue Vista is investing in secondary markets and niche plays that require smaller checks. They like self storage and small-bay or shallow-bay industrial because of the supply and demand dynamics, and because they are “a lower-basis-type” of investor. “We are very fond of niche strategies that make sense,” Stephenson said.
For MetLife, the current focus is on trying to buy multifamily and industrial at discounts to replacement costs, Aiken said. In industrial, they favor the light-scale variety in markets with population density and infrastructure. They also like single-family rentals in communities with lifestyle amenities and good schools.
Standard Real Estate is pursuing multi-tenant industrial properties because demand is good, and there is not a lot of supply. And, in markets that are approximate to amenities and employees, they see a growing opportunity for industrial tenants to co-locate their offices at the properties.
But even Jue is managing expectations. “What people want out of real estate has changed,” he said. “Love the basis and hate the yield, and still move forward.
The panel was moderated by Kyle Bolden, senior audit partner, in Ernst & Young’s Real Estate, Hospitality & Construction practice.
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