Evening Keynote – Real Estate’s Bull Market: Does It End Here?
The Graaskamp Center Spring Board Conference began on Thursday evening with a keynote presentation featuring Pam Boneham, Managing Director of Barings, Robert Bollhoffer, Managing Principal of 29th Street Capital, Robert Vrchota, Managing Director of Fitch Ratings, and Jojo Yap Chief Investment Officer of First Industrial Realty Trust. Moderator Michael Brennan began by asking the panelists why so much money is still coming to U.S. real estate given that we’re now a decade into a bull run. The panelists agreed that the U.S. is still a safe haven with a highly liquid and transparent market. In addition, industrial demand continues to grow thanks to e-commerce.
Brennan also asked what the panelists learned from the last recession and whether they saw any “canaries in the coalmine”. The group agreed that at this stage in the real estate cycle, underwriting the potential for a downturn is increasingly important. Vacant land ownership also comes under scrutiny with some companies setting a limit to vacant land ownership as a certain percentage of their balance sheet.
What are the best opportunities today? The panelists noted that rent growth between markets is more varied than ever. Accordingly, a keen eye towards growth is more important than ever. All agreed that prices, generally, are high. They’re looking for off-market transactions to avoid bidding wars, and they’ve also been taking a second look at alternative property types, such as student and senior housing. The industry is ripe for disruption.
Morning Keynote – Dr. Mark Eppli, Director, James A. Graaskamp Center for Real Estate
Our own Mark Eppli, Ph.D. kicked off the conference on Friday with a keynote presentation detailing the economic drivers behind the current real estate cycle. Through a compilation of Federal Reserve data, peer-reviewed publications, and research findings of his own, Eppli painted “a picture of caution” regarding the national economy, real estate capital markets, and highlighted concerns and opportunities for real estate moving forward.
Eppli discussed the strength of the S&P in recent months but cautioned that Europe contributes roughly 43% of S&P revenue; international events have a major impact domestic investment in the US. Eppli also did a great job deconstructing commonly advertised data metrics. For example, although 2018 saw 2.9% growth in GDP, 0.55% of that comes from government spending. In addition to this, Eppli featured some of his recent research on pension fund investments: showing a common theme of underfunded pension funds and alluding to what that may do for real estate investment managers as pension funds seek higher risk-adjusted returns in real estate.
Eppli moved into a discussion on real estate capital markets. Showing transaction volumes are around the previous peak, Eppli made sure to note that these transaction volumes do not account for inflation and that he feels volumes are at a sustainable level. Eppli presented data from the Mortgage Bankers Association that showed delinquency rates on multifamily loans are near 20-year lows which has led to more bullish lending, and, therefore, multifamily debt has been growing at a high pace. The entry of real estate private debt funds into the space, however, may raise questions about where investors are feeling they are best hedged against risk. Given that equity capital is yield constrained, investors are looking for even more alternatives to allocate their capital. These real estate private debt funds seem to have been an answer in recent years.
Eppli finished his presentation with concerns and opportunities he sees in the real estate marketplace moving forward. Among his principal concerns is homeownership rates. However, in recent years data has shown millennials to behave the same way their baby-boomer parents did. The only difference is the time horizon on which debt-saddled millennials are moving to suburbs and starting their own families. Industrial has a lot of runway for growth as last-mile distribution will become increasingly important to major e-commerce retailers.
Session 1 – Disruptors and Innovations in Real Estate
The real estate industry has not traditionally been an early adopter of technology. However, some of the new technologies discussed in Session 1 promise to bring value to the industry. This panel, moderated by Douglas Herzbrun, Co-Head of Global Research of CBRE Global Investors, and featuring Aaron Block, Co-Founder and Managing Directore of Metaprop; Bassem Hamdy, Co-Founder and CEO of Briq; and Sonny Tai, CEO of Aegis AI, offered fascinating insights about how the tech industry views the real estate industry and vice versa.
Money raised by venture capital firms and designated for property technology (“PropTech”) has tripled over the past five years. Some of this capital is funding Aegis, which is building a platform that uses artificial intelligence to recognize gun threats in buildings. The increase in capital is also helping Briq improve construction processes by monitoring pH balances in concrete so that fewer holes need to be drilled in the structure.
Session 2 – M&A Madness: Investment Strategies and Consolidation
Moderator Zoe Hughes, CEO of of NAREIM, began Session 2 with an observation: There was a lot of M&A talk during the financial crisis, but much of it never materialized. Today, M&A is everywhere. Why?
Panelists Ross Prindle, Managing Director of Duff & Phelps; Jeff Giller, Partner and Head of Real Estate of StepStone Group; Tim Kessler, Global Head of Corporate Strategy and Business Development for LaSalle Investment Management; and Doug Lyons, Managing Principal of Pearlmark Real Estate, noted that many of the mergers today are about economies of scale and raising money. Institutional relationships tend to be sticky, but managers can access this capital through a merger while gaining access to senior management and service platforms they may not have.
Unemployment is low and profits are high, as is competition for talent. Another reason for M&A today is increased liquidity, which allows firms more flexibility with compensation as more employees are seeking a portion of their firm’s carried interest. The panelists noted that they rarely lose employees due to compensation alone, however, and that opportunity, support, and a positive culture are crucially important.
Session 3 – The CEO Outlook
The conference ended with a heavy-hitting panel of real estate CEOs moderated by one of our Board Members, Serena Wolfe, Central Region RHC Sector Leader of EY. The panel brought together the whole spectrum of real estate with CEOs from multifamily, office, senior housing, and retail. The topics discussed included the major growth drivers within each sector, how public policy has affected each business’s operating model, and how innovations in real estate will present opportunities and/or threats to each.
Mark Parrell, CEO of Equity Residential, cited the urbanization of American cities as a means of bolstering continued demand growth in the multifamily sector. Coupled with Millennials pushing back their time horizons for establishing their own families and poor balance sheets as this generation is plagued by student debt, it shows why the homeownership rate has fallen in recent years and demand for apartment units in urban centers remains strong.
Bill Bennett, Principal and Founder of Novel Coworking, cites enterprise users as the main tenant of his company’s coworking spaces. As firms use office space to attract talent, a suburban-based company with an urban office satellite can compete for young talent.
Through the lens of public policy, Cindy Baier, CEO of Brookdale Senior Living, expounded on how new Medicare and Medicaid services have actually deterred seniors’ move into assisted living facilities as more options have been created to help individuals remain in their homes. Despite this, the aging boomer generation will certainly remain the fuel for growth in her industry.
Luke Petherbridge, CEO of ShopCore Properties L.P., shed interesting light on retail. Petherbridge cites innovation in retail real estate as a major driver and pushed the narrative that retail must adapt and be thought of with a different purpose in response to the upheaval caused by e-commerce. Viewing rent as an asset for customer acquisition in the case of companies like Warby Parker or Apple are examples of how retail will move forward.