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|Moderator||David Sherman ’82, Metropolitan Real Estate and Paul Milstein Center for Real Estate|
|Panelists||Sonny Kalsi, GreenOak|
|William Rahm, Centerbridge Partners|
|Nancy Lashine ’81, Park Madison Partners|
|Steven Hason, APG Asset Management|
By Sofia Zamora ’18 and Morgan Mann ’17
Given the recent US election, instability in Europe, reliance on foreign investment in US markets, and recent valuations in commercial real estate, the panel provided some varied and interesting perspectives on what it means to be a global investor in today's world. David Sherman ’82 opened by sharing that the panel had originally brainstormed their vision for this conversation a few months ago, before the US election, and how they had all imagined that the discussion would be focused on Brexit and the instability in the European Union. He mused over the fact that now there is no avoiding the fact that the election results, in a way, overshadowed the European volatility, and most people are talking now about the uncertainty here in the US. So instead of a conversation focused around European uncertainty, he opened with a question about how the global uncertainty had changed the panelists’ investment strategies.
William Rahm started by sharing that this perceived uncertainty has generated a high demand for repricing of loans and, despite the low rates, there is high yield in the US and European markets. There are low spreads in the real estate and leveraged finance markets. Due to the uncertainty and new regulation, this will be the first year of contraction since the downturn in the CMBS volume at $65B down from the $225B in 2007. Loan originations in the US are back to pre-2008 volume. Shares of Freddie Mac and Fannie Mae surged post-election and it is his belief that if both institutions pull back it will drastically hit the residential multifamily sector. Finally, the European market has not shrunk post-Brexit.
Steven Hason weighed in next, stating that from a capital investment perspective, it appeared rates were not going to move up too fast. In general, the market seems balanced, there is no oversupply, and banks are not overleveraged. Economic growth is moderate at 2%. Thus, as a firm, they invest in low leverage assets with a steady 5% to 6% yield. Multifamily residential and Class A malls remain a strong investment for them, and Brazil is an appealing market because investors have lost interest; therefore, high yield opportunities are more affordable in contrast to the US market. There is a general preference for investment in the US because the current climate presents a growth scenario and assets continue to perform well. In contrast, the European market offers a lower growth environment and there is a general concern about underlying real estate fundamentals.
Nancy Lashine ’81 felt that it is too early to tell what the US election may mean for markets. There is uncertainty about the direction of the U.S. Treasury risk free rate. During the 1990s the political risk premium was massive, but the currency risk was ignored. She rhetorically asked what the true risk free rate should be today. In her opinion, there are areas where risk is being miscalculated as particular attention should be placed to the unique risks prevalent to each city. Ms. Lashine also recommended looking into investing in emerging economies, particularly Brazil, where other capital has become uninterested, lowering entrance costs. When correcting for currency risk in Brazil, returns are very positive, especially when partnered with local talent.
Mr. Sherman then pushed the panelists to share where they specifically would invest.
Sonny Kalsi indicated that prior to October, he would have invested in Japan, Spain, Italy and the US. Post-October he is more constructive towards the US due to the supply availability, the costs and the high valuations. In the numbers, the US appears to be doing only slightly better than Spain and Italy, but the US is a tricky market because most statistics are about the general country while the main hubs have much higher opportunities. He believes that the governmental gridlock will decrease, the prospect of infrastructure investment is very positive, and the country is on track for growth and inflation, which makes it very appealing to investors. He does warn that it is a tough time to be a landlord. Fixed income is going up but most buildings are fully occupied with long-term leases, so no one is buying.
To clarify, Mr. Sherman then asked if the panelists believed that there was growth in the United States.
After some contemplation, Ms. Lashine began by saying that there continues to be government-fueled growth in capital through low interest rates. However, institutional investors are pricing their portfolios at 6-8% and are getting a lot less. She believes that incremental capital flows are artificially keeping pricing high. Mr. Rahm believes that this was not a policy-driven election, but that there is a view that there will be growth, though there are no concrete steps of how it will happen. Markets seem to be optimistic of more growth despite the fact that we have already enjoyed the longest recovery in 45 years. Everyone seems to be wondering what will trigger the next recession.
As a final question for the panel, Mr. Sherman asked the group about their predictions for the industry. Mr. Kalsi took the question first; he thinks global growth in the next 10 years will be slower than in the previous 15 years. In the US, Trump’s non-descriptive agenda is providing better near term prospects; however, land values are dropping. Land values in NYC are a huge indicator of national behavior. Ms. Lashine added that she believes technology innovation will increase growth rates. Noting that technology is changing the replacement costs of buildings, potentially making it more affordable in the long run to replace than to renovate and repair. Mr. Hason jumped in with his view on growth as it relates to changes in life expectancy and how that changes the ways to invest in the human lifecycle.
In closing, Mr. Sherman brought the conversation back to the recent election results, observing that we saw the Midwest vote for Trump, but from a real estate standpoint we do not see the economic stimulus in that region. The Department of Labor leans towards anti-labor policies and anti-expansion of union rights. Thus, the cycle appears to continue: political unrest for the next 10 years, with slow economic growth rates, which Mr. Sherman believes indicates that people should consider investments with shorter durations as opposed to certain geographies or regions.
Sofia Zamora ’18 is a first year MBA student at Columbia Business School. Prior to starting her MBA, she worked for five years as a structural engineer in the infrastructure and real estate markets. She focused on engineering consulting and fast track project management for restoration projects. Upon graduation, Sofia is looking to join a real estate investment team.
Morgan Mann ’17 is a second year MBA candidate focused on real estate finance and development. She received a Bachelor of Arts in Architecture and a Bachelor of Science in Construction management from the University of Washington. Prior to business school she worked as a Preconstruction Manager for a commercial general contractor in the San Francisco Bay Area. Recently she was a Summer Associate with Allianz Real Estate of America in the commercial mortgage lending group, valuing current portfolio assets, sizing and underwriting new loans in addition to assisting the portfolio management and equity investment teams.