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|Moderator||David Sherman ’82, Metropolitan Real Estate and Paul Milstein Center for Real Estate|
|Panelists||Peter Ballon, Canada Pension Plan Investment Board|
|Adam Gallistel ’04, GIC Real Estate|
|Susan Swanezy, Hodes Weill & Associates|
|Kevin Faxon, J.P. Morgan Asset Management|
By Mark Abramowicz ’18 and Robin Lore ’19
The United States, and especially New York City, has always been an attractive destination for foreign capital but over the past several years, global institutional real estate investors have played an outsized role on the US investment scene. David Sherman ’82 moderated a discussion on trends in the global real estate investors with four experts on global and domestic real estate investment.
The panel began by discussing how global institutional real estate investors have evolved in the last few years. Offering his expertise on Asian investors, Adam Gallistel ’04 explained that Asian capital is no longer content being silent partners and investors are electing to build internal teams to get closer to the asset and avoid costly fund management fees. Moreover, these investors are expanding their investment horizons beyond the traditional “big four” asset types and are now investing in niche strategies such as manufactured homes and ski resorts. Peter Ballon echoed the increased focus on niche strategies by explaining that global pension fund investors are more focused on finding attractive risk-adjusted returns and that many investors, including CPPIB, no longer use strict asset class allocations.
The conversation then shifted to the changing landscape of fund management and the recent consolidation in the space. Susan Swanezy, offering her perspective as an advisor to many funds and investors alike, asserted that consolidation is a natural progression. Driving this trend are investors looking for larger GP commitments from middle market fund managers who in turn are seeking to align with platforms with access to more distribution channels. Eliminating the back-end promote has taken its toll on middle market managers.
Evaluating risk and seeking appropriate risk-adjusted returns were common themes. In describing trends in capital flows over the last several years, the panel agreed that core strategies fell out of favor in 2016, but Kevin Faxon described a peculiar and dramatic shift in investor sentiment with capital now exiting higher-risk and return strategies and moving into core and core-plus. Sherman remarked that he had never seen sentiments flip so quickly before. Diving deeper into the concept of risk, the panel discussed how investors view and price risk differently. Ballon noted that CPPIB’s requirements for liquidity are far lower than for other investors and therefore don’t require the same risk premium, resulting in essentially “free” return. The disconnect between public and private markets has also been a problem, with buyers coming in with bids at much higher cap rates than asking price, sometimes as high as a 200-basis point spread.
Circling back to another hot topic debated by the panel, where to find yield in today’s environment, Faxon explained that secondary and tertiary markets can be appealing because of the increased ability to push NOI, but that matching asset type and location is till tantamount to employing these strategies successfully. For example, luxury multi-family in middle America or trophy office assets in smaller markets would struggle relative to industrial in transportation and logistics nodes. Sherman weighed in on how well-located retail can be a land play for future multi-family or office conversion or development, while Swanezy discussed the opportunities in taking a contrarian approach to retail, like repositioning street retail by matching non institutionally managed retail in markets with strong local demographics with retail -savvy managers.
One area where the panel agreed that yield will not be coming from, is further cap rate compression. Ballon noted that most investors have not been achieving their underwritten NOI growth and instead have benefited from cap rate compression driving returns. Gallistel mentioned Brazil and India as potential sources of value growth, but agreed that most of the developed markets will not see further cap rate compression. One wild card, however, could be Japanese investors that are ready to deploy significant amounts of capital into the US, particularly into core real estate.
Overall, the panel concluded that real estate continues to be in high demand by global institutions. Swanezy shared results of an annual Hodes Weill target allocation survey showing investors are increasing their allocations to real estate, although their conviction in these investments has declined from last year. Gallistel commented that GIC has consistently been below its target allocation to real estate but that it remains in the teens.
To conclude, the panel offered their outlooks on specific asset classes moving forward, and then debated where we are in the real estate cycle. Specifically with office, some thought that there was still potential for future growth and absorption while others were bearish with concerns about oversupply and the changing work habits of millennials. Similar concerns about industrial and multi-family reaching their peaks were discussed as well.
By combining global institutional investors Peter Ballon and Adam Gallistel, on a panel with domestic experts Kevin Faxon and Susan Swanezy, it became clear that global and domestic investors share similar investment strategies and outlooks on the market. Overall the real estate investment market is extremely competitive and to remain active and successfully chase yield, investors have to carefully assess risk-adjusted returns look for opportunities beyond the traditional asset classes.
Mark Abramowicz is a second- year student at Columbia Business School and is VP of Case Competitions for the Real Estate Association. He is pursuing opportunities in real estate investment and spent his summer at Tishman Speyer. Prior to Columbia Business School, he co-founded two real estate technology ventures in Boston, MA. He graduated from Tufts University in 2010 with a BS in Quantitative Economics and a minor in Entrepreneurship.
Robin Lore ’19 is a first-year student focused on real estate and is the AVP of Trips for the Real Estate Association. Prior to Columbia Business School, Robin worked at Bentall Kennedy, a North American real estate advisor, on both the investment management and corporate teams. Robin graduated from the University of British Columbia with a BCom in Finance and Real Estate and is a CFA Charterholder.