Institutions transfer billions to new real estate sectors due to volatile office real estate market


Money is pouring into U.S. real estate funds as the country recovers from the coronavirus pandemic, but the investment strategies they are pursuing look different from two years ago.


Bisnov / Miriam Hall

New York skyline

Historically, downtown office towers have been a prime target for major real estate investors, as their asset size allows them to host hundreds of millions of dollars at a time. But now the long-term stability of office assets is in question as many office buildings remain less than half full and investors are turning their attention to new types of real estate.

The multi-family and industrial sectors were two of the hottest targets as property types performed well during the pandemic, but as these sectors fill with cash, investors are turning to alternative sectors such as life sciences, medical offices and data centers. …

“There is a flow of capital all over the world in search of some kind of return, so capital is invested in alternative CREs just as a way to find opportunities, because there are so many people in other markets,” Real capital analytics Senior vice president Jim Costello said.

The volume of transactions in industrial properties and apartments from January to May was 18% and 8% higher than the 2015-2019 average, respectively, as shown in the latest RCA US Capital Trends report, while all other major real estate sectors were below their pre-pandemic norms.

The total volume of real estate transactions in the United States in the second quarter was $ 68.3 billion, according to the Preqinwhich is more than double the number in the second quarter of 2020. Between January and June Preqin reported an increase in the number of real estate funds on the market by 16% and an increase in endowment capital by 15%.

“There’s a lot of money” Avison Young President for Capital Markets USA John Kevill said. “Unlike in 2009 and 2010, there was no serious degradation of the capital base. People have made more money, so they have more opportunities to invest. And the world is an unstable place, and real estate has always been a good place. for investments in times of instability ”.

This increase in fundraising targets has not yet resulted in the closure of new funds; 59 funds closed in the second quarter for a total of $ 19 billion, according to Preqin, the weakest quarter in five years. There have been several high-profile closings so far this year, including $ 4.7 billion fund of Oaktree Capital Management, but $ 2.8 billion fund of Cerberus Capital Management and $ 1.7 billion fund of Ares Management

“Now there is an appetite for real estate”, Nuveen Real Estate Managing Director Nadir Settles said. “We raise money where there is great demand, and we raise money in large volumes.”


Courtesy of Nuveen

Nuveen Managing Director Nadir Settles

Settles directs office investment in New York for Nuveen, a subsidiary of the insurance giant. TIAA with assets under management of $ 133 billion. According to him, he sees the greatest demand in the apartment and industrial sectors, as well as in emerging sectors such as life sciences.

“In other cases, it’s more of a problem because it’s investor appetite,” Settles said. “They have a thrill in retail. They have a thrill in the office, so where there is demand for Nuveen in multi-family and alternative investments, other investors, as well as we, are likely to see the lion’s share of the flow coming from here. ”

Concerns over investment in downtown office space persist because workers have yet to return in large numbers, 17 months after the outbreak of the pandemic. Building Security Firm Kastle Systems reported on average building occupancy 31% in the top 10 markets in the week of July 7, up from 32.7% a week earlier.

Settles said the market for investment in a traditional downtown office is still not recovering, but he expects that to happen after Labor Day, when more people return to the office. Meanwhile, he has seen a surge in demand for real estate, which Nuveen sees as a sub-sector of office activity: the science of life.


Courtesy of Nuveen

Rendering of a Nuveen life science reconstruction at 125 West End Ave. in Manhattan.

Nuveen and several partners in March closed financing deal for $ 600 million rebuild the former ABC / Walt Disney Manhattan office building into the life sciences building, including wet and dry chemistry laboratories. Settles said the project has been in development since 2019, but the pandemic has only increased the demand for life sciences.

“The subsector that really grew during the pandemic was life science,” Settles said. “We already have a foothold in the life sciences and are looking to delve deeper into them, and there is a strong investor interest in life sciences.”

The $ 1.7 billion Ares Management Fund is the largest fund to date, attracting more than 35 investors from around the world, said Ares, head of US private equity investment David Roth. He said the active fundraising, which was above the $ 1.5 billion target, shows that there is a strong appetite for US real estate in today’s market.

“The industrial sector continues to experience strong investor demand, with the secular e-commerce trend further exacerbated by COVID,” Roth wrote. “In addition, we see that over the past decade, ‘niche’ or ‘related’ sectors such as life sciences, data centers and student residence have quickly become institutionalized, and institutional investors have become more familiar, active and convenient to invest in these sector “.

Kevill, who brokered the sale of a housing estate for workers. near Atlanta in April for $ 45 millionAccording to him, he has seen large investors strive to reduce the number of offices in their portfolios and add other types of real estate that they did not previously own.


Courtesy of Avison Young

Avison Young Managing Director for Capital Markets, USA John Kevill

“Institutional investors in particular are looking at the pie chart they all put together, with asset allocations and adding new pieces to the pie,” Kevill said. “Now you see a segment for senior living, medical office, self-storage, last mile industrial plants, data centers. Even the larger core and core plus funds seek to spread risk in many cases outside the office and across other asset classes. “

Kevill said that the stability of the stock market and financial system during the Covid crisis, compared to the previous recession, has given investors large reserves of money to invest in real estate, and they increasingly look at the underpinnings of each sector and see how much more upside potential others have. types of real estate than an office.

“This strategy is essentially a reboot,” said Kevill. “This [pandemic] was such a shock to the system that many investors had to take a step back and look at their strategy. “

Aside from market fundamentals, Kevill said the shift was also driven by the amount of information available on emerging real estate sectors.

“The amount of data available to investors to validate asset classes that were not previously institutionalized has skyrocketed,” Kevill said, citing medical office, data centers, industrial plants, flexible offices, and high-rise apartment buildings as examples.

In addition to the stock markets where you can invest billions of dollars in real estate, the debt markets are also full of cash. CBRE Vice Chairman David Webb said.

“When it comes to financing, banks are stronger than ever,” Webb said. “Banks are stimulating bank lending, and they are also stimulating debt fund lending, so both of these areas will continue to improve. They are both very strong. Life companies have been strong all year, and Fannie and Freddie are strong too. and very competitive. “

Webb said the volume of debt and equity instruments requiring deals is tightening capitalization ratios in many sectors, reducing the potential return on investment in acquisitions.

“There is a huge amount of cash that can be invested around the world, so much money for everyone,” said Webb. “So it’s just supply and demand, they’re cutting capitalization rates and raising prices … and buyers seem to be willing to put up with lower yields.”

Costello said investors are particularly willing to put up with lower returns in the multi-family and industrial sectors, which are in the highest demand, leading to higher prices. According to RCA, national apartment prices rose 10.1% in May over the same period last year, the highest growth followed by industrial prices of 9.5%.

“The housing and industrial sectors tend to be slightly more stable and have more predictable income streams,” Costello said. “It’s an element that they are willing to accept with lower returns and the fact that they see some growth opportunities ahead.”

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