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On October 19, 2018, the Cornell Real Estate Council (CREC) was pleased to welcome leaders in real estate finance and capital markets to the 36th annual Cornell Real Estate Conference. Our esteemed panel of Wall Street and capital markets professionals represent some of the largest and most influential real estate investment firms in the world. The panel gave valuable insight into key changes impacting capital markets, shifts in real estate fund structures, and future performance in the face of rising interest rates.
Andy Jonas – Co-Head of Real Estate, Goldman Sachs
Jonathan Pollack – Senior Managing Director, Blackstone
Mark Fawer – Partner, Greenspoon Marder LLP
John Kukral – President and CEO, Northwood Investors
Darcy Stacom – Head of NYC Capital Markets, CBRE
The panel kicked off with a discussion about the effect of increases in asset valuation on asset selection for investment managers, and on how the state of the real estate cycle has created some style drift pressure on equity investors. The panelists all noted a trend in firms redefining the categorization of assets between value add and opportunistic opportunities. One panelist noted that while more money chases more expensive assets, broad return targets of around 20% have not changed. This market dynamic is causing the assets held in some value-add funds to look more like properties fit for an opportunistic strategy. In other words, the amount of capital flowing into value-add funds and the chase to hit high-target returns has put pressure on these traditionally lower risk profile investment strategies to move toward assets that more traditional opportunistic or “buy, fix, sell” investor would have looked at in the past. A value-add fund that might traditionally do light upgrades on a property, sign higher-credit tenants and sell on a ten-year hold might now shift interest towards more development-heavy and riskier investments held for longer durations than a typical opportunistic fund.
In addition to this shift on the equity side of real estate investments, all panelists noted a large increase in the number of debt funds over the past two years. Driven by strong returns, rising rates and a desire to be closer to first lien position, debt funds address a growing appetite for lower risk and high upside (often double digit returns on an unlevered basis) without taking excess equity-like risk. The financing markets have become very competitive and the covenants that would be required a just a few years ago are often not attainable by lenders today. Panelists have seen a higher equity contribution from investors, even in the face of .25 to .50 decreases in cap rates over the last year in some markets. Rising rates have also put pressure on holding periods as investors seek to trade out of properties bought at high valuations and financing becomes more expensive.
The panel finished by discussing the possible consolidation of managers as an after effect of the late cycle environment. Large pension funds have outlined a desire to consolidate the number of managers in their portfolio during the last few years and many see this desire to limit the number of relationships as the impetus for consolidation. To meet the desired investment style and risk profile of each large capital provider, funds might have to acquire new capabilities by purchasing other managers to gain a competitive product offering for their clients.
The Cornell Real Estate community would like to thank the esteemed panel for their support of Cornell and for taking time to convey their observations and experience. The panelists are all in unique position to observe the late cycle trends impacting the real estate finance and investment industry. We wish them continued success and hope for more interactions in the future.