Blueprint: ESR’s confidence in rental growth, PAG and KKR’s shortlisting in $10bn data center deal, ADIA’s new student housing JV

ESR touts the power of rent growth to mitigate interest rates; KKR and PAG are shortlisted in $10bn data center deal; ADIA expands existing student housing relationship; and more in today's briefing, exclusively for our valued subscribers.

They said it

“I still think you’ll see rent growth for the next three to five years”

Patrick Carroll, founder and CEO of CARROLL, an Atlanta-based multifamily fund manager, speaks to CNBC in response to a potential recession’s effects on multifamily investment

What’s new?

What, me worry?: ESR chairman Jeffrey Perlman thinks inflation and strong rental growth in the firm’s chosen sectors will stave off any negative effects of rising interest rates

Rising rate offset
Jeffrey Perlman is not worried about rising interest rates. “Rent growth is a powerful thing,” the ESR group chairman told investors last week on the Hong Kong-based firm’s H1 results webcast. Inflation and strong rental growth in the new economy sector would offset any potential repricing of assets in its portfolio, he asserted.

Underpinning the firm’s rental growth – which averaged 13 percent in Australia and exceeded 15 percent in South Korea during the first half of the year – is high occupancy. Indeed, ESR has seen an overall positive weighted average portfolio rental reversion of 5.8 percent across its new economy portfolio, according to the firm’s H1 2022 financial results. That portfolio reached a record 96 percent occupancy, with record leasing of 21.5 million square feet, in the first six months of the year. Read our full coverage here.

Bidder pool narrows for Global Switch
After launching a search for a buyer in May, London-based data center specialist Global Switch has reportedly narrowed the field of potential suitors from more than a dozen to five. The shortlist comprised a diverse mix of bidders, including multi-asset firms with dedicated platforms in both real estate and infrastructure, namely New York-based KKR and Stockholm, Sweden-based EQT, according to a report in Bloomberg.

PAG and Gaw Capital Partners, two Hong Kong-based firms that have invested in data centers through their real estate businesses, are also in the running, as well as New York-based infrastructure firm Stonepeak Partners. Not making the cut were Blackstone, Brookfield Asset Management and AustralianSuper. The sale could value the company at around $10 billion.

Trending topics

Office shrinkage continues
As office occupiers reduce their footprints, so too are North American pension plans shedding space in the once stalwart property type. Offices now represent 23 percent of real estate portfolios compared with an average of 34 percent at the end of 2019, according to a report from The Wall Street Journal last week. Michael Turner, president of Oxford Properties, the Toronto-headquartered real estate arm of the Ontario Municipal Employees Retirement System, told the publication that he expects the investor’s office exposure to shrink from 25 percent to 20 percent of its real estate portfolio within the next decade. Also downsizing in office is Sacramento-based California State Teachers’ Retirement System, whose chief investment officer Christopher Ailman said at a board meeting last month: “No one can quite figure out the office market because office usage is just all over the map.”

Powell warns of another ‘unusually large’ rate hike
As inflation continues to run at a 40-year high in the US, Federal Reserve chairperson Jerome Powell delivered a speech at the Jackson Hole Economic Symposium on Friday on the central bank’s continued efforts to temper sustained levels of high inflation. Powell said that the bank will likely have to maintain “a restrictive policy stance for some time,” and that another “unusually large increase” in the federal funds rate could be coming at the Fed’s September meeting.

In the last few months, rising rates have begun to trigger a pricing reset across property types, slowing transaction activity as highly levered buyers retreat from the market, according to conversations with market participants. In his address, Powell acknowledged the negative knock-on effects of aggressive rate hikes on households and businesses. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” he said.

Data snapshot

Retail cap rates poised to expand
After remaining flat or compressing during H1 2022, retail cap rates are now expected to tick upward, according to CBRE’s US Cap Rate Survey H1 2022 report. However, a renewed interest from institutional buyers could put a ceiling on the increase in coming quarters, the report warns.

People moves

From head of New York to CEO
Former Oxford Properties executive Adam Frazier [his LinkedIn here] has joined New York-based real estate investment trust Columbia Property Trust as its new president and CEO. Frazier most recently served as head of New York for the Toronto-headquartered real estate arm of the Ontario Municipal Employees Retirement System. Before Oxford, Frazier spent more than six years at Boston Properties, another office-focused REIT.

He replaces Nelson Mills, who has been CPT’s CEO for the past decade and will step into the role of non-executive chairman of the board. CPT is in a period of transition following its privatization by PIMCO last year. After becoming part of PIMCO, the REIT recently exited an investment in Normandy Real Estate Management, a real estate manager it had acquired only two years prior.

Investor watch

Another Landmark deal for ADIA
ADIA has added another commitment to its longtime student housing partnership with US residential specialist Landmark Properties. The pair have just formed a $2 billion build-to-core joint venture targeting one of the sovereign wealth fund’s high-conviction themes. The venture will focus on developing and operating student housing properties in select markets throughout the US, according to a press release.

This will mark the second time this year the parties have teamed up in the sector, having established a $1 billion value-add student housing platform in March. The Athens, Georgia-based manager and ADIA currently oversee a portfolio of around 17,400 beds in tier one university markets across the US through their existing joint ventures.

This week’s investor meetings

Friday, September 2

Today’s letter was prepared by Peter Benson, with Evelyn Lee and Christie Ou contributing