Blueprint: Lone Star boss considers distress investing today, real estate reacts to the US debt ceiling agreement, what ESR’s Korea vehicle launch means

Lone Star's Grayken sees opportunities while the market finds its footing; a US debt ceiling deal relieves pressure on real estate but does not remove its obstacles, for now; ESR prepares a South Korea vehicle to capitalize on refinancing problems in the country; and more in today's briefing, exclusively for our valued subscribers.

They said it

“The journey to [a] better day… will require price discovery against a very uncertain macro and geopolitical backdrop – and, probably, more than a little hand-to-hand combat between borrowers and creditors”

Julian Salisbury, chief investment officer of asset and wealth management at investment bank Goldman Sachs, wrote in a commentary in the Financial Times on what it will take to get back to normal in private real estate

What’s New

Distress signal: John Grayken, founder of Lone Star Funds, says opportunistic buyers can take advantage of the market while there is a lack of consensus on pricing (Portrait credit: Richard Dawson)

Grayken’s view
Getting ahead of market groupthink is the name of the game for private equity real estate veteran John Grayken. In a rare interview, which forms the cover story of the June issue of PERE, he tells editor-in-chief Jonathan Brasse: “Once there is a general consensus, usually it’s too late for investors like us.” With inflation yet to become under control and interest rate rises still on the cards, a solid footing for institutional real estate investors remains out of reach. As such, many onlookers expect firms like Grayken’s distressed investment giant Lone Star Funds to make some serious hay with their opportunistic resources.

In our interview, Grayken shares his 1,000-foot take on today’s macroeconomic environment as well as his views on the various real estate asset classes. One key takeaway? In our discussion, he said while today’s economic predicament has its own hallmarks, it also shares some notably common ground with the crises of the past: issues arising from inappropriately assigned leverage.

A sigh of relief… for now
President Biden signed into law Saturday a deal that will ensure the US avoids defaulting on its sovereign debt by suspending its $31.4 trillion debt ceiling. The House of Representatives passed the bill last Wednesday night, which allowed for an extension to the US debt ceiling before its June 5 deadline, paving the way for its advancement to the Senate.

“In the short-term, a resolution will bring benchmark Treasury yields down slightly, especially on the short end of the curve,” Nitin Chexal, chief executive of Austin-based manager Palladius Capital Management, told affiliate title Real Estate Capital USA last week. Chexal noted a deal on the debt ceiling does not negate other issues the market is facing. “The majority of institutional real estate market participants continue to focus on economic growth, inflation and employment data, which will ultimately drive the Federal Reserve’s next move – skip, pause, or hike rates,” he added.

ESR’s next co-branding launch
Since closing on its acquisition of ARA Asset Management and LOGOS in January 2022, ESR has gone on to raise multiple co-branded vehicles, including ESR’s and LOGOS’ Pan Asia Core+ Venture, which collected $250 million in equity commitments from investors including the German pension fund Nordrheinische Ärzteversorgung and the US pension Employees Retirement System of Texas, according to PERE data.

Next up is the potential launch of a South Korea-focused capital solutions fund that will combine the traditional property sector focus of ARA with ESR’s new economy sector focus, which includes logistics, data centers and life sciences. The vehicle is expected to be used to capitalize on opportunities emerging from borrowers under pressure amid spiking interest rates in the country. For more details on the fund, check out our interview with ESR chairman Jeffrey Perlman here.

The hunt begins
Washington, DC-based Artemis Real Estate Partners is on the hunt for opportunities after closing on $2.2 billion of commitments in its fourth real estate fund, Artemis Real Estate Partners IV. The firm can invest in both debt and equity, with the latter being the most immediate opportunity, co-chief executives Deborah Harmon and Alex Gilbert told PERE. “In the transitionary phase where, with increasing rates and more difficulty providing equity, it’s made the most sense in the capital stack to be in that position,” Gilbert said.

More specifically, Artemis targets mezzanine or preferred equity positions, provides joint venture equity or will even buy non-performing loans. However, that will not be what all the capital is used for, as equity acquisitions will happen later in the three-year deployment period. “As pricing does correct, we would expect to be doing a lot more equity,” Gilbert added. Look out for full coverage of the fund this week.

Trending topics

All in on SFR
New York-based residential specialist manager Pretium Partners has acquired the majority of the US’s largest home builder’s single-family rental portfolio in a deal slated to be worth more than $1.5 billion. The manager is receiving a portfolio of properties across the Southeast and Southwestern US from Arlington, Texas-based housing construction firm DR Horton, as first reported in The Wall Street Journal. The deal size matches Pretium’s secondaries recapitalization of its first SFR fund in 2019, highlighting the firm’s conviction on a sector it helped to institutionalize. It  has more capital to deploy, having just closed its third SFR fund, Pretium Single-Family Rental Fund III, in April with $2.22 billion in commitments, per PERE data.

DR Horton is parting with 4,000 homes purposely built for rent. The homebuilder’s rental portfolio was valued at approximately $2.1 billion, according to its Q1 earnings call earlier this year. At that time, the firm predicted it would deliver between 4,000 and 5,000 homes this year, meaning Pretium has purchased the majority of that output.

Ban the ban
As a growing roster of US states adopt legislation to restrict foreign ownership of property, momentum is building in the fight to block the enforcement of such laws. Last month, Florida governor Ron DeSantis ratified a series of bills that would prohibit citizens of China from purchasing land in the state unless they are American citizens or permanent residents. Due to take effect on July 1, the bills also restrict the right of Russian, Iranian, Cuban, Syrian, North Korean and Venezuelan citizens to buy land within 10 miles of military bases in Florida. “If enforced it will have huge impact on international re-investment into the US,” one market source told PERE.

According to the Associated Press, Florida is one of 11 states where lawmakers have aimed to bar foreign ownership of property to some degree. Following calls of discrimination from protesters and attempts to sue lawmakers, the chair of the Congressional Asian Pacific American Caucus, Judy Chu, and CAPAC’s Housing Task Force chair representative, Al Green, have introduced the Preemption of Real Property Discrimination Act, which aims to preempt federal state laws that seek to prohibit property purchases based on an individual’s citizenship. According to Chu, laws such as Florida’s Senate Bill 264 aim to “implement a property-owning regime where Asian Americans and people of Asian descent will face undue suspicion and potential racial profiling by realtors, lenders, and others in the real estate industry.”

More of the proptech food chain
Los Angeles-based Fifth Wall is taking proptech capital markets to another dimension. Not content with dominating PERE’s Proptech 20 ranking of managers by capital raised over the last five years – it tops that with a haul of $2.65 billion – founding partner Brendan Wallace has announced the firm is to become an investor in other proptech funds too.

In a Linkedin post, he wrote: “Really excited about this: Fifth Wall is investing in seed funds and accelerators in both proptech and climate tech… we want to build close working relationships with the founders of these funds because they’re so close to the ground of the proptech and climate tech ecosystems.”

What does this say about proptech capital markets? Every market has a food chain, PERE has been told, and while Fifth Wall has a record of investing into the technologies that have already taken off, there is an incubation stage before that also needing funding – something this manager is now preparing to provide.

Data snapshot

Real estate remains significant for NPS
With a real estate AUM of 48.5 trillion won ($37.1 billion; €34.5 billion), real estate represented 31.8 percent of National Pension Service of Korea‘s alternatives portfolio in Q1 2023. The Seoul-based investor continues to add to it, recently tapping Goldman Sachs and Chicago-based specialist Bridge Industrial to manage overseas real estate investment. Read our full coverage here.


Big departure at JPMorgan AM
Any time there is a major real estate update from the asset management arm of JPMorgan Chase, the world’s largest bank by market cap, the private real estate industry pays attention. Late last week, PERE reported that Mike Kelly [his LinkedIn profile here], the head of Americas real estate at JPMorgan Asset Management, will be leaving early next year after nearly 15 years at the firm.

Since Kelly assumed leadership in July 2019, the firm’s Americas real estate business has grown slightly from $65.2 billion in assets under management in the Americas to $67.4 billion. The Americas continues to account for the vast majority of JPMAM’s global real estate business, which currently manages $80 billion in assets. To learn more about Kelly’s upcoming departure, check out our coverage here.

Investor watch

Doubling down on BTR in Australia
Dutch pension managers APG and Bouwinvest are looking to capitalize on the Australian government’s regulatory change in the build-to-rent sector by forming a partnership with local developer Scape. Operating under a new brand, the A$1.5billion ($992.5 million; €926.2 million) joint venture will focus on developing urban, transport-oriented rent-to-live assets.

The venture is still open for future capital raising. The formation of the venture comes amid Australia’s decision to half the withholding tax rate in the BTR sector imposed on foreign investors in managed investment trusts to 15 percent from July 2024. The change represents the government’s significant effort to attract more capital into the sector. All three parties previously partnered to invest A$150 million in the living sector in 2016, and last year, Scape hired Bouwinvest’s Asia director Tjarko Edzes as chief capital officer, PERE reported.

This week’s investor meetings

Tuesday, June 6

Wednesday, June 7

Thursday, June 8

Friday, June 9

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