He said it
“Maybe you can’t buy a media company or tech company. But you can own their real estate”
Urbanization is the granddaddy of all secular trends for real estate investors. Year after year, millions around the world move from rural areas to access big city opportunities. But the story is a bit different in the US. The flow of migration for businesses and people has actually been away from the biggest, densest (and most expensive) cities to lower-cost metros. Like so many trends, this movement has been accelerated by covid-19, with remote work capabilities sending big city office workers scattering throughout the country, with some pledging never to return.
It is easy to write off this big city exodus as a mere hiccup, rather than a terminal threat. However, a full-scale collapse is not necessary for a paradigm shift for urban core real estate. Many investors and managers embraced this possibility before the pandemic. As this month’s cover story finds, those who do not accept it now could find themselves left behind.
Speaking of the big city office market, it got some critical insight into pricing last week when San Francisco’s most iconic skyscraper changed hands at a notable discount. A group of investors including the German pension Bayerische Versorgungskamme, London-based manager Deutsche Finance International and New York private investor Michael Shvo, finalized their purchase of the Transamerica Pyramid from its namesake company, Transamerica Insurance for $650 million. The sale came after eight months of negotiations that saw the sale price drop 8.7 percent from the $711 million originally asked for in February. So yes, trophy assets can be bought and sold in a pandemic, but not without some extra negotiating and possibly a discount.
As the focus on scientific progress has intensified during the pandemic, so too has investor demand for real estate that touches the sector. London-based private equity firm Meyer Bergman is the latest manager to jump on the bandwagon, unveiling plans to launch new strategies in life science and digital real estate, as part of a broader announcement about its rebranding as MARK. Previously, Meyer Bergman focused primarily on office and residential strategies, but after a successful dip into industrial with its Crossbay logistics platform, the firm has opted to explore other alternative property types.
Winds of change
Real estate owners, operators and investors are bracing for big shifts in occupier expectations post-pandemic, an Ernst & Young survey found.
Co-working innovation reaches retail money
The conundrum of how to de-risk the flexible working component of an office building continues to drive innovative solutions. The latest case is happening at The Mailbox, the large, mixed-use property in Birmingham currently listed on specialty stock exchange IPSX by private equity real estate manager M7 Real Estate. Serviced offices specialist IWG (more info on them here) has agreed to a 10-year lease on 50,000 square feet at the shopping center for its brand Spaces. Occupiers will pay rent directly to the incoming REIT, while IWG’s management fees will be based on a percentage of rent received. Partners are so keen on the deal that M7 is pushing back its floatation of The Mailbox to update its listing prospectus and increase its target raise by £3.5 million ($4.6 million; €3.9 million) to pay for Spaces fit-out, while IWG has expressed its intention to participate in the raise. Find the full announcement here.
A tale of two office markets
The future of the $2.5 trillion US office market has been a prominent discussion topic for months. But, as US-based asset manager FS Investments pointed out last week, it is hardly a monolithic sector (see their blog post on the subject here). Suburban offices, for example, were performing better than CBD offices even before the pandemic, and the current environment has only boosted demand for them. Comparatively cheaper rents and more space availability are the biggest draws. The firm notes the average price per square foot of suburban office space is slightly less than half that of the CBDs across the US. So, the office sector as a whole might be facing structural headwinds, but there are enough tailwinds pointing towards a pickup in suburban office development and leasing activity.
At your service
As the real estate industry continues to sharpen its focus on service, Hines has made one of its most occupier-centric hires to date in Europe, bringing aboard WeWork executive Ronen Journo as European head of operations. In his new role, Journo will focus on workplace interaction for Hines’ European office tenants, property management operations and enhancing the user experience. He has a lot of transferrable skills coming from WeWork, having carried out very similar duties during his three-year stint at the customer-focused co-working operator.
Getting in the game
Croatia’s largest pension fund, AZ, has made its first investment in real estate through a special purpose vehicle managed by London-based M7 Real Estate. AZ’s first acquisition through the vehicle was a €21 million logistics and distribution center in the Croatian capital Zagreb. The pension credited the decision to enter the real estate market to the low interest rate and bond yield environment as well as a desire to diversify its portfolio. AZ will continue to invest with M7, though it did not announce a specific target for the sector.
This week’s investor meetings
Wednesday, November 4
- The Foundation Daytona State College
- Alameda County Employees’ Retirement Association (ACERA)
- City of Tucson Supplemental Retirement System
- Fresno County Employees’ Retirement Association
Thursday, November 5
- Los Angeles County Employees’ Retirement Association
- City of San Jose Police & Fire Department Retirement Plan
- Los Angeles Fire & Police Pension System
- Oklahoma State Regents For Higher Education
- San Bernardino County Employees’ Retirement Association (SBCERA)
Friday, November 6
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