Blueprint: WeWork’s 12-month survival plan, leadership retirements at AEW and Savills IM, Brookfield’s Flatt predicts top vintage opportunity fund

WeWork plots a mass reduction in office occupation as part of plans to save itself in another headwind for institutional office landlords; AEW and Savills Investment Management see senior shuffles as Jeff Furber and Kiran Patel prepare for retirement; Brookfield boss Bruce Flatt predicts a repeat of the firm's famous post-GFC Turnaround Consortium performance; and more in today's briefing, exclusively for our valued subscribers.

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They said it

“Where investors are looking now, and you’re seeing extreme interest, is in need-based assets, assets where demand is consistent”

Christopher Merrill, chief executive at Harrison Street, speaking on CNBC’s Worldwide Exchange about real estate investment opportunities outside of residential.

What’s new

WeWork-ing out a problem
When WeWork announced in its Q2 earnings last week that “substantial doubt exists about the company’s ability to continue,” office landlords – while not surprised given the flexible space provider’s financial performance in recent years – would have been concerned. WeWork said it would take action over the next 12 months to reduce rent and tenancy costs and negotiate more favorable lease terms. Judging by the size of WeWork’s footprint in the US and Canada alone – which data provider KBRA Analytics pegs at 18.3 million square feet as of December 2022, despite having already reduced by around 27 percent over two years prior – this could have sizable implications for the office market.

Those implications will differ by market. For example, rent is still being paid at Charlemont Exchange, a building in Dublin entirely leased to WeWork. London-based Savills Investment Management purchased the office property in 2019 for €145 million in partnership with Seoul-based Vestas Investment Management, at a yield 70 basis points higher than Ireland’s CBD prime office average at the time. However, Kiran Patel, Savills IM’s deputy CEO and global CIO, told PERE this week “we were skeptical of WeWork,” owing to its limited profitability. He said there continues to be space for such a provider, but “in hindsight, if we had a similar occupier with the same credentials, paying the same rent, taking the same lease length, but with stronger financials, and that was available to us at the time of leasing, we would have chosen the latter.”

Savills IM shuffles its pack
Patel’s insights in his capacity as a full-time executive at Savills IM are coming to an end as the firm sets about making leadership changes ahead of the next market cycle. The management business of global broker Savills has hired Kevin Aitchison to the newly created role of managing director – equity investments UK and Europe. In local circles, Aitchison is a high-profile signing having led the investment management activities of Savills’ brokerage rival and London neighbor Knight Frank for past 11 years. His arrival at the end of the year coincides with the retirement of Patel. Patel, who was himself a high-profile recruit when he joined the firm in 2012 after serving as a top executive at Paris-based investor AXA Real Estate investment Managers, will remain as an adviser after a handover next year. During his time at the firm, Savills IM has grown in assets under management from £3 billion to £22 billion ($28 billion; €25 billion) and from eight to 16 offices. While paying tribute to Patel’s contribution, chief executive Alex Jeffrey said in a statement Aitchison was just the man to keep the “momentum and strength” of the business going “at a key time in the real estate cycle.”

CapitaLand’s search for growth
Singapore’s CapitaLand Investment is looking to India and Asia’s debt markets for growth as it further builds out its fund management business, the firm said following the release of its H1 financial results briefing. Citing strong demand from its investors, the manager owned by Singapore state fund Temasek announced last week it raised S$368 million ($272 million; €248 million) for its second business park development vehicle CapitaLand India Growth Fund 2 in India and has plans to scale up a credit program in Australia later this year. The group is accelerating its third-party capital management capability and has raised a total of S$3.2 billion of equity across four funds since the beginning of 2023. This represents a 28 percent increase compared with the S$2.5 billion of equity raised in full-year 2022. Check out our coverage here.

Trending topics

A fine vintage
“Vintage” was one word we heard on multiple earnings calls this quarter, including Bridge Investment Group executive chairman Bob Morse referring to 2023 as a “very good vintage of opportunity” for real estate.

Another top executive discussing the performance potential of current vintage-year funds was Brookfield Asset Management chief executive Bruce Flatt, whose firm launched its latest global real estate fund, Brookfield Strategic Real Estate Partners V, back in June. During the Toronto-based mega-manager’s Q2 2023 earnings call last week, Flatt said he expected the fund to be one of Brookfield’s best-ever vintages in real estate. BSREP V is due for a first close this year and a final close during H1 2024, per documents from the Pennsylvania Public School Employees’ Retirement System.

“The combination of the pockets of stress in capital markets and strong underlying fundamentals with constrained supply will lead to the best environment we have seen since 2009 to execute on our longstanding investment strategy for real estate, which is to buy high-quality assets for value and drive upside through active asset management,” he said [read the full story here].

Indeed, Brookfield’s strongest-performing real estate vehicle was its 2009-vintage Brookfield Real Estate Turnaround Fund, which was generating a 35 percent net internal rate of return as of June 30, according to the firm’s Q2 2023 supplemental information. The manager’s second-best performing real estate vehicle was its debut global real estate opportunity vehicle, the 2012-vintage Brookfield Strategic Real Estate Partners I, which delivered an 18 percent IRR during the second quarter.

M&A-wol
The high level of mergers and acquisitions enjoyed by the private real estate industry in the past two years has tapered off, according to research by Hodes Weill. In its 2023 Mid-Year M&A Market Review, the capital advisory firm finds only 10 M&A deals were closed or announced during H1, compared with 21 transactions in the first half of 2022, as capital market instability continues its chokehold on pricing.

The challenging fundraising environment managers have endured since interest rates skyrocketed should point to an increase in consolidation among smaller, boutique real estate firms, we are told. However, a lack of such activity in the first half of the year suggests the options on the table for the largest firms are less than ideal from either a quality, value or strategic perspective. Read last week’s Friday Letter for more on how M&A has diverged from expectations so far this year, and check out our coverage for key findings from Hodes Weill’s report.

NREP continues in Pole position
Two years after PERE broke the news that Copenhagen-headquartered manager NREP was seeking business beyond its familiar Nordic borders with a plan to invest in Poland, the firm has made its biggest play in the country so far.

NREP announced last Thursday the acquisition of an 80 percent stake in logistics developer 7R in a deal where it will inject €200 million into the business. The deal brings exposure to almost 20 million square feet of commercial space across 36 assets in “prime locations across Poland” as well as a pipeline extending to a further 25 million square feet and a 154-strong team to manage it. As with its first outlays in the country, NREP’s latest investment in Poland was made via is Nordic Strategies Fund Value-Add fund series, the latest and largest fund of which closed in May on a firm- and region-record of €3.65 billion.

Rune Kock, chief executive officer at NREP, described Poland’s logistics market as benefiting from “continued tenant demand but reduced supply.”

Data snapshot

The drought continues
Global investment in commercial real estate has fallen meaningfully for the sixth consecutive quarter. According to broker CBRE’s Q2 global investment briefing, $142 billion was invested in commercial real estate globally in Q2 2023, representing a decline of 57 percent year-on-year, and down 13 percent from the first quarter. 

People

Life after Jeff

When PERE asked AEW’s senior leaders in an interview in 2017 what was bad about real estate, then-chief executive officer Jeff Furber said: “What is bad about real estate is that we are seeing the lowest yields I have seen in my entire career. But cap rates relative to sovereign debt are still actually quite attractive. This is a place I have never been before.”

With both cap rates and sovereign debt looking markedly different today, Furber, who subsequently became the Boston-based manager’s chairman, is calling time on his 38-year career. After overseeing the firm’s growth in assets under management from $8 billion in 1997 to $90 billion today, he will retire at the end of the year, handing over the reins to Jon Martin, AEW’s North America CEO, Rob Wilkinson, who holds the same position in Europe and David Schaefer, chairman of its Asia business.

How does Furber describe looking back over his career? “Enormously gratifying,” he said in a statement.

Investor watch

Fund commitments bolster NPS holdings

National Pension Service of Korea, Korea’s pre-eminent state institutional investor, grew its real estate exposure in 2022 by 19.9 percent from the year before. The pension had 38.3 trillion won ($29.1 billion; €26.5 billion) invested into real estate last year with North American funds being the biggest portion of its investment, according to the pension’s latest annual investment disclosure. The investor added at least 23 new funds in 2022 including Invesco US Real Estate Fund VI, HCP Studio Fund and EQT Exeter Industrial Core-Plus Fund IV. See PERE’s coverage of NPS’s real estate holdings here.

This week’s investor meetings

Tuesday, August 15

Wednesday, August 16

Thursday, August 17

Friday, August 18

Today’s letter was prepared by Jonathan Brasse, with Evelyn Lee, Charlotte D’Souza and Christie Ou contributing