The Los Angeles-based firm surpassed its $400 million target, receiving all commitments from repeat investors from previous funds in the series. It did not set a hard-cap. The Teacher Retirement System of Texas committed $200 million to the fund, according to PERE data.
CBRE GI has already invested 90 percent of the raised equity in 10 properties across Dallas, Denver, Phoenix, Portland, San Jose and Washington, DC. The firm declined to comment on the fund’s performance target but noted that the first three funds in the series have reported an average 20 percent internal rate of return.
CBRE US Development Partners 5 differentiates itself from prior funds in the series with a name change from CBRE Wood Partners Development and an expansion of the previous strategy. While predecessor funds in the series focused on multifamily, CBRE US Development Partners 5 will not be limited by any one property type, according to CBRE GI portfolio manager Robert Jue.
Over the last 10 years, CBRE GI has seen opportunities in multifamily driven by demand from the millennial demographic, which the firm captured in previous funds. Now, Jue sees the same millennials creating demand across other real estate sectors at a time when return profiles for many commercial property types look more favorable than multifamily. The firm also wanted to assemble a more diverse portfolio for this latest fund, he added.
Unlike prior funds, the focus of the investments for CBRE US Development Partners 5 will revolve around developments catered to what the firm calls the “New Economy.”
“Real estate demand is changing structurally,” Jue told PERE. “In many cases there are certain things about old buildings that you cannot retrofit.”
Jue believes changes in demographics and technologies are creating a demand for more flexible spaces, mixed-use developments and properties that are closer together. Many old buildings cannot be renovated to meet these new demands, he explained. For example, older industrial buildings are built with shorter clearing heights that are not suited for the new technology being used on the market. Many industrial tenants today want higher clearing heights, which would require a structural overhaul. Similarly, office tenants these days want more shared common areas and open floor plans; existing buildings today were not constructed for these specific needs.
Though Jue acknowledged that construction costs have been rising, he said that in many property types it is currently cheaper to build than it is to buy, especially for high quality real estate. He also believes the firm lowers development risk for investors by choosing to work with long-term partner and CBRE GI affiliate Trammell Crow Company, a US developer.
Though there is risk in developing in the late cycle, Jue still sees near-term opportunities to build and exit these properties. In the base case scenario, the firm will build, lease and sell the properties over three to five years. However, if a downturn makes exiting difficult, the firm could hold the properties long term – approximately 10 years – he said. As a result, investors gave the CBRE GI team power to decide, without going back to the board to vote, whether properties should be held for the long term. Jue characterized the vehicle as a development fund with build-to-core potential.