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Exeter’s Fitzgerald: 40% of office assets will become obsolete

The executive sees investment opportunities in the sector’s outdated properties as the firm seeks to expand in real estate with new parent company EQT.

As with most mergers and acquisitions, EQT’s purchase of US real estate investment manager Exeter Property Group is a growth play.

“We decided to focus on growing our real estate platform,” said Lennart Blecher, head of real assets and deputy managing partner at EQT, in an interview with PERE. “Organically, it would have, in the context of EQT, taken too long a time. So we felt that we had to do something on the strategic side. Based on capital mega-trends, the low-interest-rate environment, LPs hungry with yield, we wanted to focus on the industrial logistics sector, because it’s growing quite quickly, driven by some structural trends, including accelerating e-commerce adoption, changing global supply chains.”

The Swedish private equity firm had also wanted to increase its presence in North America, which made it focus on the North American market for real estate acquisition opportunities.

Founded in 2006, Exeter currently manages a global real estate portfolio of more than $10 billion of logistics, industrial, life science, office and residential properties, including $7.7 billion in the US and $2.5 billion Europe, with additional holdings in Asia-Pacific and Latin America. With logistics accounting for approximately 80 percent of the firm’s portfolio, Exeter founder and chief executive Ward Fitzgerald expects the firm’s allocation to other property sectors will grow slightly more quickly given Exeter’s already prominent exposure to industrial real estate.

For example, he sees more investment opportunities in outdated office assets. “There is going to be an interesting evolution of the use of office space,” he said. “I would say approximately 25 percent of the sub-markets that hold office space today will become obsolete and within the 75 percent of viable sub-markets, 25 percent of the product in them will become obsolete.”

All told, Fitzgerald estimated that approximately 40 percent of office assets in the US and Europe are facing obsolescence overall.

Fitzgerald pointed out, however, that the same phenomenon had occurred in the logistics sector starting about 25 years ago, when the first million-square-foot warehouse was built for food manufacturer Kellogg’s. “The movement towards the specialization and efficiency and utilization of space and productivity of space in offices is no different than logistics. It’s just perceived differently and you will see the same types of manifestations over time and we expect to be at the forefront for the benefit of our investor clients.”

He added that most obsolete office buildings would most likely get repurposed for residential uses or for medical office uses: “I don’t think they’re exceptionally well-positioned to be redesigned as warehouse space.”

Indeed, 41 percent of respondents in professional services firm pwc’s Emerging Trends Europe 2021 survey said they were concerned about asset obsolescence and nearly half believed the problem will worsen in the next three to five years. Office was the most common property type to be repurposed in 2020, a trend expected to continue in 2021, the report stated.

EQT and Exeter declined to discuss specific growth targets. “It’s difficult to ascertain,” Fitzgerald said. “We don’t have any specific projections because we are responsive to our clients. So where the demand comes is where we will grow most.”

EQT made its entry into European real estate in 2015, with the hires of Edouard Fernandez and Rob Rackind from Wainbridge and Fredrik Elwing, formerly of Greenhill & Co and Credit Suisse. The firm closed its first real estate fund, EQT Real Estate, on €420 million in 2017, and went on to hit its €1 billion hard-cap for the successor fund, EQT Real Estate II, last October. EQT Real Estate does not disclose its AUM.

Last month, EQT agreed to acquire 100 percent of Exeter, which is currently 40 percent owned by Boston-based private equity firm TA Associates, for $1.8 billion. The transaction is expected to be completed during the second quarter. After the deal closing, the existing EQT Real Estate business and Exeter will be combined under a joint EQT Exeter brand. EQT Exeter will be part of EQT Real Assets, which currently consists of EQT Infrastructure and EQT Real Estate.