The opening panel session of the annual PERE America Summit in New York this week touched briefly on the US mid-term elections which saw Democrats win the House of Representatives and Republicans consolidate their grip on the Senate, a result one panelist described as an outcome “we both expected and underwrote.”
That was that. From then onward, speakers shared with the event’s 300-plus attendance ideas and concepts that should see institutional capital navigate the next downturn. Here are five of them:
1. Move over B-to-B, it’s all about B-to-B-to-C now: In every asset class, creating core real estate will depend on factoring the driving forces for a tenant’s customers into the strategy. “The WeWork effect is forcing us to think not only about attracting tenants into buildings but building environments optimal for the end-user,” one panelist said. What’s more, “amenitization” is applicable across all asset classes, another added. Landlords not switching their modus operandi to service provider will be left behind.
2. Alternatives no more: Twenty-five years ago, multifamily residential was considered alternative. Today it is private real estate’s second most institutional asset class, PERE’s audience was told. Assumptions about how to underwrite the sector’s myriad asset types are changing. “What is more core, a midtown Manhattan office or a student housing complex in Texas that has been 100 percent leased over the last 10 years?” one investor asked. “I’d argue the student housing.”
3. Obsolescence is not an option: From opening speaker, Abu Dhabi Investment Authority’s global real estate head Tom Arnold, through the panels, the consensus was clear: obsolete real estate must be reimagined. From hotels reconfiguring lobby space to entice non-guests to outmoded retail being converted for flexible use, underutilized real estate is fast becoming taboo. “I’m waiting for the WeWork of retail,” one panelist said of the latter. “That’s the gamechanger someone is going to figure out.”
4. Misconceptions about credit vehicle homogeneity will give way: Debt fund proliferation is here to stay. According to PERE’s research, the last four years have seen growth from 15 percent of total fundraising in 2014 to 29 percent last year. Panelists pointed out these vehicles no longer focus solely on higher risk-and-return profiles, as some assume. “Debt funds now also run the risk-return spectrum, just as equity does,” one manager said.
5. Sidecar demand will kill off ad hoc behavior: One panelist ran a survey that revealed 98 percent of co-investors intended to keep or extend quantums of co-investments. Predictably, these supplementary vehicles are sophisticating. Another panelist posited co-investment vehicle documentation will be entirely pre-negotiated, as opposed to its situational and often cumbersome nature today. This way, discretion will not even be much of a factor: “Investors just need to sign off,” making this growing capital cohort a far more dextrous proposition.
Most likely, the late-cycle characteristic of US real estate is forcing institutional investors and managers to make through-cycle prognostications, whether it be at the vehicle, asset or even occupier level. But as PERE’s panelists agree, that is the only way to operate in a market where 3.5 percent cap-rates seem ever less attractive against treasuries trading at just 50 basis points lower. As ADIA’s Arnold put it: “You have to keep reinventing yourself or you’ll just fall behind.”