Ashbel Williams, the seasoned chief investment officer at the Florida State Board of Administration (SBA), can get as excited talking about a new property investment as a newbie dealmaker.
Following the acquisition last month of 1370 Broadway in Midtown Manhattan, Williams told PERE: “This is unambiguously dramatic as you come down Broadway. You say, ‘Whoa, look at that!’”
The eye-catching building, which is a triangular high-rise office tower that Florida SBA acquired for $186 million from Normandy Real Estate Partners, is one of its latest investments in core real estate and comes after a decision by the investor in December to increase its property allocation from 7 percent to 10 percent. The pension plan has increased its allocation to property after deciding to reduce fixed income investments by 6 percent and, as Williams noted, “real estate received a share equal to all the others combined.”
Explaining why Florida SBA decided to reduce its exposure to fixed income, Williams said it centered on concerns over inflation stemming from central banks around the world providing monetary stimulus. This, he said, could have negative implications for fixed-income assets. “Our objective long-term is to get a 5 percent real return. You can’t get a 5 percent real return on any kind of investment-grade, fixed-income security. So, that led us to do a bit of head scratching about where we could put money that would make sense.”
Further explaining how real estate came to receive as much as other asset classes put together, Williams said the pension plan already was nearing its upper limit for alternatives, whereas property was not as close to reaching its maximum allowable allocation. Its allocation to alternatives, which is defined by statute as being an investment in a private equity fund, venture fund, hedge fund or distress fund or a direct investment in a portfolio company through an investment manager, is capped at 20 percent of assets under management, and it currently stands at 16 percent.
Williams said property played several roles within its portfolio: a diversifier to global equities, an inflation hedge and a source of liquidity of cash flow.
However, investing more in property comes with a challenge, Williams acknowledged. Florida SBA wants more stabilized, institutional-grade real estate in gateway markets, but the problem is core real estate has become increasingly difficult to buy because of global demand.
Williams said: “Every sovereign wealth fund, every mega-family office, lots of pension funds and other sorts of capital-allocating institutions are chasing real estate, and they’re really chasing US core gateway real estate because it’s a proxy for a secure security. Compared to Latin America or parts of Asia or Eastern Europe, this is a very, very appealing place to invest, so that’s a problem.”
To address the issue, Florida SBA has become a very selective investor, which is where 1370 Broadway comes in. “It’s harder find things than it’s probably ever been. One of the main things is you avoid commoditization. You want to have the asset that is unique, that is going to be very hard for somebody to build a competitor to,” Williams explained. This could be properties located in coastal areas, where oceans form natural boundaries for development; projects in locations where it is highly challenging to build; or assets that are well-priced but are undermanaged.
In addition to its architectural profile, 1370 Broadway is located in the gateway market of New York, which is extremely supply-constrained because of a lack of vacant land and a stringent permitting and review process. It also is located in the area known as Times Square South, which “is exploding in an evolutionary way” because of the IT development and other tech-related businesses that are clustered there and its easy access to public transit. “When the leases roll off, you repurpose the space for a new tenant at a different type of rent and it completely changes the cash flow structure of the building.”
Separately, Florida SBA also has responded to the current competitiveness of the US core real estate market by approving a new initiative to invest up to 15 percent of its private real estate portfolio in overseas investments. “If stabilized US core real estate is your sweet spot but it’s priced to levels that make it unattractive, then you’re really probably better off evaluating opportunities elsewhere than trying to stick to a discipline where your historical excellence has been,” evaluated Williams.
Williams noted that, while real estate valuations in certain parts of Western Europe are relatively more appealing, the region holds its own set of investment challenges. “The art of investing is being able to sort through the coal heap and find the diamonds,” he said. Florida SBA clearly will keep looking.