Edgar Alvarado, group head of real estate equity at Allstate Investments, the single biggest challenge of the past year has been finding investments to generate a good return without requiring a significant amount of risk. It became increasingly evident that how those transactions were structured was central to the issue.
According to Alvarado, investing in properties no longer generates the returns that meet the Northbrook, Illinois-based insurer’s targets. “What I told my team is, the day of the asset play is over,” he said. “If you go after an asset in the market, call it a multifamily complex or an office building, 95 percent of the time it’s going to be an auction and you’re just going to be highest bidder. I don’t feel that’s the right way to make money anymore.”
With asset-level plays currently out of favor, Allstate’s real estate equity investment arm instead is exploring other options. One major initiative is investing in operating platforms like a private equity firm, where Allstate can be the capital source in helping to grow a business.
“We’re adding value not just in the real estate but creating enterprise value with our capital,” Alvarado explained. “Now the value proposition isn’t just in the real estate, it’s also in the platform that we’re building, so that’s how I still get to double-digit returns.”
With operating platform investments, returns are generated from both the business’ real estate assets, which in some cases are in the single digits, and the platform itself, where the investor participates in both the promote and management of the enterprise. Operating platforms, however, are much more complicated transactions to negotiate and structure than asset-level investments and require the investor to have an internal team to be able to execute and manage such deals. Additionally, in the case of a large institution like Allstate, senior management also is required to be on board with the strategy.
Alvarado considers real estate operating companies to be the next phase of Allstate’s direct real estate investment drive. The insurer made the decision to go direct in 2010 and, since then, has been building its direct platform by developing its asset management, acquisitions, dispositions and accounting and reporting capabilities in order to be able to manage direct real estate.
Alvarado views operating platforms as an opportunity for at least the next three years. However, Allstate has not allocated a specific amount of money toward the strategy, which instead will be executed on a deal-by-deal basis.
“It’s a very challenging way to put money to work,” Alvarado said. “You need to have the skill sets to be able to structure and execute on something like this, and not everybody can do it.”
One institution that is considered a pioneer in the space is the Washington State Investment Board, which has made the ownership of controlling interests in private real estate operating companies its principal strategy since 1997. In fact, the strategy comprises more than 85 percent of its active investments in the asset class because of what the pension system considers to be a better alignment of interest with its partners and the desire to have a local partner making the day-to-day property-level decisions. The Teacher Retirement System of Texas and a handful of other institutions also have made operating platform investments.
“There are four to six institutions that are looking or have done this,” said Alvarado. “I would say we’re a little behind that first pack, but we’re rapidly making progress.”