Prudential Real Estate Investors (PREI), the real estate investment management arm of Newark, New Jersey-based Prudential Financial, will be making value-added real estate investments a bigger focus in 2012, as investors anticipate a moderation in core real estate returns and a strengthening of the US economy, according to one executive at the firm.
“We will focus more on value-added investing,” said Kevin Smith, a managing director who oversees PREI’s Property Investment Separate Account (PRISA) group of US open-ended real estate investment funds. Those funds include PRISA I, a $13 billion core fund; PRISA II, an $8 billion core-plus fund; and PRISA III, a $2 billion value-added fund.
The greater focus on value-added investments is being driven largely by investors, who increasingly are viewing such investments as having better risk-adjusted returns than core, where real estate values have appreciated in recent years.
In 2009 and 2010, core produced returns in the mid-teens, as falling capitalisation rates helped commercial real estate values to rebound. But with cap rates unlikely to decline much further, such returns aren’t expected to continue. Meanwhile, a perceived firming of the US economy is helping to increase investor appetite for value-added real estate opportunities.
“More of our investors are talking about value-added investments, whereas most of the conversations in 2011 involved core,” said Smith.
Last year, most of PREI’s value-added investing centered on apartment development, where “the opportunities were pretty clear to us,” said Smith. In 2012, the investment manager plans to expand its value-added strategy to also include the acquisition and repositioning of office properties, as well as select retail development projects.
Geographically, the firm will be heavily focused on real estate markets with strong employment in the technology sector, such as Austin, Seattle, Silicon Valley and Raleigh, NC, particularly for its office and apartment sector investments.
Smith predicts that deal flow for value-added real estate opportunities – which picked up during the second half of 2011 – will continue to gain momentum in 2012. Recent value-added investments include last month’s acquisition of a 303,000-square-foot office building in the Seattle market for $76.5 million; a $62 million, 384-unit apartment development that broke ground during the fourth quarter in Boca Raton, Florida; and an approximately 500,000-square-foot retail project in suburban Baltimore slated to begin construction by the end of 2012.