The 16th Annual U.S. Real Estate Opportunity & Private Funds Investing Forum was held in New York City on June 15 and 16, bringing together private real estate fund sponsors, limited partners, and other industry participants. Over two packed days of panels, networking, and “shark tank”-style panel demonstrations, industry participants shared their views on the current state of the commercial real estate market, fund raising and predictions (from a fund investor’s perspective) for the near future.
In general, we saw several themes emerge throughout the two days of panels:
- Is There Life Outside of Core? While panelists acknowledged that investor capital, especially foreign capital, continues to flow to core and core-plus assets in 24-hour gateway cities in order seek attractive risk-adjusted returns, chatter was high about looking to non-core assets in secondary and tertiary markets in the great quest for high yield. Cities like Salt Lake City, Seattle, San Antonio and Greenville, SC, among others, were the topic of conversation, as was the rise of construction lending. A number of panelists stressed the importance of having well vetted and experienced operating partners with successful track records when pursuing opportunities such as these.
- Less is More, and the Longer the Better. Fundraisers in the industry are always looking for new ways to raise capital and much discussion revolved around the following trends:
- Fewer Managers. The recent decision by CalPERS to halve the number of its external fund managers was a hot topic, as it echoes the trend that many in the industry are seeing of pension funds trying to do more with fewer managers. This shift is paired with fee pressure, and, in particular, panelists noted a trend towards discounts for larger investments, and pushback on fees measured against committed capital.
- New/Specialized Funds. While we’re starting to see investors place larger sums of money with experienced funds with proven track records, opportunities continue to flourish for new, smaller and more specialized funds to attract capital.
- Separate Accounts and Coinvestment.
- Commingled fund investments are being put aside in favor of separate account and coinvestment structures by the larger pension funds and institutional investors. The reason – they want more control; given the length of time these investors have been engaged in the commercial real estate space, they feel that they have additive knowledge that should be utilized in such structures.
- One of the upsides for fund managers of the trend towards separate accounts and coinvestment is that smaller JV-type vehicles might provide a pathway for newer managers to access institutional capital. The economics of such vehicles are such that investors typically are happy with the deal they are getting, and newer managers are able to take out their upside on a deal-by-deal basis (rather than waiting through a 7-10 year typical fund lifecycle), which helps “keep the lights on” as newer fund operators become established.
- Capital Sources. Panelists noted that top sources of capital have changed from pre-recession sources. In the continuing search for yield, high net worth and non-U.S. investors have increased their commitments to real estate funds. An interesting point of note was mentioned by several panelists regarding timelines of non-U.S. investors – many foreign pension and sovereign wealth funds have investment horizons of 20 or even 30 years, much longer than a typical fund cycle. How this will ultimately affect the U.S. real estate fundraising market remains to be seen.
- What Inning is It Anyway? Thinking was mixed as to where we are in the cycle. On the side of the existing, well established, core based platforms, the feeling was that we were in the seventh, or maybe even the eighth inning. On the side of the new opportunity investors with eyes on new markets and new investments, the strong sentiment was that we are right in the middle of the game. With everyone keeping close tabs on interest rates and watching and waiting for the effects of global events, it will be interesting to see when the cycle does wind down, or if we have multiple cycles happening at once.
- Up At Night. As might be expected, while the tone of the conference was optimistic, panelists fielded questions regarding their thoughts on the current status of the economy, especially as it pertains to real estate investing, and what bumps they might expect in the road ahead. Here is what is keeping folks up at night:
- Geopolitics and the volatility of world affairs.
- Not being able to find enough deals in which to invest – competition.
- Interest rates – however, nobody’s waiting with bated breath.
In sum, while the general consensus of the conference is that we are in an up-cycle and that some markets may, in fact, be near their peak (Austin, Denver), diligence in underwriting and management should protect any downside. The fund investor side of the commercial real estate industry views our current cycle to be not as debt-driven as the pre-recession market, and is optimistic that opportunities remain in today’s market for savvy operators and investors to continue to deliver strong risk-adjusted returns.