Cities pulse with life

I consider myself something of a science geek. Not in terms of actual knowledge about the hard sciences, mind you, but in terms of interest. So naturally when I watched a program comparing highways in cities to the arteries of the human body and the wealth creation of CBD buildings to the human heart, I was intrigued.

On an episode of Morgan Freeman’s Through the Wormhole called “Is the Universe Alive?” Professor Geoffrey West, a theoretical physicist at the Santa Fe Institute in Santa Fe, believes most of us live within giant super organisms — cities — which, like living beings, are made up of networks that distribute energy. The human body’s circulatory and respiratory systems can be likened to the flows of cars, people, electricity and other resources in cities.

Whether you’re looking at a shrew, a human being or a whale, says West, their different heart rates are simply scale versions of the same thing, and cities are really no different, with the ebb and flow of energy to and from its “heart” beating twice a day, during the morning and evening commutes.

So the next time you’re stuck in rush-hour traffic because those highway arteries are clogged, fear not — you aren’t having a heart attack. Take a moment to appreciate the thriving metropolis around you, horn honks and all. Such major city super organisms are vital to wealth creation.


Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

Black Friday turns into Black Weekend

The U.S. retail sector had its big shopping event over the past weekend, the annual spending orgy on the day after Thanksgiving known as Black Friday. The trend this year was for retailers to expand out of Friday, offering “doorbuster” sales earlier in the week and through the weekend. And many stores opened up Thursday evening, so shoppers filled with turkey could get a jump on their Christmas shopping.

(Though with all the emphasis on electronics deals and car sales, I wonder just how much of the purchased products are actually gifts.)

According to ShopperTrak, foot traffic was up 8.2 percent over the full weekend:

“Shoppers follow value. And this year, for the first time, retailers presented significant value for shopping on Thanksgiving Day,” said Bill Martin, ShopperTrak founder. “So even though retail sales were slightly down on Black Friday, traffic and sales for the weekend as a whole increased over 2011.”

But while more people went to the mall, there was also an increase in online shopping. Reuters reports that retail sales online exceeded $1 billion — a record-setting total.

And sales for the whole month of November were less strong. MarketWatch reports that analysts are lowering their forecasts for same-store sales for this month. Despite the “Black Weekend,” the lingering effects of superstorm Sandy is expected to affect November totals.


Loretta Clodfelter is a contributor to Institutional Real Estate, Inc.

The stars turned out for PREA

The fall PREA Investor Real Estate Conference was held last month at the Beverly Hills Hilton. I was staying at a small hotel about three blocks away, which allowed me to enjoy the gorgeous California weather each time I walked back and forth, rather than remain in a windowless conference room the entire time. When I walked over for the evening reception the first night of the conference, I thought PREA had really outdone itself. There was a red carpet, lots of paparazzi with flashing cameras, limos and sports cars lined up along the circular drive, and greeters wearing tuxes and evening gowns. Turns out it wasn’t a PREA welcome. The good and the great of Hollywood were turning out for the Hollywood Film Awards, which honors actors and directors of films that haven’t been released (and therefore not seen) yet on the assumption they’ll be good. Robert De Niro, Bradley Cooper, David O. Russell, Quentin Tarantino and Ben Affleck were all receiving awards for things like best actor, best director, best supporting actor, etc. in films that are still being worked on. Very strange concept, but accounts for all the paparazzi at the entrance to the hotel. I suspect there is a photo editor somewhere still trying to identify the confused looking blond lady walking up the red carpet and into the lobby.

The PREA conference group might not have hired paparazzi to swarm delegates, but they really did go all out this time. In addition to high-level panels focused on today’s most-asked questions, they brought in outstanding speakers such as President Bill Clinton and financier Michael Milken to present a wider view of the world. Both promoted the work of their foundations, which are trying to improve worldwide healthcare and reduce poverty. Milken kept everyone in their seats after dinner (if he had presented his talk, which had a strong element of obesity prevention, before dinner, no one would have eaten the dessert), with slides showing how technology and demographics are changing the world. President Clinton spoke the morning of getaway day — but not one participant was interested in getting away. He held everyone’s attention for the entire two hours of presentation and Q&A. He was a hard act to follow, but the next panel of Roy March, CEO of Eastdil Secured; Jon Gray, global head of real estate at The Blackstone Group; and Sam Zell, chairman of Equity Group Investments, more than held their own as they presented their opposing views of where the opportunities lie during the wrap-up session.

Although on paper it might have seemed that PREA saved the best for last with the power-ending of Milken, Clinton, March, Gray and Zell, the entire conference was composed of speakers with head-slapping takeaways.

The conference began with Carmen Reinhart, the Minos A. Zombanakis Professor of the International Financial System at Harvard Kennedy School and the co-author of the New York Times best-seller, “This Time Is Different.” Her talk reinforced the description of economics as the dismal science. While there are glimmers of hope on the horizon, in general, there is no reason for any great optimism that we will see the end to the effects of the recession any time soon.

“The rocket fuel to get real estate off the ground is employment,” said Reinhart. And employment isn’t moving in the right direction very quickly. But that’s not unusual. In 10 of 15 major recessions, employment didn’t return to normal for a decade. Some of the other key points include:

  • The long unwinding of the housing market is at an inflection point, which is one of the few pieces of good news.
  • The sheer volume of indebtedness in the mature economies is a major headwind to recovery.
  • Debt overhangs typically last more than a decade — the average is 23 years. These problems do not vanish quickly.
  • Highly indebted economies are vulnerable. It’s like having a weak immune system — normal shocks can become major problems.
  • Too much equity inflow can be a problem in emerging economies.
  • Regulation in emerging markets is to keep capital out; regulations in mature economies are meant to keep capital in and interest rates low.
  • It’s a myth that defaults and instability only happen in emerging markets. They occur in mature economies as well.
  • No country except Finland paid its WWI debt to the United States — external defaults are common.
  • A little more inflation would help the healing process.

The second panel consisted of investors who presented a varied look at where real estate fits in a multi-asset portfolio. James Williams, CIO of the J. Paul Getty Trust, noted that his organization doesn’t worship at the altar of diversification. Rather than a diversified portfolio, he works to develop a portfolio that can withstand the stress of a recession. To do that, it must be liquid enough to cover four years of liabilities because depressions tend to last three and a half years.

Williams asserted that decisions are made by those who show up. Asset class managers need to understand what is going on in the organization. The more you understand the other asset classes, the more you can explain where real estate should fit. He noted that real estate has to compete for dollars with the other alternative investments, so managers are not just trying to hit a target of 8 percent or 10 percent, but are comparing asset classes and allocating opportunistically to where they can get the best risk-adjusted return.

Steve Nesbitt, CEO of Cliffwater, warned that real estate is a risk-on asset class and investors have to be acutely aware of those risks. REITs have performed well during the past 20 years, but core real estate funds are liquidity challenged. “I don’t see continued core real estate allocations,” he added. Because they look at core primarily as a diversifier and income-producer, sovereign wealth funds and big institutions might maintain their allocations to core or stabilized real estate, but overall core allocations most likely will go down.

James Walker, managing partner, Fir Tree Partners, seemed to agree that core has lost its attractiveness. “We can go to what is most attractive,” he said. New asset classes are some of what is attractive. For example, “There’s a new interest in residential real estate, which in the past was not considered an investable asset class for institutional investors,” he said.

Not everyone agrees, however, that the new emphasis on single-family residential investment is advisable — or even new. Jon Braeutigam, CIO of the State of Michigan Retirement Systems, said that his fund had already tried this investment gambit in the early 2000s, but sold most of its single-family real estate investments before the financial crisis and wrote down the rest. “It’s difficult to invest in single family on the equity side,” he said.

Braeutigam’s comment would have been the perfect segue into the housing panel if the housing panel had actually followed the portfolio investment panel, but is still a nice intro in recap of the program.

Moderated by John Burns, CEO of John Burns Real Estate Consulting, the panel discussed where and whether single-family housing units fit into an institutional portfolio.  One of the more interesting charts illustrated where the U.S. housing market stands today, showing the total number of housing units and then breaking them down by vacant, owned, rented, with mortgage, delinquent, etc. You can download the chart at here.

A primary reason for the interest in single-family units is that they seem to be one of the few asset classes with higher-than-average returns at lower-than-average risk. Those on the panel who are doing single-family investment stated that normal apartment margins are 60 percent. Single-family portfolios, however, have been showing a 65 percent margin, primarily because the turnover is much lower.

It certainly isn’t a risk-free investment however. Many of the units are bought on the courthouse stairs sight unseen. This acquisition process would seem to favor those who have been in the business the longest, and thus developed the experience needed to separate the diamonds in the rough from those that are just rough.  Oliver Chang, co-founder and managing director of Sylvan Road Capital, said that he was surprised at how much capital has been thrown at this space without the internal infrastructure needed to manage it. He said it takes years to build the right team and learn how to manage these properties — no good will come to those who jump in without being ready.

The asset class will eventually need to overcome the roadblocks to scalability, as well as defining a clear exit. Panelists believed technology can help with scaling. As more data is input on neighborhoods and trends are developed, the need to physically stand in front of a house to score it will decrease. Over time, panelists expect to be able to develop a model that lets them serve 25,000 homes rather than 2,500. The exit might be more problematic. Right now, the idea of spinning off as a REIT seems to hold the most promise, though some investors might want to see these investments as long-term holds.

This fall’s PREA conference was one of the best I’ve been to. From location to content to after-event parties (the Clarion roof-top reception featuring Pink’s hot dogs and overlooking the city at night was outstanding), everything seemed to come off perfectly. Last spring’s Boston event might have generated more war stories, but the fall event seemed to generate more investment talk. And that’s not only good for a conference — it’s good for an industry still looking for good news.


Sheila Hopkins is managing director – Europe at Institutional Real Estate, Inc.

Pass the corn, please

The seeds that grow into real estate bubbles usually germinate in America’s gateway cities. Not this time around. The latest real estate bubble appears to be taking root in the fertile soils of the Corn Belt, where farmland is selling for record prices.

One case in point recently cited on the radio program All Things Considered was an 80-acre tract in Iowa that went for $1.8 million. The $22,000 per acre price was five times higher than the property sold for only five years earlier. Escalating prices for farmland have swept the U.S. breadbasket from Illinois to Iowa and Kansas to Nebraska.

What’s the buzz? Have you been to the grocery store lately and decried what you paid for a bag of dietary staples? Crop prices are booming, topping $8 per bushel and making farmland a better return on investment than bonds, gold or the stock market.

With returns that lavish it’s no surprise that investors with no connection to farming and no knowledge of agriculture are plowing money into farmland. One of them is Steve Diggle, CEO of Singapore-based Vulpes Investment Management, which manages $250 million in client money, about 15 percent of which it has committed to farmland. Diggle told All Things Considered that in 2009 he plunked down $3.3 million for 650 acres in southeast Illinois. This year his investment firm auctioned off the land for $5.1 million, a 55 percent return in three years.

The getting is good for now. If the bubble bursts, though, farmland might be hard to sell, especially relative to more liquid investments. But demand for food isn’t expected to subside anytime soon, leading farmland investors to argue that any bubble is still far off, making farm acreage a good long-term investment — one they might be harvesting for a long time to come.


Mike Consol is editor of The Institutional Real Estate Letter – North America.

Any way you slice it, energy assets are hot, hot, hot

According to Mergermarkets, global mergers and acquisitions in the first three quarters of 2012 totaled more than $1.4 trillion, a decrease of 19.4 percent compared with the same period in 2011 ($1.8 billion), and representing the second lowest total since the first three quarters of 2009 ($1.1 trillion). Third quarter 2012 totaled $433.5 billion, down 20.2 percent from the second quarter ($543 billion).

Deals in the energy, mining and utilities sector have contributed the lion’s share of overall deal value so far this year, accounting for 26.6 percent of total global deal value in the first nine months of 2012, more than the next two sectors combined. The sector has contributed four of the 10 largest deals announced since the beginning of 2012.

Energy and utility investments are some of the most highly targeted by institutional investors with infrastructure allocations, in part because accessing these assets is relatively easier compared to transportation, water and other infrastructure sectors; investors can more quickly get their capital deployed and put to work.

Of course, most of the investment capital recorded in the Mergermarket report is invested in energy exploration and production (E&P), typically in private equity transactions, rather than energy infrastructure assets such as pipelines and storage systems. The “upstream” E&P investments are typically higher risk/return and are targeted by private equity investors while the “midstream” pipelines and storage assets are a closer risk/return match for many infrastructure investors who want total yield rather than higher risk capital appreciate an upstream investment offers.


Drew Campbell is senior editor of Institutional Investment in Infrastructure.

Now that the election is over

With the presidential election behind us, most people are asking: What do we have ahead of us?

Chris Macke, senior real estate strategist – Americas research at CBRE, forecasted a few items that we should be on the look out for in his presentation Presidential Election: CRE Winners & Losers.

Based on his assumption that President Barack Obama would be re-elected, and he was, the property sectors that would be “winners” are the retail, industrial and housing sectors, with “losers” in the office sector and “mixed” in the apartments and hotels sectors.

The regions that would be “winners” would be the Midwest manufacturing markets, non-Gateway markets and West Coast ports. “Losers” would be Washington, D.C.; Charlotte, N.C.; and San Francisco. The industries that are “winners” would be trade, housing and retail, with “losers” in the finance industry.

As mentioned in the November issue of The Institutional Real Estate Letter – North America’s feature article “Real Estate Goes to Washington,” one of the main issues to focus on is the Dodd-Frank Act. Macke focuses on this specific act in his report, stating that with the re-election of President Obama, a possible impact would be on the District of Columbia, where there would be less incentive for lobbyists to staff up and a possibility of even staffcuts reducing office demand in the district, as well as in New York City, San Francisco and Charlotte, where the possible impact would be a depression in financial space demand.

For more on this report, see Macke’s article in the upcoming December issue of The Institutional Real Estate Letter – North America.


Denise DeChaine is special projects editor of Institutional Real Estate, Inc.

Year-end blowout

It looks like fundraising activity for private equity real estate funds will top $20 billion during fourth quarter 2012, according to Institutional Real Estate FundTracker. While not a huge cause for celebration, it will mark the first time the three-month total has been that high since second quarter 2010. In the capital-constrained world of the post-global financial crisis, quarterly fundraising activity has averaged $11.2 billion per quarter during 2009 to 2012. In the 2007 to 2008 period, the quarterly average was $33.7 billion. In addition, the 12-month 2012 total should surpass $50 billion, which would represent the highest annual fundraising total since the whopping $135 billion raised at the top of the market in 2008. So maybe at least a little “whoop-whoop” is in order.

However, the caveat that somewhat mutes the celebration is that one fund will account for a substantial chunk of the fourth quarter and 12-month 2012 totals: The Blackstone Group’s Blackstone Real Estate Partners VII closed in October with an equity haul of $13.3 billion, an amount that will likely represent 25 percent or more of the 2012 total fundraising volume.


Larry Gray is editorial director of Institutional Real Estate, Inc.

Every day is an Open Day

Sir Peter Parker, erstwhile chairman of the now defunct British Railways Board, once famously remarked that in transport every day is an Open Day. By this he meant that users of British Railway’s trains were able every time they traveled to experience at first hand the detail and the quality of the service being provided, to develop a view and to express that view if they didn’t like what they experienced. In the British Rail of the 1970s and 1980s, that view was often critical and volubly expressed.

Real estate is the same — every office worker, every shopping center footfaller, every warehouse forklift truck driver is a user of a building and is often able to develop a view on the quality and efficiency of his or her surroundings and to express that view. Do you, as owners of buildings, seek those views? Do you act on those views, comments, suggestions, criticisms? Would it not make sense to elicit such views from people who are at the coal face, who are more acquainted than you ever will be with your building? Do you know where the flickering lights are, the cracked pathway, the dripping tap, the broken window, the clattery aircon, the dirty toilets?

Open days, with their glimpses of behind-the-scenes workings, can be costly and a hostage to fortune, but at least it’s your choice to offer one. But they are a way of getting people involved. And they offer you a means of improving your product, service and brand.


Richard Fleming is editor of The Institutional Real Estate Letter – Europe.

Inaction in Australia creates opportunities for the brave at heart

In October, I attended a conference organized by Property Investment Research in New Zealand that was dedicated to Australian property markets.

As you probably know, the Australian real estate market is one of the most institutionalized markets with a large number of real estate investment trusts (also known as listed property trusts or LPTs) listed in the stock market and traditionally large investments in properties by superannuation funds. It also seems to have a low cyclical correlation with the rest of Asian markets, which is an important factor for institutional investors looking for diversification.

This tradition of investment by superannuation funds was broken several years ago, when after the global financial crisis institutional investors suffered substantial losses on their equity and fixed income portfolios. These losses left many funds in Australia with an over-allocation to real estate as the losses in real estate portfolios, although substantial, were smaller than in other asset classes. This denominator effect has led most of the institutional investors in Australia to currently stay away from real estate markets, both domestically and internationally.

There were many interesting reports at the conference, and although not all of them were optimistic, many presenters pointed to interesting investments opportunities in Australia. The Australian economy has its own challenges, as job creation is lagging in most parts of the country and vacancy rates in office buildings appear to be at historical highs. The economic slow down in China is expected to negatively impact industries associated with natural resources. But at the same time, many sectors seem to be bottoming out from the cyclical point of view, and although it may not be obvious from the first glance, there appear to be interesting investment opportunities for the brave.

Several overseas institutional investors, unlike the domestic ones, have recognized these opportunities and started deploying large sums of capital into Australian property markets. In this respect, the acquisition of large interests in two of Australia’s best-known shopping centers by the Canada Pension Plan Investment Board and Abu Dhabi investment Authority deserves our attention. Both organizations invested $452.87 million each into the AMP Capital Retail Trust, a vehicle that holds a 50 percent stake in Sydney’s Macquarie Centre and an 80 percent stake in the Pacific Fair in Gold Coast, Queensland.

Perhaps they see and know what the rest of us don’t, or they are just under pressure to place capital.


Alex Eidlin is managing director – Asia Pacific at Institutional Real Estate, Inc.

West Coast catching up with the East

The battle of East Coast versus West Coast continues.

For years New York City has been the hottest city for investors to place their money, with San Francisco trailing behind; however, the City by the Bay may soon overshadow the Big Apple. Investors from across the nation and globally have been gobbling up San Franciscan residential and commercial properties.

The recent Urban Land Institute’s Emerging Trends in Real Estate named San Francisco as the top city in 2013 for real estate activity, commercial and residential sectors. Its office sector has started to come back, the retail sector is “not as bad as feared,” and the hotel sector is “surprisingly good.” Some 62 percent of the survey participants said San Francisco retail is a good buy — the greatest proportion for any city in the country, beating New York City at not quite 60 percent of respondents and Los Angeles at less than 48 percent of respondents. In addition, apartments have gotten “rather pricey,” which indicates the City by the Bay is experiencing high demand from residents.

Publicly traded REITs have been pouring billions of dollars into the San Francisco Bay Area. In October, office REITs Boston Properties and Kilroy Realty Corp., lodging company Pebblebrook Hotel Trust and multifamily behemoths Equity Residential and Essex Property Trust have disclosed new Bay Area investments reaching $1.5 billion.

An example of San Francisco’s attraction is Boston Properties investing $900 million in two San Francisco office developments: the new Transbay Tower and 680 Folsom St., both located South of Market Street. Kilroy Realty has invested $200 million to develop a 27-story, 400,000-square-foot office tower on the property next to the Transbay Transit Center.

Foreign investors are also looking at the Golden Gate. San Francisco has attracted a partnership led by the Government of Singapore Investment Corp., which has acquired a 92 percent controlling stake in a 1.25 million-square-foot office tower, 101 California St., located in San Francisco’s financial district for $851 million.

Move over New York City, there is a new city in town.


Andrea Waitrovich is web content editor of Institutional Real Estate, Inc.