Nearing a top?

Toronto condo development

I was in Toronto this past June, and I remember standing at the corner of Adelaide Street and University Avenue. Waiting at the traffic light, I looked around and counted 12 construction cranes in different directions, which seemed like a lot from just one corner. Perhaps it is?

A recent Bloomberg article about the Toronto central business district included the thoughts of an influential local architect:

“The last time Toronto office developers were this exuberant, Carl Blanchaer remembers it ending badly, he said. Construction on the 57-story skyscraper his firm designed for the financial district halted after just six floors and stood abandoned for 15 years.”

Right now, vacancies in downtown Toronto are low at 6 percent. Going forward that could be a different story. You could see the vacancy rate rise to 10.5 percent in 2017. That would mark a big shift because the last time Toronto saw that level was 2003. The Bloomberg article notes, “The seven properties set to open by 2017 have 5.1 million square feet of space and are about 55 percent leased, according to brokerage Cushman & Wakefield Inc.”

Will demand continue to expand to off set increase space? One key question is the intermediate and long-term projections for the Canadian economy. At the moment, global growth remains low with a number of headwinds. Growth in Canada is starting to soften and Bank of Canada is starting to ratchet down growth projections. As noted in Bloomberg: “The Bank of Canada last month cut its forecasts for Canada’s growth, to 2.2 percent from 2.3 percent for this year and to 2.4 percent from 2.5 percent next year. [Bank of Canada Governor Stephen] Poloz has said growth in exports and business investment needs to pick up in order to have a self-sustaining recovery.” If that trend continues and increases, it could help create a turning point in the real estate cycle.

On a positive note, unlike past booms of the 1980s and 1990s where development was fueled by easy credit and leverage, this time it’s being driven by long-term investors such as pension funds, which would not be under pressure to sell on dips. However, if the economy slows and space expands, values will still fall even if there is not a lot of selling activity.

Regardless of where we are in the cycle, Toronto will always be a world class city.

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JohnHunt91x119John Hunt is conference program manager of Institutional Real Estate, Inc.

The Yale investment model cuts another dashing figure

david swensenThe hissing sound you’re hearing is David Swensen’s ego inflating to ever-grander proportions.

Some people have big egos to mask disconcerting insecurities. Others have egos pumped up by long track records of success. Think Steve Jobs, Warren Buffet, Oprah Winfrey, Richard Branson — and David Swensen.

No, Swensen is not a household name. But, as CIO of the Yale Endowment, the man has proven he knows how to make money and burn his own path. And he does that with a heavy emphasis on non-liquid assets, including private equity real estate and other real assets, such as natural resources. It’s a strategy Swensen detailed in Pioneering Portfolio Management, a book he published in 2000.

Then the global financial crisis hit with catastrophic force, and Swensen took a drubbing, as the mighty Yale Endowment watched $7 billion flushed out of its coffers. That was followed by a chorus of I-told-you-so’s from liquidity advocates. But, with the fiscal year ended June 30, Swensen sent yet another counterstroke to his naysayers, reporting a 20.2 percent return, making it the best performer among four Ivy League schools that have reported results. More impressive still, during the past 10 years its average return was 11 percent, while domestic stocks had returned an average of 8.4 percent and bonds returned 4.9 percent. For that same period, the average annual performance for 138 institutions of higher learning tracked by Cambridge Associates was 7.6 percent. That gives Yale the best 10-year results of any Ivy League endowment (2003–2013), matched only by Columbia University.

The value of Yale’s endowment now stands at $23.9 billion, meaning the fund has recouped its losses from the economic collapse and has more assets under management than ever. The stampede of incremental returns was largely driven by a 17 percent position in real estate and an 8 percent position in natural resources.

Obviously, Swensen is not about to back off from his philosophy that large investors — endowments, foundations and public pension funds among them — can achieve superior returns by reallocating a large portion of investments away from traditional stocks and bonds and into select hedge funds, private equity real estate and other alternatives.

But let’s not oversimplify things: it’s not just the recipe; it’s the chef. As Forbes magazine reported, hundreds of college endowments have adopted some form of the Yale model during the past 10 years, and in doing so have spent billions of dollars on consulting fees, hedge funds, incentives and other profit-sharing arrangements. “All the spending was a waste. The returns did not develop for most of these other schools,” Forbes wrote.

Swenson, as reported by the New York Times, says he will keep the Yale Endowment’s portfolio deeply invested in illiquid markets.

“My regret,” Swensen says, “is that we did not have more liquidity to play offense.”

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MikeCfinalwebMike Consol is editor of The Institutional Real Estate Letter – Americas.

Like riding a bike


On Sept. 10, close to 90 of the country’s institutional real estate investors and fund managers gathered for the fall meeting of the Editorial Advisory Board of The Institutional Real Estate Letter – Americas in Carmel, Calif.

As part of Institutional Real Estate, Inc.’s ongoing effort to engage in giving back, these individuals joined forces with Build-A-Bike Charity and Team Building Program and, over three hours, built 16 girls and boys bicycles for the local Boys and Girls Club of Seaside in Monterey County.

Here are a few more photos of the event:

build bike 1

build bike 2

build bike 3

build bike 4

build bike 5

build bike 6

build bike 7

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JS_91x119Jonathan Schein is senior vice president and managing director of business development at Institutional Real Estate, Inc.

The retirement knot

So much of what we do in the real estate investment world is ultimately about eventual retirees, some of whom are postponing retirement because they cannot afford to retire. And as more pension funds struggle beneath the burden of underfunded liabilities and move from defined benefit to defined contribution plans, even more of the onus of saving for retirement is placed on those eventual retirees.

There’s some good news to be had, though. The March 2014 Retirement Confidence Survey by the Employee Benefit Research Institute found that workers who have retirement plans through their employers (and even through IRAs) are more confident now about their ability to afford retirement than they were during 2009–2013, when confidence was at an all-time low.

And then there’s the Federal Reserve Board’s just released triennial Survey of Consumer Finances, which looks at changes in U.S. family finances between 2010 to 2013. Reduced interest rates on most types of consumer debt during this time period helped debt obligations for families with debt fall a median of 20 percent, or a mean of 13 percent. In addition, more Americans are paying down debt than during the 2007–2010 period covered by the previous survey. (But student loan debt is on the rise, now surpassing credit card and auto loan debt in America for these distant-future retirees.)

And once we’re all lucky enough to make it to retirement, where to live?

WalletHub studied 150 of the largest U.S. cities to determine the best and worst places to retire in 2014. Rankings were determined from a series of 25 metrics across five categories: affordability, activities, quality of life, healthcare and jobs, with the “jobs” category given a lower weighting given that most, but not all, retirees stop working during retirement. Three out of the top five best places to live were in Florida — no real surprise there — with Grand Prairie, Texas, and Scottsdale, Ariz., rounding out the list. Chicago and New York City, major cities for real estate investment professionals to work and live, are among the five worst places to retire, ranking 146 and 147, respectively.

But the fact of the matter is that populations globally are getting older — much older, and that’s reason to keep those of us in the real estate industry thinking about it well past our bedtimes.

This past August, Moody’s Investors Service published a sobering report on population and aging that is enough to turn just about anyone’s hair white. As more and more people age, the working-age population declines, and that will put tremendous stress on labor supply in the coming years. The report’s title says it all: Population Aging Will Dampen Economic Growth over the Next Two Decades. According to the report, by 2015 more than 60 percent of countries rated by Moody’s will officially be “aging,” meaning more than 7 percent of a population is age 65 or more. By 2020, “super-aged” nations, those with elderly populations above 20 percent, will increase from three today to 13 globally, and by 2030 there will be 34 super-aged countries. And aging isn’t just a problem of developed nations; many emerging economies around the world are aging rapidly as well. All of this will continue to wreak havoc on the age dependency ratio, which the World Bank tracks over time.

What do these global demographic shifts in aging indicate to you about future property market trends?

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

Institutional capital fundraising climate update

Institutional capital flows continue to rise at a predictable pace. Demand for cash flow–oriented products — debt and core real estate — remains strong and actually continues to grow, particularly among non-U.S. investors. Even CMBS is beginning to draw renewed interest after being severely tainted by the severe and sudden collapse in demand experienced during the GFC.

Institutional investors’ risk appetites also continue to grow: Suburban and second-tier city investing once again is on the rise. And despite the fact that many investors are concerned that the REIT market may be fairly or even overpriced at present time, investor demand for global REIT investment strategies and products continue to grow, both domestically and offshore.

Mega-fund managers such as The Blackstone Group, The Carlyle Group, Starwood Capital and Lone Star Funds continue to command a disproportionate share of the capital fundraising market. New entrants also are drawing a lot of capital — private equity fund managers like TPG, which fairly recently have entered the funds markets, as well as hedge funds, which increasingly are competing for distressed debt and opportunistic type plays, and, in some cases, even core deals. Lift-out teams such as Richard and Bill Mack as well as well-established traditional developer/owner/operators such as the Related Companies also are now raising capital directly from institutional capital sources, rather than relying on joint venture relationships with traditional investment managers as they had in the past.

Consequently, all real estate investment managers — including the mega-managers — are finding the fundraising environment to be a lot more crowded, a lot more competitive and, consequently, a lot more challenging. Everyone is having to exert a lot more effort for a lot less yield, on a relative basis. Some managers — particularly those with narrow product lines, particularly those with single product lines, and especially those saddled with sketchy track records and relatively weak marketing teams — are finding it nearly impossible to raise capital.

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GeoffFinalv5forwebGeoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.

A bit of this, that and the other

It’s that time of year, again. The leaves are starting to fall. It’s getting darker in the evening. It’s coming up to winter and the new year beckons.

It’s at this time of year that the editors of IREI’s publications start preparing their editorial programs for the next year. I like to give readers a bit of everything. Real estate investment people have wide interests. Everyone likes a good deal in their backyard, but we also have to remember those whose passion lies elsewhere. I divide stories into three types — geographic, sector and issue.

Geographic — that’s easy. Pick some countries in Europe, and relate the treatment to topical events. As an example, Russia — where does the wounded bear go from here? What effect will the economic sanctions placed on Russia and Russians by the United States and the European Union for perceived (make that actual) non-cooperation on the crisis in eastern Ukraine have on Russia’s real estate markets and on the country’s aspirations?

Scotland? Well, let’s wait for the people of Scotland to decide next week if they want to be independent, before we start thinking about what all that might mean for Scotland and rUK. (That’s the term for the “rest of the United Kingdom”; the “r” could be “residual,” “remnants” or “remains,” but “rest” will do as a descriptor for England, Wales and Northern Ireland. Get used to it. It’s looking neck and neck, and a decision in favor of independence is, indeed, possible. We are in margin-of-error territory. Go Scotland, in both senses.)

Sector — that’s not too hard, either; there’s only really five to choose from. An example of a trend story is retail, where you can repent at leisure. Office markets, faced with below-trend economic growth prospects and limited rental growth, have lost some appeal to real estate investors. The retail sector, however, continues to impress — people have to eat and seemingly have not reduced their propensity to spend. What does this mean for retail and retailers, and how will the spoils be divided between the High Street and out-of-town shopping centers and retail parks? How is the increasing demand for leisure alongside retail being met? Who drives change in retail — owners of retail centers, retailers or consumers?

Issue — that’s much harder. There are so many issues in real estate investment. And they interrelate to an astonishing degree. Risk? Always a good one. Leverage? Another good one. Value-add and opportunistic investments? Always worth a look, although not everyone is convinced. All three put together? Now there’s a story. Are investors being paid for the risks they are taking, whether in core, value-add or opportunistic strategies? What are the right return targets?

REITs? If you want exposure to real estate, isn’t it just easier to place an order for listed property securities? You can buy and sell as you will. Why go to the trouble of buying a building or units in an open-end or closed-end property fund, with all the liquidity and asset management issues that come with those routes? Can the addition of REITs give a total portfolio a better risk-adjusted return?

Asset allocation is always a good issue. Your consultant suggests, almost seriously, that your global real estate exposure should be based on North America, Asia Pacific, London, rest of Europe including regional UK, and emerging markets. Is London becoming a geographic sector of its own, not just against the rest of the United Kingdom but also against the rest of Europe? For me, that comes under issue, not geographic.

We mustn’t forget Europe as a whole — again, as an issue, not geographic. Real estate — rising to the rate? The Bank of England is expected to be the first of the G8 central banks to start increasing interest rates, “soon” and in incremental steps. Meanwhile, the European Central Bank has reduced deposit rates to negative territory. Deflation is seen as a real risk.

How will the different macroeconomic scenarios across Europe play out? What will be the impact of higher interest rates on bond yields, property prices and investor asset allocation? What are the risks? The real risks? Should we be concerned? How can real estate investors invest now in such a way that the negative consequences from rising interest rates will be limited as much as possible?

There you have it. How an editorial program is put together. There is method in the madness. And if you don’t see IREI’s publications, perhaps you should.

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

Building new hope

508275867Tomorrow is Sept. 11.

As the 13th anniversary of the 9/11 terrorist attacks is upon us, I am planning to remember all those who lost their lives, including those who worked or visited the WTC towers and Pentagon building, those on the hijacked planes, and the brave men and women who lost their lives while saving the lives of others.

I often find myself looking online to see when 1 World Trade Center will be finished. The opening of the new tower will mark a moment when the nation can breathe a sigh of relief that the once destroyed towers have become a monument to those who were lost that day and also a monument to those who are going back to do business there once again.

According to an update from the New York Daily News, the much-delayed and much-anticipated project could open later this fall.

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DenisefinalwebDenise DeChaine is special project editor and video production specialist at Institutional Real Estate, Inc.

Real estate capital and property markets update

Debt and equity capital remain plentiful and relatively cheap for most borrowers for most acquisitions in most markets. The CMBS market is trending upward as well. Competition for deals remains fairly intense. Underwriting disciplines remain strong, but are starting to erode ever so slightly, which always happens before they start to slip more aggressively.

Development is beginning again in many urban markets, but funding still appears to be a bit constrained for some property types. Money seems to be flowing freely for multifamily development. Funding for development of other property types in the process of loosening up, too.

Speaking of multifamily, the apartment sector continues to perform, but some markets are drawing record low cap rates — sub-4 percent in some markets. Are we at or nearing a peak? Divided opinions abound.

Looking at the other types in the four main food groups: Industrial property market values may be impacted by the expansion of the Panama Canal. Continued economic recovery bodes well for continued industrial property dynamics. As consumer spending continues to rise, the retail sector continues to surprise and outperform.

Office properties in the world’s financial capitals continue to trade at record pricing. Now pricing for offices located in suburban and secondary markets are beginning to gather strength. Contrarian players are beginning to target tertiary markets and suburban markets of secondary cities, anticipating eventual cap rate compression as wholesale capital once again returns to flood these markets.

Oil patch markets — Bakken, Permian, Eagleford Shale — are all booming and attracting risk capital in larger and larger quantities. The question is the sustainability of these fields. As oil and gas reserves have risen, prices have steadily fallen. At some point, the cost/benefit tradeoffs become prohibitive, and demand for commercial and housing stock wanes along with drilling and extraction activity. There’s a lot of money to be made, but a lot of volatility assumption goes along with it.

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GeoffFinalv5forwebGeoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.

London is on track to become more connected

475724745The London Underground, also known as “The Tube,” has been providing rapid transit to Londoners since 1863. This system has been instrumental to the growth of the economy and population of this city.

Today, there’s another new rail project in the works to add more capacity to the system. The project is called Crossrail, and the idea is to make Central London more accessible.

This project is about four years away from being finished and will cost £15 billion ($24 billion). Although the price is high, so are the returns for people and businesses.

This line will connect isolated parts of the city with its center. It is expected that Crossrail could bring as many as 1.5 million people into the heart of London.

As noted in a report in Bloomberg, house prices near Crossrail stations have gone up 30 percent since 2008. In the report, Grainne Gilmore of Knight Frank U.K. residential research says prices are projected to go up another 40 percent in the next five years.

How is Crossrail going to offset some the huge rail development costs?

With what else, real estate! According to the Bloomberg report, “Crossrail purchased a lot of land for their stations which makes them one of the largest property developers in the city. They plan to develop these stations which are expected to create 2.3 million new square feet for shops with built in foot traffic. These prime locations are expected to help Crossrail earn approximately £500 million ($800 million).

In real estate, it’s always location, location and location.

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JohnHunt91x119John Hunt is conference program manager with Institutional Real Estate, Inc.

IREN publishes more than 600 original stories

The IREN publication has published 608 original stories since the beginning of the year, surpassing the previous year’s goal of 500. (Last year, the 500th original IREN story was published on Dec. 31, 2013.)

The IREN team has increased its coverage, providing more international coverage of commercial real estate news.

During the month of August, 86 original stories were published, fewer than July’s record-setting pace, when 93 original stories were published, but still a strong pace when you consider that the publication only has two regular staff writers.

Major headlines that were posted to the IREI NewsCloud during August include:

And September is off to a great start. Today’s headlines include:

To read more exclusive IREN stories, podcasts, video and the latest commercial real estate news, visit IREI’s NewsCloud.

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AndreafinalwebAndrea Waitrovich is editor of IREN and web content editor of Institutional Real Estate, Inc.