When Goodwin and Columbia Business School teamed up to host our first Real Estate Capital Markets Conference 10 years ago, few realized how challenging market conditions were about to become. The global financial crisis that plunged the U.S. economy into recession in late 2008 put acute downward pressure on real estate asset prices and chilled investment across the industry.
The recovery since then has been modest, to say the least, but as we met in New York on January 27th for the conference’s 10th anniversary, the outlook for real estate capital markets was positive. Andy Jonas, global co-head of real estate investment banking at Goldman Sachs, laid out a bullish case for real estate and REITs in 2017 that included: limited or slow interest rate hikes, strong capital flows, steady oil prices, sustained economic growth, and stability both in Europe and Asia. “The real estate markets are in pretty good shape,” Jonas told the audience of more than 520 industry leaders.
At the same time, Jonas noted that deal flow is slowing, with uncertain tax law developments and other federal policy changes a likely culprit. Michael Bilerman, managing director at Citi Research, picked up the theme of policy uncertainty during a panel focused on the outlook for global real estate capital markets. “We don’t have a capital problem – we may have a transaction problem,” he said. “We’re talking about a massive amount of change” on the policy front.
Policy Push and Pull
The participants expressed general optimism that the tax cuts promised by President Donald Trump would benefit both property investors and tenants alike. Along the same lines, reduced regulations – such as a rollback of Dodd-Frank – would likely free up additional capital for investment. And many industry participants would likely stand to benefit from increased federal expenditures on infrastructure, the capital markets panelists concluded.
But other proposals have proven more worrisome. Some speakers cautioned that the administration’s immigration policies could stanch the flow of foreign capital coming into the United States through the EB-5 immigrant investor program, which grants foreign investors U.S. residence status. Other concerns voiced at the conference centered on proposals to allow for full, immediate expensing of all real estate investments, new tax rates for pass-through entities, and the elimination of interest deductions.
“There are incredible levels of uncertainty created by the new administration,” said Andy McCulloch, managing director at Green Street Advisors. “It feels like the range of potential outcomes just got a lot wider.”
“A Danger of Freezing”
Some of the speakers said the policy uncertainty is prompting them to focus on current cash flows, rein in their growth expectations, and target “recession-resistant” projects that play on long-term demographic shifts, such as office and multifamily developments in gateway cities, student housing and health-care facilities. Several participants from real estate investment firms highlighted the importance of scale in today’s operating environment, as it enables them to provide a whole financing solution and frees development clients from having to worry about syndication.
“You get access to more opportunities if you can take down the whole capital stack,” said Catherine Marcus, global chief operating officer at real estate investment firm PGIM Real Estate.
Jonathan Gray, global head of real estate at Blackstone, said the divergence in the performance of stocks and bonds in recent months reveals how divided investors are on the outlook. Lower taxes, fewer regulations and increased infrastructure spending bode well for growth, but are also more likely to contribute to higher interest rates and inflation.
Still, he also underscored that owning real estate isn’t the same as owning a bond – when investors grow concerned and sell their fixed-income holdings, there isn’t a “one-for-one” impact on real estate assets. He said the industry’s strong fundamentals are still in place, including the fact that the domestic real estate supply is rising by about 1 percent a year in an economy that is already growing at 2 percent.
With all of the policy uncertainty, “there is a danger of freezing – it stops you from taking advantage of opportunities,” Gray said. “If you can buy assets at reduced cost, then you do it.”
Long-term investment themes supported by technology innovation and adoption may also factor heavily in real estate development in the years ahead, providing both opportunities for further development and challenges for some existing markets.
One innovation explored in a session dedicated to disruptors in the global real estate market was autonomous vehicles, which have the potential to impact real estate markets as diverse as shopping malls (reduced need for parking spaces as cars return home or are sent to perform other chores) and storage facilities (more room in home garages to store personal possessions as number of vehicles per household shrinks). Already, ride-sharing companies are affecting vehicle usage patterns in large urban centers, and a near future in which cars can drive themselves – and require less parking in dense developments and mass transit-oriented projects – could fundamentally alter the physical landscape in residential and commercial settings, along with the capital flows that support them.
“Ride-sharing is a bridge to driverless vehicles,” said Gunnar Branson, president and chief executive officer of the National Association of Real Estate Investment Managers. Branson asked how many attendees had not used Uber since its start just seven years ago, and only a single person raised his hand. But only a minority raised their hands when asked whether driverless cars would transform the transportation system within the next 10 years. “We like to think of change as gradual but it can be quite dramatic,” Branson said.
Crowdfunding and Disintermediation
Of course, there may be limits to how disruptive some technologies will be. For instance, some in the industry have worried that crowdfunding solutions could cause disintermediation between real estate investors and investment managers, given the ability to raise money much more quickly.
“What happens to our investment infrastructure if it only takes 20 minutes to raise $2 million, instead of two years?” Branson asked.
But intermediaries will likely still be needed to collect and analyze transactional information that can be difficult to come by, and ultimately help decide whether an investment is suitable for each investor. Ultimately, lack of access to information will likely lead to co-investment models that tap crowdfunding platforms.
“I am definitely a skeptic. I hate the idea of taking the interpersonal piece out of capital markets,” said David Sherman, Co-Founder, President and Co-Chief Investment Officer of Metropolitan Real Estate. The complexity involved in real estate transactions makes trusting relationships between intermediaries and investors all the more important, he said. In addition, while the availability of information has made REITs less “clubby and secretive,” that level of disclosure “doesn’t exist in the private real estate business. We’re nowhere close to that.”
2017 Speaker Predictions
Over the course of the event, speakers were asked to make predictions about select real estate markets in 2017. Click below to read a handful of their perspectives.