Amidst a time of political uncertainty, yet capping a year with markets still on the rise, Goodwin and Columbia Business School held their 12th annual Real Estate Capital Markets Conference in January 2019, with over 450 attendees. “The driving theme for a positive market is confidence,” said Tom Flexner, Vice Chairman of ICG and Global Head of Real Estate for Citigroup. Christopher J. Mayer, Paul Milstein Professor of Real Estate, and Co-Director, Paul Milstein Center for Real Estate at Columbia Business School, opened the first session of the conference in a conversation with Flexner, analyzing the current state of the real estate capital markets.
2018 was a record year with over $100 billion of real estate activity, not including asset sales or public sales. One-third of the activity was public to public and two-thirds was public to private. Public companies experienced difficulty finding ways to create value and frustration with lower trading prices. Private companies were able to raise money suitable for public company privatizations. In contrast to the United States, Europe saw a drop off in real estate capital markets and M&A activity, and the UK even trailed the European public market. Flexner discussed Brexit as a geopolitical risk that may have a direct impact on emerging markets in the future, but for now one can only wait to see the implications it brings.
As technology becomes a greater influence on real estate, among many other industries, Mayer and Flexner discussed the retail sector, and how tech companies such as Amazon are having an impact. Flexner mentioned a historical oversupply in retail, with “well over 2,000 malls 20 years ago, to 1,200 malls today, and maybe only 400-500 malls 10 years from now.” However, malls are repositioning themselves, becoming more experiential, and learning how to attract millennials. Even a growing percentage of retailors that were online only three to four years ago are now opening up physical space to use it for distribution and showroom space (Amazon, for example), representing a source of new demand.
In the office space sphere, Flexner spoke about WeWork as a case study, focusing on the product of the offer, its financial model and capital structure, and its valuation as a tech company, not real estate. WeWork has “reimagined the workplace and the co-work concept, and it’s a very legitimate thing they’ve done in terms of designing workplaces where people actually want to be, interconnected with others. It has profoundly and in some ways irreversibly changed the work environment,” said Flexner.
Global Flows of Capital
The following session focused on where investors should look for pricing power, on a global scale. Trish Barrigan, Managing Partner of Benson Elliot Capital Management suggested “Europe offers one of the most attractive investment opportunities because it is a geography with a tremendous amount of volatility, constant elections and changing governments. With volatility comes opportunity, especially in an area like Europe organized as a collection of cities.” In the United States, Ann Cole, Managing Director of J.P. Morgan Investment Management, pointed to the major 24-hour cities (New York, Chicago) continuing to be strong, as well as the 12-18 hour cities such as Nashville and Portland also exhibiting strong fundamentals. Cole added “Industrial and multifamily were favored for 2018, and will continue to be for 2019. Office space continues to see demand, less so for construction.” Concerning valuations in the listed property markets, Ted Bigman, Managing Director and Head of Global Listed Real Assets Investing for Morgan Stanley said he is seeing “unprecedented discounts allowing for a very cheap entry point for investors to get access to real estate. Rarely have such large discounts to private market value been offered in so many markets globally.”
Innovation and Disruption: Investing in Tech to Drive Value
For the second year in a row Zach Aarons, Co-Founder and Partner of MetaProp participated in the conference. As moderator this year, he addressed the ways technology is impacting the real estate sector. One of the major challenges for real estate companies currently is cybersecurity and privacy. Robert Entin, Executive Vice President and Chief Information Officer for Vornado Realty Trust, said he now devotes triple the time he did 10 years ago to cybersecurity. “The scope of defending the corporate network (people and systems) and the building network (devices) changes almost on a daily basis, becoming more and more complicated to withstand cybersecurity attacks. Defending the building network is made more complicated by the fact that many of the devices found in this network are not created to withstand such attacks.” Commenting on the speed of adoption, Entin added, “Disruption is hard, it is often difficult to know where and when it will happen. Somewhat counterintuitively it happens like lightning with consumers, yet often slowly with commercial enterprises.”
Merritt Hummer, Principal at Bain Capital Ventures, addressed the topic of real estate technology through the lens of FinTech. “An acceleration of FinTech investment started about a decade ago. The word “FinTech” itself entered the lexicon fairly recently, in the 1990s. Looking back ten years ago to 2008, roughly a billion dollars of capital was invested in FinTech companies in the U.S. Last year, in 2018, fintech investment amounted to over $10 billion. The PropTech sector is following a similar path in terms of capital invested, but is on an even steeper trajectory than fintech was ten years ago.” Moving forward, Hummer says she feels very bullish on the PropTech sector, and Bain Capital Ventures will continue to look for investment opportunities at the intersection of PropTech and FinTech.
Kent Tarrach, Vice President of Global Corporate Development for Brookfield Properties has observed a new level of collaboration within the real estate industry surrounding PropTech. Real estate companies are sharing how PropTech is incorporated in their business models, and identifying new technologies to implement and action upon data. So where are we in the cycle? John Helm, Managing Director at Real Estate Technology Ventures (RETV) predicts we’re at the top with PropTech, having grown from $100M in VC in 2010 to $12 billion by 2017. And in the first six months of 2018, a report from MetaProp found global confidence in the real estate technology sectors swelled. Looking towards 2019, Hummer predicts “we’re likely to see more compelling ideas take hold.”
State of the Retail Sector
Contrary to the media’s headlines portraying retail as a dying sector, Martin “Hap” Stein, Jr., CEO and Chairman for Regency Centers, described that many retailers which are providing value, service, and a compelling experience are doing well. While these retailers are investing in technology, the physical store is critical to their multi-channel strategy. Their “more cautious, deliberate and rational expansion plans are creating a more sustainable and healthier environment.” Moderator Jim Sullivan, President of the Advisory and Consulting Group at Green Street Advisors added, “There are a lot of good things happening in retail, especially in the higher end. Whether it’s high end malls or high end grocery anchored shopping centers, they are at or near record high occupancy, their rents are growing, and when spaces are vacated, there are retailers coming in and filling that space.” At the same time retail is changing with technology like everything else. In five to ten years Stein predicts “Robots may be introduced in stores, stocking shelves and replacing cashiers, with the common goal of increasing efficiency. However the real differentiating factor in retail will be service, and how competitors stand out from one another.”
2018 was a stronger year for retail than 2017 according to Kenneth Bernstein, President and CEO for Acadia Realty Trust. When the Amazon / Whole Foods acquisition was announced, it demonstrated the convergence between an online only retailer embracing real estate. Since then, he has noticed retail becoming more thoughtful, not trying to sell everything to everyone, and creating a more focused shopping experience, especially if you buy in a store as opposed to online.
In closing, Stein and Bernstein offered tips and advice for Columbia students in the audience looking to pursue a career in real estate. Stein advised, “One size does not fit all – if you pursue real estate look for a company with good people and a sound business model and understand it’s cyclical.”
Video: What is the State of the Global Real Estate Capital Markets?
In this brief video from the 2019 Real Estate Capital Markets Conference, several experts share their views on global capital flows, including participants from Citigroup, J.P. Morgan Investment Management, Goodwin and Columbia Business School. They commented on where investors are spending money on real estate, the sectors they’re investing in and what the future holds for real estate capital markets across the globe.