While 2021 provided light at the end of the tunnel, the effects of the global COVID-19 pandemic continue to be felt in the real estate industry and capital markets. The widespread rollout of vaccines has allowed a path to recovery to emerge for 2022, but persistent concerns about health and safety has resulted in investors taking a more cautious and selective approach when identifying investment opportunities. Once again on the virtual stage, the 15th Annual Real Estate Capital Markets (RECM) Conference, hosted by Goodwin and Columbia Business School, welcomed guests for spirited discussions about the state of the real estate capital markets, and specifically global capital flows, internal migration in the U.S., the Chinese economy and real estate market, and myriad of other topics.
The conference kicked off with Mandee Gruen, partner and co-chair of Goodwin’s Private Investment Funds practice, and Christopher Mayer, the Paul Milstein Professor of Real Estate and co-director of the Paul Milstein Center for Real Estate at Columbia Business School, introducing featured speaker Jeffrey D. Horowitz, Global Head of Real Estate, Gaming & Lodging Investment Banking and BofA Securities. Horowitz was joined by moderator Gentry Ashmore Hoit, Finback Real Estate and GAH Real Estate LLC, who interviewed Horowitz and explored the trends that we saw in 2021 and the opportunities that are already bubbling to the surface of the real estate industry in 2022.
“2021, regardless of what your business is, felt like the longest year and I think working from home all year wore people out,” Horowitz said. “The level of capital markets was extreme, the market has been up and in the public real estate markets we saw more than 40% returns. I think it was an amazing marketplace and that shocked people a bit. We saw cap rates go to prices we never saw before, interest rates were very low and if anyone was in a business like ours they had to be worn out – because it was a really good year. As we move into 2022 though, you can feel the transition of what we all expected inevitably – volatility has arrived.” Noting the shift in dynamics as the calendar turned to January 2022, Horowitz expanded on how to advise clients and identify opportunities as the unfettered access to capital is dialed back.
Horowitz stressed that companies must reflect and determine the reality of their business and see if there is an opportunistic transaction that makes sense for them. “Just like we did in 2008, clients have to make that decision of ‘are we at the top of the market or the bottom?’ And determine if you are a buyer or a seller based on that,” Horowitz said. “I think you will see board rooms have in-depth discussions about strategic alternatives, ‘where are we,’ ‘where is our business going to go,’ and ‘what should we do about it?’ It will be a year of introspection, but a year of action as well.”
But as cap rates rise and the market fluctuates, Hoit asked how these factors impact transaction activity. Horowitz noted that amid volatility, transactions typically slow at first but he expects certain sectors to become more active as opportunities emerge, specifically retail office space and lodging. “A lot of the opportunistic money has sat on the sidelines over the last year or so. We’ve received a lot more inquiries and we think you are going to see those sectors really ramp up in terms of deal flow. We saw few distressed transactions in the hospitality space and only a few big, key deals,” Horowitz said, noting that he expects to see hotel activity pick up, particularly in the resort space.
Turning to capital markets and more specifically the outlook for special purpose acquisition companies in 2022, Horowitz noted that there are roughly 600 SPACs vying for a deal, with many of them reaching the halfway point of their transaction window, and while there has been a focus on the proptech and hospitality sectors, a slowdown seems imminent. “I think we are not going to be as active in that space. The companies that have de-SPACd need to mature a bit more and need to put management teams in place. I think sponsors that can really add value to a business are the ones that will succeed,” Horowitz said.
Global Flows of Capital Panel
The virtual setting of this year’s conference allowed for an in-depth look at global capital flow, with experts from Asia, North America and Europe providing insights. John Ferguson, partner in Goodwin’s Business Law Department and co-chair of the firm’s Real Estate Industry group, introduced moderator Walter Stackler of Shelter Rock Capital Group who steered a panel discussion that examined the impact of inflation on decision-making, the types of real estate assets garnering interest, and rising focus on environmental, social and governance (ESG) matters.
Saul Goldstein, CEO and CIO of ActivumSG Capital Management, began the conversation by noting the impact of inflation on market dynamics. Goldstein said that for those that have a portfolio set in stone the effects might not be felt, but for those more focused on investing and divesting the environment has grown more complicated. For those that do business in Europe, matters become even more complicated due to various rates of recovery from COVID-19. “You can see the impact occurring at different rates in the various markets throughout the EU,” Goldstein said. “Price increases in the Netherlands have gone up about 20% the past year. In Spain though, we are seeing some developments be put on pause because the price has risen so greatly to the point it is inaccessible to the end-consumer.”
Wilson Leung, Head of Asia Real Estate at Angelo Gordon, noted that an opposite trend is currently observable in Asia, highlighting that Japan is still in a deflationary environment. Leung said that Japan is trying to get to 2% inflation and, as a result of the ultra-competitive environment and rising material costs, “we are finding companies aggressively bidding on projects, pushing down their margins in order to keep their business going.”
Beyond the impact of inflation, the panel discussed the types of real estate assets that are gaining interest, with Leung noting that interest in Asia has dramatically increased due to the tremendous upside in terms of growth. “We are seeing more interest than we’ve ever seen. Investor appetite has turned to other markets outside the U.S. If you look at the macro, political issues, I think people don’t think Asia is as risky as they once thought,” Leung said, noting that events like Brexit has shifted perceptions.
Hilary Spann, Executive Vice President of the New York Region at Boston Properties, Inc. echoed those sentiments and said that Asia is one of the best markets if you want to invest capital at scale. “Many of the big cities in Asia have economies very similar to those of the large cities in the U.S. and western Europe. When seeking out opportunities, investors should look at relative value and consider these regions. I would say that all large, global investors are tilting their portfolio focus toward Asia.”
One critical area of growing interest in the investment community is ESG principles, as more and more regions develop new, yet varying standards. “Investors, tenants, buyers of these properties – everyone is looking for ESG-certified assets because they will carry a premium going forward. I have never had more investors inquiries around ESG and we have created a dedicated team to evaluate ESG criteria,” Leung said, highlighting that an important aspect they are dealing with is the different standards in each region.
Spann noted that in the U.S., major cities have been the ones to step up and implement these standards, and while there has not been federal or state level adoption, it is a necessary requirement of a viable investment. “We think that it’s the right thing to do, but we also think it is the smart thing to do because everybody that we partner with are all driving towards a greener future for major, global cities. We began our sustainability initiatives about 20 years ago and we have a central sustainability group responsible for coordinating our efforts across each region we operate in,” Spann said.
Burst 1: U.S. Internal Migration
With the impact of COVID-19 still being felt throughout the economy, the conference welcomed Dr. Betsey Stevenson, Professor of Public Policy and Economics at the University of Michigan and a prior member of the Council of Economic Advisers that advised President Obama on social policy, labor markets and trade issues. Stevenson, who also served on the Biden-Harris transition team, provided an in-depth look at the current labor market, the continuing impact of COVID-19 and the Omicron variant’s impact on a return to office.
Stevenson covered myriad of topics during the burst session, including inflation, the trend of workers seeking new opportunities – known as the Great Resignation – and supply chain issues. In examining the current flux in workforce, Stevenson noted that while we are seeing high rates of individuals seeking new opportunities, we are also seeing individuals enter the workforce at a higher rate than pre-pandemic. “I refer to this as excessive churn. You’ve heard of the Great Resignation but it is also the Great Reallocation,” Stevenson said, highlighting the silver lining of this scenario.
Stevenson acknowledged that there are still challenges present in the labor market that are pushing companies to take a hard look at how they operate and create a more accommodating environment. Among these challenges are health and safety concerns, access to caregivers, and a desire to remain at home, among others.
“This has led to the notion that the hybrid work mentality is the way of the future. Businesses must learn what they need to attract workers,” Stevenson said, noting that she believes some changes will result in greater productivity. Looking at the outlook of 2022 and the supply chain and labor force hurdles that lie ahead, Stevenson said that “ultimately vaccination is the only way to move past COVID and the greatest risk to the U.S. recovery is a bifurcated economy and an increased residential and occupational segregation fueled by political ideologies.”
Burst 2: Chinese Economy and Real Estate Market
The conference then turned to a discussion on the Chinese economy and the outlook on the real estate market in the country which was led by Dr. Shang-Jin Wei, Professor of Finance and Economics at Columbia University’s Graduate School of Business and School of International and Public Affairs. The conversation focused on the recovery in the region and the main factors that contribute to trend growth: people, pandemic, politics and policy.
Wei said that “people are the major drivers of trends” and highlighted an unbalanced age structure and unbalanced gender ratio as critical components of Chinese growth. Regarding age structure, Wei noted that the workforce in China is shrinking due to aging while the gender gap is attributed to “unnaturally high rates of boys being born rather than men outliving women.”
While people drive these trends, Wei said the fluctuations are driven by the pandemic, politics and policy. The impact of the pandemic is felt through the varying recovery rates in each region within China and leads into the second variable: politics. In addition to varying local health and safety policies, there are political factors at work that will have an impact on the Chinese recovery. Among these factors, Wei noted that geopolitical factors to keep an eye on include Trump-Biden tariffs and the de-listing of Chinese firms from U.S.-listed exchanges. He noted that the most significant event to monitor is the 20th CCP Congress which will put in place various policies that will set the tone for the country going forward. Regarding the final factor, policies, Wei examined monetary and fiscal policies and noted that China has eased interest rates and that there is still room to reduce interest rates and stimulate the economy further, if necessary.
Burst 3: Alternative Asset Classes
The final session of the day was introduced by Mark S. Opper, partner in Goodwin’s Business Law Department and a member of the firm’s Real Estate Industry group and REITs and Real Estate M&A practice, and focused on debt and equity investing and alternative asset classes. Opper gave the floor to Michael Lavipour, Managing Director of Credit Strategies at Square Mile Capital, and Albert Rabil, CEO of Kayne Anderson Capital Advisors and Kayne Anderson Real Estate, for a discussion that centered around the dynamics underpinning alternative asset classes that are creating a tailwind in various sectors.
“For as far as the eye can see, you’ve got demographic trends that are assisting and providing a tailwind to many sectors,” Rabil said, among them being a widening age gap in the U.S. with 11,000 Americans turning 65 each day. Examining the medical office sector, Rabil noted that the over 65 age group averages five more doctor visits per year compared to those under 65 – which will amount to roughly 100 million more doctor visits per year in the U.S. in five years.
Pivoting from the medical office sector, Lavipour noted that areas that continue to gain interest are those that represent the convergence of real estate and technology – or proptech – and said that on the lending side his work has been focused on life sciences and laboratory space, production studio space, and multi-story industrial facilities such as robotics facilities. Lavipour said that on the lending side, Square Mile has been life sciences-focused – both ground-up development and conversions of existing spaces. “Anything that touches technology, you are starting to see money flow in that may not have been interested, such as data centers and life sciences businesses,” Lavipour said. Both Lavipour and Rabil noted that entities that may not have been typically interested in these spaces are now paying a premium to be involved and gain exposure to these projects.