All Eyes On The Capital Stack
Deal structures are changing and returns shifting as an increasing amount of capital is allocated toward real estate—that’s why we’re thrilled to bring together 12 industry icons for our special summit, The Capital Stack – What’s Next? on Tuesday. A sneak peek at three trends:
1) So Much Liquidity
Pearlmark Real Estate Partners managing director Doug Lyons (snapped at the World Cup, his seventh in a row, with the family) says it’s been a challenge to find attractive risk-adjusted returns on both the equity and debt sides. Sticking to your knitting helps, Doug says, along with leveraging Pearlmark’s network to source deals in the top 15 US markets. Its value-add equity is investing in office, industrial, and retail, as well as garden-style apartments in growing Sun Belt markets. On the debt side, Pearlmark has been an active provider of mezz loans (up to 85% LTV).
Doug sees increased demand from foreign capital for US real estate (considered a safe haven), and Pearlmark now reps a separate account of European capital looking at core assets and markets. He only hopes for some reprieve from the Foreign Investment in Real Property Tax Act, which often means an onerous withholding tax, varying from country to country, which eats into their returns. (Though investing in private REIT debt products can provide substantial relief, he adds.) An example of the value-add CBD deals Pearlmark seeks in Chicago: 200 S Wacker, above, which it just sold profitably after substantial lease-up and capital improvements.
2) Diversifying is Key
Partners Group invests globally, up and down the capital stack, and across all asset classes on behalf of its clients, private real estate asset management pro Poonam Mathis tells us. Whether Nordic retail or Asian office or US industrial, the goal is always to create core real estate, she says. As a five- to seven-year holder that invests both directly and through a select group of high-profile real estate managers, balance and considering relative value are imperative. Recently, Poonam’s noticed an asset management ramp up on the firm’s debt deals. As investments mature, Partners Group is thinking ahead and reevaluating its participating positions to respond to opportunities as they arise, she says.
Partners Group has both mixed-use and industrial investments in the Chicago market, and the question for hot industrial continues to be when to sell, Poonam tells us. Staying flexible during a liquid market helps maximize an asset’s value, she says, for example, by selling multi-asset portfolios or breaking them up if the right bidder comes along. While construction costs have risen across the board, she’s encouraged by Chicago rents rising in a commensurate way. Fun facts about Poonam: at one point she was training for her private pilot’s license, and she’s also a published author of both novels and books on business.
3) Funds Shouldn’t Be a Hard Sell
Despite more money being allocated to real estate, Blue Vista Capital chairman Robert Byron (snapped with Lord Stanley) has noticed that classic, closed-end private equity funds have become a difficult sell to institutional investors since the downturn. But many large investors are not equipped to invest directly, so it’s a rock and a hard place-type situation, he says. That makes Blue Vista’s strong story and demonstrated success that much more critical when courting potential investors. About to begin its 13th year of business, Blue Vista is thriving on its student housing biz and providing equity capital for middle-market real estate operators ($2M to $15M equity/deals).
Robert says Blue Vista hasn’t been a huge participant in the Chicago market in the past, since you’re always a tougher underwriter when you live in the market and have stronger opinions. But it's had local student housing success (like Tailor Lofts, above) and dipped its toes in suburban office and Gold Coast retail. Nationally, the firm's active in San Francisco’s creative office scene and just closed on four vacant office buildings in Manhattan’s Silicon Alley. This summer, Robert’s looking forward to his Windy City favorites—golf, tennis, biking, and runs by the lake. Get your event tix here.