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The Wall of Capital and the Last Mile: Real Estate in a World of Disruption and Uncertainty

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What keeps you up at night?

That was the question Karen Horstmann, head of acquisitions at Allianz Real Estate of America, posed to the “Real Estate in a World of Disruption and Uncertainty” panel at the 2019 Global Real Estate Summit. In a candid and far-ranging conversation, the panelists compared perspectives on the risks and opportunities facing the market today, including pressures from the “wall of capital,” disruption from last-mile distribution and the balancing act of staying “one toe ahead of the curve.”

The Wall of Capital

“The wall of capital” chasing commercial real estate (CRE), combined with low interest rates, was to blame for some sleepless nights, according to Len O’Donnell, president & CEO of USAA Real Estate. “It gives and takes,” he noted, citing concerns about inflated asset values across all spaces. Horstmann painted a picture of a low-interest-rate environment in which, according to a Bloomberg report noting $17 trillion of negative-interest-rate holdings, the Fed is expected to cut rates again and growth is low.

O’Donnell had “come around” to the idea that the market is a low-rate environment for the long haul and said, “We need to look at ourselves as a relative return industry.” Debra Cafaro, chairman & CEO of Ventas Inc., posited that return expectations have come down in the industry.

As highlighted in the DLA Piper annual Real Estate 2019 State of the Market Survey, 53 percent of respondents believed interest rates will decrease over the next 12 months.

Horstmann noted that Blackstone recently raised more than $22 billion in one of its opportunistic funds. Kathleen McCarthy, global co-head of real estate at Blackstone, said that in their case, the fund was not meant to create immediate pressure to invest, but to take a long-term view of investments. “The conversation was, over the next five years, do we think you have the discipline and patience to find the right moments and select the right opportunities?” McCarthy said of their investors. “Our capital is constructed not to put that sort of pressure on the system.”

The Last Mile

When asked what keeps him up at night, Sandeep Mathrani, CEO of Brookfield Properties Retail Group, was quick to answer.

“The last mile of distribution,” he said. 

That last mile—shorthand for the movement of goods from a transportation hub to the final delivery destination—seemed to be on every panelists’ mind. Mathrani admitted that retail is under pressure from e-commerce and other forces.

O’Donnell, who led USAA in betting on a major e-retailer before it became successful, did not share fears of the last mile. After years of working closely with the e-retailer, “We made a decision as a firm that we were going to do whatever they wanted to do, because whatever they did was the future of e-commerce. Liquidity has followed.”

Today, USAA Real Estate plans to “follow the company into that last mile,” he said, predicting that the firm will continue to see returns from their close relationship with e-commerce colossuses.

McCarthy also anticipated opportunity from last-mile distribution disruption.

“Since the financial crisis, we’ve purchased nearly one billion square feet of warehouses around the world,” she said, which is how Blackstone plans on “moving into that last mile.” Blackstone is currently focused on logistics. “People love seeing photos of big, shiny buildings, but our greatest successes have been with relatively unattractive assets in those last-mile locations,” she said.

In fact, logistics and warehousing was ranked as one of the most attractive investment opportunities for US CRE in DLA Piper’s 2019 State of the Market Survey.

One Toe Ahead of the Curve

Every panelist agreed on finding pockets of growth by remaining innovative. Cafaro said that balancing innovation with pragmatism was her focus. “Our whole strategy has been to stay one toe ahead of the curve,” she said. “You don’t have to be a visionary to do well and honestly, if you’re too far out front, you fail.”

In this spirit, her organization is transitioning away from nursing homes and toward medicine and life sciences, as Cafaro described medical offices as “the most forward-focused part of our business.”

While the details varied, every panelist echoed the call for sustainable innovation throughout the real estate industry. Given the prioritization on innovation for CRE companies, “It doesn’t matter what industry you’re in, you always have to stay ahead of the curve,” Mathrani said. He also noted that he believes “everything old is new again” and maintained that retail is going strong, thanks in part to data analysis that allows for targeted development and renewed interest in experiential retail. He also pointed out that 85 percent of sales happen at brick-and-mortar stores. 

McCarthy noted that Blackstone is using PropTech to become better at their core business, introducing new elements such as apps available to tenants of residential buildings, while O’Donnell said that effectively sharing large amounts of data throughout his organization was a priority.

As Horstmann summarized, “We all seem to agree that we’re in a persistent low-rate environment going forward, but there’s still value to be had. What becomes increasingly important is staying ahead of the curve.”