Is "Winter Coming" for CRE? Fundraising Experts Weigh in
To kick off a panel at DLA Piper's Global Real Estate Summit titled "Raising and Deploying Capital in a Fragile World," attendees first listened to an Urban Land Institute assessment of the CRE landscape.
"RE players want to believe that an unprecedented decade-plus of halcyon returns will endure indefinitely, but somehow sense ‘the boom is over'," said Stephen R. Quazzo, CEO of Pearlmark Real Estate, reading the ULI findings aloud at the Summit on September 26, 2017, in Chicago.
"What I didn't tell you," Quazzo added, "was that those were the emerging trends from 2007."
That year, of course, saw the beginnings of the global financial crisis, which led the world's economy to depths not seen in decades. Quazzo closed his opening remarks by saying, "For you ‘Game of Thrones' fans, winter is coming."
Some Pessimism, But Cautious Optimism, Too
Quazzo's panel included experienced fundraisers in a wide range of businesses – some who said they'd been defensive for years, including Leonard J. O'Donnell, president and CEO of the USAA Real Estate Company.
"We have a broad view that over the next two or three years, core values will more likely decline than increase," O'Donnell said. He said his company is looking beyond a market correction – and has been since 2013. If a correction happens in the next two or three years, the goal is to be in a good position to add value down the road, he said.
But other panelists, including Alan F. Riffkin, managing director of global investment bank Lazard, were more bullish – even as the memory of the Great Recession still resonates in the boardrooms.
"What I see among our clients is cautious optimism," he said. "All the things you'd worry about as a CEO or an investor haven't come to bear. But there is an angst … and that resonates with people on the board and how they have to think about returns over long horizons."
Benjamin S. Butcher, CEO of STAG Industrial, a real estate investment trust focused on the acquisition and operation of single-tenant, industrial properties throughout the United States, said the last downturn was a credit crisis, which historically necessitates longer recoveries. He said a recession could happen in the next year or so, but that not all sectors of the economy would be hit as hard.
"In our particularly parochial industry, the industrial industry, recessions aren't necessarily that bad," he said. "Industrial demand tends to follow GDP growth. In a recession, when tenant retention goes up, rent increases go down, so your near-team results are better, your results two or three years out are a little bit worse. But it's not really a big deal.
"We've got kind of an `everything's-going-to-be-OK' view."
A Long Cycle with Slow and Steady Growth
The current economic cycle is the fourth-longest in history, said Glenn M. Johnson, who works with a range of institutional investors as a managing director at Clarion Partners. Overall fundamentals, Johnson said, remain quite strong, with low interest rates and cumulative supply that is significantly below previous recovery periods.
"That tells us a lot about some of the mistakes that have been made in the past," he said. "If you look at the slope of the line of recovery, it's well below the different recessions over time, the different downturns. We think that's the way it's going to go, we think it's going to be slow and steady. We don't fear runaway inflation for a number of reasons.
"I certainly wouldn't characterize our view as defensive. Smart, both eyes open? Absolutely. But we're full steam ahead."
What are the Weak Spots?
Quazzo asked whether there were potential weak spots, and panelists noted extremely high rents in some gateway cities as well as the struggling suburban office sector and retail sectors. O'Donnell said his favorite saying was "retail isn't overbuilt – it's underdemolished."
"Whether it's 300, 400 or 500 malls that are going to survive and be repurposed, we think there's an opportunity to be part of the repurposing of those malls," he said. This reflected DLA Piper's 2017 State of the Market Survey, which found that 68 percent of respondents believe smart retail companies would find the right balance between brick and mortar and e-commerce through omni-channel retailing. Another 21 percent said retail would be successful in its repositioning through new mixed-use projects and redevelopment and repositioning of existing shopping centers.
Quazzo, attempting to sum up the prevailing view from the Summit regarding CRE, said the United States has a benign economy, with the biggest worry coming from escalating tensions with North Korea. In response, O'Donnell repeated something he recently said to his board.
"We may have a big recession," he said, "but it won't be real estate's fault this time."