This is the second installment of Urban Land’s coverage of a special three-part capital markets series held at ULI’s Spring Meeting in New York City (March 9-11); you can read coverage of Part 1 here).
On Wednesday, before a standing-room-only audience, Kyle Bolden, senior audit partner in the Real Estate Hospitality & Construction practice of Ernst & Young, moderated a panel on raising equity amid ongoing market uncertainty. The panelists were Bakari Adams, a managing director and head of Starwood Impact Investors at Starwood Capital Group; Chris Aiken, head of acquisitions for MetLife Investment Management’s Real Estate group; Robert Jue, CEO of Standard Real Estate Investments; and Dwight Stephenson, a principal at Blue Vista Capital Management.
Among the knock-on effects of the Fed’s efforts last year was the sharp pullback of regional bank lending. “We’re primarily invested in the middle market sector, and regional banks [constitute] a primary source of loans for us for our value-add and opportunistic investments,” said Stephenson of Blue Vista Capital Management, a Chicago-based real estate private equity firm. He dubbed last year “probably one of the worst years on record [since] 2012.”
Adams of Starwood said the company haven’t pulled the trigger on deals it already would have in the past because the risk-reward hurdle is higher to get there. “But I think, going forward, we’ll see we’ll see opportunity.”
Aiken of MetLife said, “The withdrawal of the odyssey funds [NFI-ODCE Index] on the equity side from the market really took a lot of liquidity out of the system. A lot of that was driven by [investors’] inability to correctly mark office values and therefore raise new capital.” He also noted that, during the long bull run, good assets continued to increase in value. “I think the paradigm has shifted [so that] operations are really going to be paramount once again.”
Jue of Standard Real Estate Investments, a minority-owned private equity that manages capital on behalf of institutions, said, “We saw on the development side development activity just, sort of, stop in terms of cash flows towards it [in 2023].” Jue believes that after such pain, however, we may be at bottom or within 25 basis points. “I’m more [in] the ‘let’s get stuff done in 2024’ than ‘let’s survive until 2025 camp.’”
Standard is currently allocating limited partner (LP) equity for industrial development, with investments of $15 million to $25 million on transactions of $50 million to $60 million. “Most of that is midsized, multitenant industrial where we see good demand and not enough supply. And we’re doing that nationwide with great developers.”
Stephenson of Blue Vista was less bullish on the remainder of 2024, noting among the “known unknowns” such geopolitical risks as three major wars going on and the upcoming U.S. presidential election. “There’s some unknown unknowns, too, that could potentially tip the scales in … sort of the unfavorable direction.”
Blue Vista puts out LP equity, with checks in the $5 million to $20 million range, targeting the middle market. “We are being a little bit more on the conservative side. And if the deals make sense, we still do them,” Stephenson said.
In 2024, the bid-ask spread is narrowing a bit, according to Aiken of MetLife. “There are going to be [some] groups that are forced to sell” as they are unable to raise capital, he said. He also predicted that some developers will be “out, over their skis, on certain deals that are slow to lease up in some cases or, in other cases, just [facing] pressures from their lenders, and they may look to offload some of those exposures … to try to live to see a better day.”
Adams of Starwood, which provides both general partner (GP) and LP capital, has a $10 billion fund. He doesn’t paint all asset classes with the same broad brush, noting that the outlook depends on the sector and location. “If you’re looking at data centers, which we’re heavily involved in, you’re seeing vacancies go down there,” Adams said. “If you’re looking at multifamily, some of it is trending in the right direction, like in New York, versus other areas [in] the Sunbelt.”
Evaluating deals
In terms of kicking the tires on the economics and partnerships in deals, Aiken of MetLife said, “We want to make certain that there is economic alignment between our partners and our capital throughout the business plan, and primarily through the period of time [when] the value is being created. And so, to the extent that we can get more co-investment or structure fees in a way that aligns with that value creation, [that’s] really what we’re ultimately trying to do.”
All panelists pointed to the requirement of “great sponsors” who are prepared to respond to rigorous questions.
Adams noted that, despite Starwood’s large size, the private investment firm is still very nimble and able to make decisions quickly. “We have flexible capital to invest where we think we’re going to get the best return. So, if we don’t think development returns make sense in this market, maybe they make sense in another market. Or if we think data centers [are] the place to be, then we’ll pour money into data centers. We also can invest globally, too.”
Because there’s a lot of capital chasing multifamily and industrial, yields are compressed, said Stephenson. One approach for Blue Vista has been doing direct-stream programmatic ventures, writing five to seven smaller checks (each in the $3 million range) over a 24- to 36-month period.
Starwood Impact Investors provides GP capital on programmatic and LP capital when it meets the company’s fund thresholds. “Besides capital, we provide infrastructure support and board advisory support,” Adams said. “We also give our sponsors access to training and research, and they have access to anyone at the firm or any one of our partners within the ecosystem.”
What do equity investors look for in real estate? According to Jue of Standard Real Estate Investments, “For the industrial space, it’s still about population growth and transportation access, and access to great employment centers. And functional product, certainly. But I think one interesting trend, at least in the multitenant space is that a lot of the office users are coming out of their B office buildings and collocating with their warehouse facility.”
So, while Standard’s investment strategy remains location, location, location and basis, basis, basis, Jue said that “What people want real estate is definitely changing.”