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CRE Cycle: In the Eighth Inning of a Doubleheader

REMC From left: Wendy Silverstein, Avi Lewittes, Ivo de Wit, Ronald Kravit, Bill Thompson

NEW YORK CITY— We are long in the CRE cycle, maybe not late in the cycle—in an aberration of a very extended cycle, according to Bill Thompson, managing director and co-head at Greenhill & Co.

Cycle Expectations

“All things we’re used to seeing as stop signs: oversupply, overleverage and recession. None of these stop lights are flashing right now, other than geopolitical risk,” Thompson said, “So, it does feel like it has a little time left but it is an awfully long cycle.”

The other Global Flows of Capital session panelists at the annual Real Estate and Capital Markets Conference, organized by the law firm Goodwin and Columbia Business School on Friday agreed. The current CRE market cycle was described as in the eighth inning … of a doubleheader.

Major Trends:

Thompson highlighted major trends from this cycle:

(1) In terms of risk return, there is migration to the middle as capital moves away from core and opportunistic investments and toward core plus, value add and debt strategies.

(2) Large capital sources are migrating to direct investment funds to have more control over fees and investments.

(3) Capital continues to flow from outside the United States.

International Investments and Student Housing

Avi Lewittes, chief investment officer of the Scion Group, which operates exclusively in student housing including 57 campuses, said the international flow of capital comes from an appreciation and recognition of the value of a US higher education.

Earlier this month a joint venture between the Scion Group, the Canada Pension Plan Investment Board and Singapore’s sovereign wealth fund, GIC, acquired a $1.1 billion student housing portfolio.

“Many of the fund managers that are close to the space either went to school in the US or are making decisions to send their children here in the US and higher education is a very valued theme and export sector out of the US that is growing in global prominence,” said Lewittes speaking about the sector in general.

Tier 1 state public schools have an enrollment of 30,000 students. Most of them have on-campus dormitory capacity for no more than 25% of the enrolled student body. The requirement to have freshman live on campus creates a significant demand for professionally managed safe, secure higher end off-campus housing.

In addition, domestically, from a public market perspective, there are only two student housing dedicated REITS with active marketed housing of approximately $9 billion.

Looking at Strategy

Ivo de Wit, managing director and fund manager of the Global Alpha Fund, CBRE Global Investment Partners, said his team started working in the UK student housing sector, developing portfolios now over $300 million. This was motivated by the aging of existing student housing stock.

The fund has been shifting their strategy. The return target is 9% or 11%, which can be achieved with a 75% core and 25% value-add opportunistic investment strategy. The company also plans to add airport logistics and medical offices, according to de Wit.

With the sustained low inflation, low rate environment and cap-rate compression, Lewittes said investors are looking for more current yield than historically and are prepared to punt on the long-term total return with the mindset of “I’m getting enough currently. I’ll worry about it at the exit and the total return at a different point in a different cycle.”

Ronald Kravit, co-head of North American Real Estate and senior managing director, Cerberus Capital Management, agreed. In buying assets, the company is getting 70% to 80% cash flow up front and plans to worry about the exit later. 

Dry Powder —Still Waiting

Kravit noted $360 billion in dry powder currently sits in private equity real estate funds, waiting to be invested, which actually led to a slowdown in new capital flowing to businesses. In 2017, the capital rate for real estate in private equity funds was down 12% and in 2016, was down from 2015. Kravit added this did not even pick up all the powder available because of the many home offices with a tremendous amount of wealth being created both in the US and Asia.

There is plenty of capital available. Many people are still sitting on the sidelines, watching geopolitical issues, and not investing—still waiting to see if the market will move.

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