Global Opportunities in Commercial Real Estate (mobile)

Global Capital Trends:

• Global direct real estate capital grew in 2013 to approximately $320 billion, a 3% increase from mid-2012.
• Capital growth occurred in all regions except EMEA (Europe, Middle East, and Africa).
• U.S. market share balance with Asia and EMEA has returned to 2000 levels.
• Private and institutional investors are increasingly deploying capital compared to other investors, signaling a shift from cash on the sidelines.
• Global collateralized mortgage obligations (CMOs) are rising, providing increased leverage for real estate lending.
• Central bank balance sheets have expanded significantly, yet inflation remains tame despite monetary expansion.

Regional Market Analysis:

• Ireland & UK:
  • U.S. financial institutions have resumed lending in the UK and Ireland, with over $8.5 billion in acquisitions by panelists in these markets.
  • Irish vacancies are near 95% occupancy, with rents increasing in high-quality areas of Dublin.
  • Ireland attracted over 500 U.S. tech companies, including Google (occupying nearly 600,000 sq. ft. in Dublin), due to a young demographic, free education, and a 12.5% corporate tax rate.
  • The UK exhibits a dual economy; London retail assets like Shepherd's Bush and Stratford generated nearly £2 billion in combined sales, outperforming traditional centers due to better customer accessibility.
  • Investment strategy in the UK focuses on secondary markets for higher yields rather than just prime central London.
• Brazil:
  • Despite being an attractive environment, Brazil faces slowing growth, with Sam Zell noting the economy "did not pick off" after interest rate cuts.
  • Vacancy rates in São Paulo have doubled, and office rents are expected to decline, though Rio de Janeiro shows activity in logistics.
  • Barry Sternlich expressed disappointment in the Brazilian economy, citing a "blockage" and sluggish leasing absorption.
• Latin America (General):
  • Colombia is identified as the top investment destination in Latin America, fueled by a U.S. free trade agreement and oil production increasing from 100,000 to 900,000 barrels per day due to the decline of FARC.
  • Mexico is emerging as a primary beneficiary of supply chain diversification following the Fukushima tsunami, particularly the central region.
  • Panelists noted the "hedge against Asia" trend is driving manufacturing investment into Mexico.
• Europe:
  • The region faces recession, massive unemployment, and social unrest risks, with youth unemployment reaching 30%.
  • Germany is the primary beneficiary of the Eurozone crisis, while other nations struggle with stability.
  • Investment activity is shifting; funds are moving capital back into Europe as debt markets reopen, though equity underwriting remains difficult.
  • India is viewed as having a long-term potential (300 million young people) but is currently uninvestable for most funds due to corruption, pace of development, and a horizon mismatch with investor expectations.
  • France is largely avoided by panelists due to regulatory and operational instability.
• Japan:
  • The market has shifted from short-term (3-year) debt to 7-year financing due to changing lender willingness and the end of the previous administration's policies.
  • Panelists are financing existing portfolios at 1.3% fixed rates but are currently pausing new acquisitions due to flat rental growth and low cap rates (4-5%).
  • Japan offers high occupancy (96%) with minimal delinquency, though tenants rarely move, creating a static market.
• United States:
  • Considered the top market for risk-adjusted returns due to lower volatility compared to emerging markets.
  • The U.S. benefits from low interest rates and a lack of sovereign credit risk compared to other global markets.
  • Specific sectors showing strength include healthcare (aging population) and net lease assets (retail, office, industrial).
  • Retail net lease assets are seeing low cap rates (high 2% to low 3%) with fixed, long-duration debt available.

Investment Strategies & Asset Classes:

• Risk-Adjusted Returns: Investors are prioritizing risk-adjusted yields over high-growth opportunistic bets, with expectations for total returns settling into the 5-7% range (driven by yield rather than appreciation).
• Debt Market Aberration: The spread between cap rates and debt rates is at an all-time high, creating a unique arbitrage opportunity in the U.S. not seen in previous decades.
• Asset Shifts:
  • Panelists are moving capital from equity-heavy to debt-heavy structures to capture the spread in low-interest environments.
  • There is a consolidation of retailers into larger "super-stores" or showroom formats (e.g., Restoration Hardware) rather than closing physical presence entirely.
  • Multi-family and industrial assets are favored in the U.S. and Western regions.
• Future Outlook (12-24 Months):
  • Bill McMorrow: Western U.S. apartments and UK/Irish secondary markets.
  • Nicholas Gorsch: Domestic staples (U.S., Canada, UK, Netherlands, Germany) in low-risk sectors like grocery-anchored retail and hospitals.
  • Sam Zell: Mexico as the top long-term opportunity due to supply chain shifts; Latin America generally.
  • Barry Sternlich: European expansion (tripling investment) and U.S. office markets (e.g., Charlotte) with high cash yields.
  • Peter Loewy: U.S. markets generally, with specific mention of Century City redevelopment.

Security & Risk Management:

• Terrorism Insurance: TRIA (Terrorism Risk Insurance Act) expiration is a critical concern; its renewal is necessary to maintain U.S. attractiveness to global capital compared to other nations with federal backstops (e.g., UK's PULRI).
• Operating Costs: Security now comprises 25% of operating costs for retail malls, a drastic increase from pre-2001 cleaning costs.
• Data Integration: Real estate operators are digitizing building plans (entries, exits, hydrants) and integrating security footage with law enforcement to improve response times, citing the Boston Marathon bombings as a catalyst for utilizing private surveillance data.
• Structural Issues: The U.S. faces jurisdictional fragmentation (city, county, state, federal) that hinders unified security response compared to centralized systems in the UK.

Retail Evolution:

• Omnichannel Merging: Online sales account for only ~10% of U.S. retail, with 90% remaining offline; the trend is toward integration where customers research online but purchase in-store.
• Mall Viability: Same-store sales in the U.S. grew 6.5% (triple inflation), while Brazil saw 20% growth, debunking narratives of mall obsolescence.
• Format Changes: Retailers are consolidating into fewer, larger locations (e.g., 60,000 sq. ft. showrooms) to improve the customer experience, with physical presence remaining essential for categories requiring interaction (e.g., apparel, books).
• Mobile Focus: 70% of customers research products on mobile devices before visiting physical locations.

Panelist Biographies & Context:

• Peter Loewy (Westfield): CEO managing 105 centers globally with 1.1 billion annual visitors and $40 billion in sales; Chairman of Homeland Security Advisory Council.
• Bill McMorrow (Kennedy Wilson): Chairman/CEO building $13B powerhouse; acquired $8B+ in real estate and raised $8B equity since 2010.
• Nicholas Gorsch (American Realty Capital): Chairman/CEO with 3,000+ transactions valued at $15B; founded American Financial Realty Trust.
• Barry Sternlich (Starwood Capital): Chairman/CEO of Starwood Property Trust (largest mortgage REIT); introduced concepts like the Westin Heavenly Bed.
• Sam Zell (Equity Group Investments): Chairman focusing on diversified assets (70% in media, sports, recycling, etc.) with 30% in real estate; spends ~1,500 hours/year flying.