After a half-century in the real estate business, Joe Cosenza is as enthusiastic about dealmaking as ever. Since starting the Inland Group of Real Estate Companies in 1968, Joe Cosenza and three fellow schoolteachers have built the Oak Brook, Ill.-based firm into one of the nation’s largest, most diversified commercial real estate investment companies. Inland Group is a launching pad for a wide variety of investment vehicles: limited partnerships, listed and non-listed REITs, and institutional funds. All told, Inland owns and manages 77.4 million square feet of real estate in 49 states.
In his roles as vice chairman of Inland Real Estate Group and president of Inland Real Estate Acquisitions, Cosenza oversees the firm’s acquisition strategies and due diligence. He also serves as a consultant to other real estate organizations and has overseen or negotiated the purchase of $47 billion in income-producing real estate. Cosenza and Inland have weathered numerous turbulent times to assemble that track record, a noteworthy point as concerns mount that the longest economic expansion in U.S. history is winding down. In a wide-ranging interview, the energetic, upbeat veteran offered perspectives on the evolution of the industry and how Inland Group is positioning itself in the current cycle.
Inland Group celebrated its 50th anniversary in 2018. What have been the most significant milestones or changes in commercial real estate over that time?
Cosenza: Few people realize this, but around 1997 or 1998, more and more sellers started to use real estate brokers to widely market their properties. Before that, sellers may have called Inland directly or the brokers may have chosen us first before putting it on the market. What that did was increase transparency and increase prices as more of the world got to see more properties.
Of course, the Internet came along not long after that, making real estate even more transparent and increasing the speed of transactions. You put something for sale on the internet, two weeks later bids are due, and within a couple of days someone is chosen and it’s broadcast to the world. There are no secrets anymore.
Tax reform in 1986 crushed the savings and loan industry and almost every real estate type because you couldn’t borrow. At the time, we had about 400 partnerships, of which 40 weren’t worth what investors paid for them. This is when we started doing sale-leasebacks with Walmart. We sold the partnerships—some for a little more than the debt, and some for the only the debt—and put them into the sale-leasebacks. Eight to ten years later we sold them and our partners got all their money back.
That period also saw the transitioning from limited partnerships to REITs, and I always congratulate Milton Cooper at Kimco Realty. (Cooper co-founded Kimco’s predecessor in 1958). He showed the real estate industry that you could take a huge portfolio of shopping centers with a lot of maturing debt and cure it by putting it into a real estate trust and then listing it on the New York Stock Exchange. That opened the floodgates for REITs to stand tall with not only institutional investors, but also individual investors.
Obviously, the depression of 2008 and 2009 affected every single part of the real estate market, every financial institution, and every individual that needed to borrow or buy or sell a home. It took almost 10 years to cure, and we’re still seeing the consequences today.
Tell us about your acquisition activity over the last few quarters. How has the long-running cycle affected your strategy?
Cosenza: Over the last 18 months we’ve purchased more than $2 billion worth of real estate: $900 million of apartments, $400 million of self-storage, $300 million of medical office, $150 million of retail and about $400 million of single-tenant properties. The amount of investing that we’re doing hasn’t changed; we haven’t dialed back acquisitions, and we’re not worried about a potential recession. We’ve also intensified new construction of apartments and hotels, especially in Texas, Florida and Colorado, where we see the most promising growth prospects.
The market is awash in debt capital. What’s the risk that lenders get too aggressive and let underwriting slide in the same way they did leading up to the Great Recession?
Cosenza: The aggressiveness of lenders right now comes in the form of lower rates, not lower standards. In Inland’s case, we only borrow around 50 to 55 percent of debt for each deal. Separately from Inland, we also own banks. So I see it from all angles, and I don’t see any danger.
If not aggressive lending, then what could disrupt the market?
Cosenza: Before the most recent tax law came out, for about two years we had a heated argument over whether to change the 1031 Exchange rules (which allow property investors to defer the capital gains tax on the proceeds of a sale if they roll the proceeds into a similar property within a certain period of time). The real estate was saved, but everything else, like machinery, equipment and vehicles, was eliminated.
If the rules for real estate are changed, it will have the same effect on property as tax reform did in the 1980s. It doesn’t matter if it’s someone who has a second home and wants to flip into an two-flat, or if it’s a REIT that wants to sell a big shopping center and roll into two or three other shopping centers. That all comes to a halt. And once it does, prices will go down, and it will be job killer. You won’t have attorneys or title companies working on transactions, nor will painters, roofers or any of those other trades have jobs fixing up the building you just bought.
As you indicated earlier, Inland has a well-diversified portfolio. Which property types do you consider the most risky today?
Cosenza: I’d have to say suburban office buildings—unless there’s some reason why a company should be a tenant in one. Maybe the office is right next to a train station or has underground parking for all of your employees. Or maybe you’re on top of restaurants and shopping where you can walk out the door and have a different meal every day or stop in at the grocery store before heading home. If those things aren’t part of a suburban office building’s environment, I just think it’s more risky.
You’ve stated that grocery-anchored centers make up about 80 percent of your retail portfolio due to their resistance to e-commerce. Within those centers, what uses would you say are the most vulnerable to e-commerce?
Cosenza: I think delivery could have the biggest e-commerce impact on grocery stores. But as I look at our grocery tenants, they’re certainly moving to protect themselves. They’re doing things like introducing their own delivery services, and in some cases, with our help, they’re adding curbside pickup lanes so that customers can pull up, someone loads their groceries in the car, and then they drive off. We also think we should install charging stations for electric autos in front of grocery stores, and we’re negotiating with ChargePoint, Electrify America, Carbon Day Automotive and Volta Charging to do that.