{"id":1004356040,"date":"2019-09-27T04:17:14","date_gmt":"2019-09-27T12:17:14","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004356040"},"modified":"2019-09-29T23:19:02","modified_gmt":"2019-09-30T07:19:02","slug":"capital-interest-rates-battle-as-properties-obsolesce-faster","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/capital-interest-rates-battle-as-properties-obsolesce-faster\/","title":{"rendered":"The Struggle Between Capital and Interest Rates"},"content":{"rendered":"
\"\"<\/a>

(Left to right) Karen Horstmann, Sandeep Mathrani, Debra Cafaro, Kathleen McCarthy and Len O\u2019Donnell. Image courtesy of Michelle Weeks<\/em><\/p><\/div>\n

The plenary session at DLA Piper\u2019s 15th Global Real Estate Summit, titled \u201cReal Estate in a World of Disruption and Uncertainty,\u201d addressed a wide range of topics during more than an hour of spirited discussion. During the panel, the moderator and four panelists touched on the collision between low-to-negative interest rates and a \u201cwall of capital\u201d<\/em> waiting to get into commercial real estate. The ever-more-rapid obsolescence of product in multiple CRE sectors was also on the agenda.<\/p>\n

Moderator Karen Horstmann, head of acquisitions at Allianz Real Estate of America, started off with a lightning round, asking the panelists what keeps them up at night and what are they most excited about. Kathleen McCarthy, global co-head of real estate at Blackstone, admitted her concern over global populism and what that means for real estate, particularly in housing. <\/p>\n

High allocations, lower expectations<\/h2>\n

Horstmann sketched out the low-interest-rate state of the economy, with an estimate from Bloomberg that negative-interest-rate holdings total $17 trillion. She added that the U.S. 10-year Treasury notes have been at less than 3.25 percent for the past eight years, LIBOR is expected to remain between 1 and 2 percent, and the Fed is expected to cut rates again, all while growth remains low.<\/p>\n

Len O\u2019Donnell, president & CEO of USAA Real Estate commented, \u201cI have come around to the view that we are in this low-interest-rate environment for the long haul.\u201d<\/em> Many central banks function as arms of their respective governments, he explained, and with slow- or negative-growth economies and shrinking populations, \u201cthere\u2019s simply no incentive to push interest rates up and there\u2019s no growth to support the need for it. We\u2019re really in negative real interest rates in the U.S. right now, and I think that\u2019s something we don\u2019t focus much on.\u201d<\/em><\/p>\n

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See our full coverage of the 2019 DLA Piper Global Summit<\/strong><\/a><\/p>\n

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However, O\u2019Donnell sees less volatility going forward in the industry that he refers to as \u201crelatively mature.\u201d<\/em> \u201cI think there has to be an industry-wide shift in how people are incentivized and how they\u2019re compensated in a nominal-return world.\u201d<\/em><\/p>\n

Horstmann noted the considerable amount of capital waiting to be deployed into real estate. \u201cReal estate allocations broke the 10 percent barrier last year,\u201d<\/em> yet \u201cinvestors generally remain 90 to 100 basis points under-invested in real estate,\u201d<\/em> she said. There\u2019s an estimated $340 billion in dry powder and that total is growing steadily.<\/p>\n

Based on that, she asked the panelists if investors need to lower their expectations regarding returns. Debra Cafaro, chairman & CEO of Ventas Inc., noted that structural factors in the U.S. economy, including demographics, are leading to lower growth and added that \u201cReturn expectations have definitely come down.\u201d<\/em><\/p>\n

Times, properties are changing<\/h2>\n

In response to Horstmann\u2019s question on where to find pockets of growth, Sandeep Mathrani, CEO of Brookfield Properties Retail Group, observed that there is obsolescence in every industry and that the solution is to stay ahead of the curve. \u201cIn our industry, we overbuild and we under-demolish,\u201d<\/em> he said, then cited an example of putting one\u2019s money where one\u2019s mouth is.<\/p>\n

Brookfield will be deploying almost $300 million of capital to reconfigure its upscale Northbrook Court mall in suburban Chicago, demolishing roughly half of it and adding 315 apartment units, a food hall and a 70,000-square-foot grocery store. \u201cThis is a shopping center that has the demographics, it has a Nieman-Marcus \u2026 but it doesn\u2019t work,\u201d<\/em> Mathrani said. \u201cWe could sit here, do nothing and watch traffic go to zero or do something and make a billion dollars. You need that courage to recognize obsolescence and do whatever is appropriate for the asset.\u201d<\/em><\/p>\n

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READ ALSO:<\/strong> Retail Sector Makes Headway in Experiential Drive<\/a><\/p>\n

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\u201cIt\u2019s sort of fun to beat up on malls,\u201d<\/em> O\u2019Donnell quipped. But except (maybe) for logistics, \u201cEverything is becoming more experiential. Corporate America wants buildings that help them compete in the war for talent, that are heavily amenitized.\u201d<\/em><\/p>\n

Apartments have almost become like the hotel business, he continued. \u201cIf we\u2019re not doing a refresh every five years, that apartment building looks like it\u2019s 20 years old.\u201d<\/em> O\u2019Donnell concluded that all asset types are becoming obsolete faster and that malls have become the poster child for the phenomenon.  <\/p>\n

Cafaro commented that a balanced approach often works best. \u201cYou really don\u2019t have to be a visionary to do well. In many cases, if you get too far out in front, you fail.\u201d<\/em><\/p>\n

Takeaway trend creates opportunities<\/h2>\n

Since the financial crisis, McCarthy said, Blackstone has bought nearly 1 billion square feet of logistics space worldwide, though this has more recently focused specifically on last-mile facilities. Retailers\u2019 transportation costs far outweigh their real estate costs, by perhaps an order of magnitude, she explained, \u201cso there is room for rents to increase, especially in those closer-in locations in urban areas with very limited new construction.\u201d<\/em> In addition, more and more users are looking for last-mile locations, including kitchens specifically for delivery food.<\/p>\n

Walmart and other retailers are focusing on being their own last-mile providers through the buy-online, pick-up-in-store model, Mathrani added. Even some restaurants are starting to follow a similar pattern, he said. \u201cYou don\u2019t need 400 seats any more in a restaurant, you need 100 seats,\u201d<\/em> because there\u2019s so much takeout.<\/p>\n","protected":false},"excerpt":{"rendered":"

At DLA Piper Summit’s plenary session, industry veterans from Allianz Real Estate, Blackstone, USAA, Brookfield and Ventas reflected on the relationship between shrinking interest rates and the trainloads of capital looking for suitable opportunities.<\/p>\n","protected":false},"author":882,"featured_media":1004356046,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21808,21825,21783,23891,21742],"tags":[36612,33497,33026,33129,44930,34451],"class_list":["post-1004356040","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-finance","category-investment","category-national","category-latest","tag-allianz-real-estate","tag-brookfield-properties","tag-dla-piper","tag-the-blackstone-group","tag-usaa-real-estate","tag-ventas-inc"],"acf":[],"yoast_head":"\nThe Struggle Between Capital and Interest Rates - 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