NCPERS Conference 2017

Transcription

1 NCPERS Conference 2017 Intercontinental Real Estate Corporation 1270 Soldiers Field Road Boston, MA Tel: Fax:

2 Peter Palandjian, CEO 1. Current Market Conditions & What Lies Ahead 2. Why and How to Invest in Real Estate

3 Private Real Estate Current Market Conditions & What Lies Ahead

4 Commercial Real Estate Fundamentals Occupancies have improved substantially and rents have stabilized or are increasing in most markets. Limited construction of new buildings over the last several years has supported the recovery and will continue to do so in the next few years. Office and industrial markets have improved significantly. Retail recovery is further behind. Multifamily is starting to cool in some markets after historic renter demand over the last few years as the housing market restructured.

5 Commercial Real Estate Vacancy Rates 2016 Q4 Peak of Great Recession Equilibrium Rate Office 12.9% 16.8% 13 to 15% Industrial 8.2% 14.6% 9 to 10% Retail 10.2% 13.0% 9 to 10% Multifamily 4.9% 7.4% 5 to 6% *Equilibrium Rate is the rate which approximates a balanced leasing market in which neither landlords nor tenants hold more negotiating power. Vacancy below this rate generally implies a landlord s market and vacancy above this rate implies a tenant s market. Source: CBRE EA

6 The Outlook for Rent Growth Average Annual Rate of Growth Last 5 years Next 5 years Previous peak Peak year Office 3.2% 1.8% 11.2% 2000 Industrial 4.3% 2.1% 7.4% 1999 Retail 0.9% 1.4% 5.1% 1999 Multifamily 3.4% 1.9% 6.7% 2000 Source: CBRE EA, CoStar, REIS

7 Rent Growth Market Forecast PROPERTY TYPE Office Industrial Retail Multifamily FAVORED MARKETS Phoenix, Oakland, Pittsburgh, San Diego, Tampa, Riverside, Orange County, Portland, St. Louis, Stamford Allentown, Kansas City, Orange County, Honolulu, Greenville, Seattle, Indianapolis, San Antonio, Fort Worth, Milwaukee Columbus, Fort Worth, Atlanta, Fort Lauderdale, Nashville, Houston, West Palm Beach, Tampa, St. Louis, San Jose Sacramento, Newark, San Jose, Orlando, Oakland, Chicago, Norfolk, Ventura, Miami, Los Angeles Source: CBRE EA

8 Today s Property Type Outlook Property Type Recommendation Office Industrial Multifamily Retail Strong Buy Buy Buy Neutral

9 History of Capitalization Rates Sources: NCREIF, Real Capital Analytics, Intercontinental

10 Recent Cap Rate Movement Property Type Low Cap Rate Avg. Pre- Recession Cap Rate Avg. at Peak of Recession (Q4 2009) Q Cap Rate Average BPS Increase from Low to Peak (Q4 2009) BPS Reduction from Peak to Q Office 6.5% (Q2 07) 8.9% 6.7% +240 bps (220 bps) Industrial 6.8% (Q1 07) 8.7% 6.7% +190 bps (200 bps) Apartments 6.1% (Q4 06) 7.0% 5.6% +90 bps (140 bps) Retail 6.5% (Q2 07) 8.2% 6.5% +170 bps (170 bps) Total (All Property Types) 6.6% (Q4 07) 7.9% 6.1% +130 bps (180 bps) Source: Real Capital Analytics

11 Quarterly Volume of Property Sales Source: Real Capital Analytics

12 Loan Refinancing Demand Wave of loan maturities peaking now Distressed property sales will abate over the next few years, but opportunities remain due to: Sheer volume of refinancing demand relative to likely future origination volume Property values lower than at origination Tighter future underwriting standards vs. origination, e.g., lower loan to value, higher debt service coverage, greater amortization, etc. Source: Foresight Analytics

13 Historical NCREIF Total Returns NCREIF PROPERTY INDEX TOTAL RETURN As of 12/31/ Annualized Rate of Return (%) '79'80'81'82'83'84'85'86'87'88'89'90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12' Source: NCREIF

14 U.S. Stocks vs. U.S. Bonds vs. Private Real Estate Through 12/31/16 Returns are annualized Source: Segal Marco Advisors

15 Core Real Estate Has Led the Way Out of the Recession, but. What is most attractive today? Flight to Quality post recession (past 5+ years) Core real estate has enjoyed above average return over the past 3+ years (see below) As is typical out of a recession, Core-Plus has been slower to recover, but is now positioned to outperform for the near to mid-term Core-Plus funds positioned to invest new client commitments within one to two quarters providing exposure to today s attractive market characteristics Core-Only Total Return Total Return

16 Private Real Estate: Why & How to Invest in Real Estate

17 Changes in Pension Real Estate Investing 1970 s & 1980 s US Investments Only Private Equity Ownership Office & Industrial Only 20 managers controlled ~80% of capital 1990 s Private & Public Debt & Equity U.S. & Offshore Operating properties & development Traditional commercial, residential, telecom, storage, retail, hospitality, timber, etc managers 2000 and on Diversification and return strategies Reporting standards Transparency Alignment of interest Diversification Strategy Return Strategy Empowered Institutional Investors!!

18 Why Invest in Private Equity Real Estate? General Concerns Lacks efficiency typical of traditional marketable securities Long term commitments Demands active due diligence Demands active management Lacks investible benchmark Lacks standardization of reporting Higher financial leverage Limited institutional history Illiquidity

19 Why Invest in Private Equity Real Estate? Benefits Illiquidity is attractive! Diversification reduces risk Manager specialization Extreme information advantages Induces appropriate long term behavior Value orientation Margin of safety Manager s side-by-side commitment Low correlation Performance Low volatility Hedge against inflation High barriers to entry Severe supply constraint Collateral Benefits *Job Creation *Union Mandate *Local Investments *Regional Economic Stimulation *Recycling capital back to pension funds

20 How to Invest in Real Estate-Spectrum of Risk and Return RETURN Core Historic: 6-8% Enhanced Core ( Core Plus ) 9-14% (8-12%) Value Added 15-22% (12-20%) Opportunistic 25% plus (20% plus) Today: (5-8%) RISK

21 Property Case Studies 100 Franklin Street One Bulfinch Place 125 Lincoln Street 18 Independence Drive & 66 Saratoga Boulevard Clover Creek Apartments Rivers Point

22 Property Case Studies 343 Congress Street 90 Tremont Street (Hotel Nine Zero) 226 Causeway Street Before Before Before After After After

23 Property Case Studies Lake Forest Village Lake Forest, CA Park Place Palantine, IL Waterplace Providence, RI The Forum West Palm Beach, FL

24 Property Case Studies 900 Monroe Hoboken, NJ 915 North Orleans Chicago, IL Monroe Center Hoboken, NJ Regency Pines Cary, NC

25 Property Case Studies Novo Nordisk Plainsboro, NJ Before After Madison Racine Chicago, IL Before After

26 How to Invest in Real Estate Matrix of Decisions Private Equity vs. Public REITs if private: direct vs. commingled ( pooled ) vs. REITs if public REITs focused strategy vs. diversified fund strategy Open vs. Closed liquidity and term Geographic focus Regional vs. national vs. international Property type focus vs. diversified Leverage No answers, many choices Discuss with consultants and fellow trustees

27 How to Invest in Real Estate Issues to Consider Public REITs + s - s Liquid Higher volatility 90% dividend EPS pressure Correlations Private REITs + s Diversification Income - s Fee Structure Term Exit Vehicles Direct ( separate account ) Controls Buy/sell discretion Staff burden Property type Geographic focus Partner / J.V. approach Commingled ( pooled ) Manager discretion Partner / J.V. approach Term Alignment of interest Multiple properties Small dollars buys a lot of real estate (low minimums)

28 How to Invest In Real Estate Issues to Consider Own your own building? Local mandate job creation politics (housing stock, urban renewal, create tax base) Hard assets visible, bricks and mortar you can touch, pride

29 Conclusion Closing Advice Why Now Manager selection is everything Determine strategy Scrub track record Measure alignment of interest Market recovery opportunity Space markets continue to improve, providing healthy income growth Attractive basis Reasonable and achievable underwriting assumptions

30 Biography Peter Palandjian, Chairman and Chief Executive Officer, oversees the affiliated Intercontinental operating companies, with primary responsibility for strategic planning and direction of all company activities. Mr. Palandjian is a member of Intercontinental's Investment and Executive Committees. Prior to joining Intercontinental in 1993, Mr. Palandjian worked as the assistant to the CEO of Staples, Inc. and as an Associate Consultant with Bain & Company. Mr. Palandjian holds memberships with the Pension Real Estate Association (PREA) and the National Association of Real Estate Investment Managers (NAREIM). Mr. Palandjian has also been active on a number of corporate and not-for-profit boards. He has served as a board member of several institutions including: co-chair of the Board of Overseers of the Boston Symphony Orchestra; Dana Farber Cancer Institute; the International Tennis Hall of Fame; American Friends of the Yitzhak Rabin Center; the New England Chapter of the National Association of Industrial and Office Properties (NAIOP); O Neill and Associates; Leader Bank; Harvard Varsity Club; Town of Belmont (MA) Board of Retirement; Trustee Emeritus of the Fessenden School; and the Taubman Center at Harvard s Kennedy School of Government. Mr. Palandjian works on behalf of Harvard University as a volunteer undergraduate admissions interviewer. Mr. Palandjian was a two-time Harvard Captain and world ranked tennis player on the ATP tour. Mr. Palandjian earned his BA from Harvard University and his MBA from the Harvard Business School.