THE INSTITUTIONALISM OF THE US COMMERCIAL REAL ESTATE MARKETS Portland State University 8th Annual Co e e ce Portland, Oregon Ma 31, May 31 2013 Blake Eagle
Introduction What is an institutional investor? Who are the institutional investors that invest in the US property markets? How many dollars invested? What has been their impact on the marketplace? What is the total institutional capital invested in Portland real estate?
What Is an Institutional Investor? An entity that pools up large sums of money Sources include: Savers, depositors, policyholders Shareholders, investors Contributors, donors Highly specialized investor on behalf of others Spreads capital across broad range of opportunities ii Debt and equity markets Primary and secondary markets Public and private markets Domestic and international markets
Who Are the Institutional Investors That Participate in the US Property Markets? Financial intermediaries Real estate investment trusts (REITs) Private investment funds
Financial Intermediaries Universe includes: Commercial banks, thrifts Insurance companies Credit unions Long-time suppliers of real estate credit Construction, development, land loans Bridge loans, gaps loans, forward commitments, second mortgages Residential and commercial mortgages Spread lenders - not equity investors Borrow at one rate Lend at a higher rate
Investment Trusts (REITs) Corporation, trust, association Specializes in real estate investment Created by Congress in 1960 to allow investors to participate in real estate through a mutual fund type structure Most REITs are public companies Invest primarily in commercial real estate equity Operating properties Office, retail, industrial, multifamily, self storage, senior housing Some REITs invest in real estate debt
Investment Trusts (REITs) (Cont d) Tax exempt providing 90% of taxable income is distributed to shareholders Took k30 years, two commercial property cycles before REITs attracted broad investor interest Since 1990 growth has been spectacular
Investment Trusts (REITs) (Cont d) Year # REITs Industry growth Market Cap # Equity REITs Market Cap # Other REITs Market Cap 1971 34 $1.5 B 12 $0.3 B 22 $1.2 B 1975 46 $0.9 B 12 $0.3 B 34 $0.6 B 1980 75 $2.3 B 35 $0.9 B 40 $1.4 B 1990 119 $8.7 B 58 $5.6 B 61 $3.2 B 2000 189 $138.7 B 158 $134.4 B 31 $4.2 B 2010 153 $389.3 3 B 126 $358.9 B 27 $30.4 B 2012 172 $603.4 B 139 $544.4 B 33 $59.0 B Source: NAREIT
Private Investment Funds Single purpose investment trust Sponsored and set up to fund a specific public good Retirement Education Scientific research Philanthropy Universe Pension funds Endowment funds Charitable foundation Tax exempt
Private Investment Funds (Cont d) Portfolio investors Invest based on a strategic plan Hire professional portfolio investment managers Diversify across asset classes Diversify across investment managers Held to very high standards of fiduciary accountability Total assets: $13.0 T Pension fund assets: $11.0 T
Private Investment Funds (Cont d) Allocates real estate capital across three strategies Core Value add Opportunistic $0.0 invested in real estate equity in 1970 $500.0 B+ invested in real estate equity in 2013
Impact on the Market Legitimized real estate as an investment asset class Eh Enhanced did industry professionalism Promulgated transparency Mandated performance measurement
Legitimized as an Asset Class Changed perception of real estate investment From one based on: Deal driven Fee motivated Tax oriented Over-leveraged To one offering: Portfolio diversification Inflation protection Income production Capital growth
Legitimized as an Asset Class (Cont d) In a relative short time frame real estate accepted as an asset class along side Equities Fixed income Money market securities
Enhanced Industry Professionalism New real estate industry evolved Real estate portfolio management Offering to institutional investors Research driven investment strategies Asset management, property management Leasing, market value accounting, investment reporting Valuation, performance measurement Portfolio monitoring Buy/sell/hold analyses No such business existed prior to institutional equity capital coming into the market
Enhanced Industry Professionalism (Cont d) Today, more than 300 real estate investment portfolio management organizations are in the business The universe of real estate investment managers include: Insurance companies Commercial banks Wall Street Registered investment advisors Developers Real estate brokerages Real estate operating companies Total AUM in excess of $500.0 B Compensation based on value of AUM
Promulgated Transparency Institutional investors demand/require timely, relevant, reliable, third-party verifiable information from which to Make informed investment decisions Monitor and track results Undertake periodic buy/hold/sell analyses Information required at the Property level Investment level Market level Everything by property type, market, sub-market regarding Operating data, transaction prices, rental rates Vacancy ratios, absorption rates, construction rates
Promulgated Transparency (Cont d) Spawned a real estate information industry NCRIEF Private market performance indexes and benchmarks CBRE Econometrics, REIS, COSTAR, PPR, Moody s Economic and market analysis and forecasting Capital Analytics Transaction prices Altus, Research Corporation Appraisal values, cap rates, discount rates Wall Street Public REIT analytics, REIT buy/hold/sell rankings, public market pricing, NAV premiums vs. discounts IPD Portfolio attribution
Promulgated Transparency (Cont d) Academia took notice, jumped in Initiated scholarly research - expanded the literature Provide highly credible third-party analysis and perspective Real estate centers, research and education Real estate degree programs on the rise
Mandated Investment Performance Measurement Institutional investors require/regulated measure and compare asset class performance regular basis Two reasons Keep fully informed Sponsoring organizations Beneficiaries/contributors Trustees Appropriate regulators Be able to engage in comparable analysis (i.e., How am I doing? ) Against asset class standard measures of performance My managers against a larger universe of peers My yportfolio against a larger universe of peers Compared to my investment return objectives
Mandated Investment Performance Measurement (Cont d) National Council of Investment Fiduciaries (NCREIF) Founded in 1981 to address private real estate investment performance Industry association Members include real estate investment managers, plan sponsors, accountants, appraisers, academics, consultants Established specifically to respond to institutional i i investors demand for a real estate asset class performance index
Mandated Investment Performance Measurement (Cont d) NCREIF mission Collect, validate, disseminate real estate performance data Calculate and publish real estate performance indices Establish market value information reporting standards Foster and promote academic and independent research
Mandated Investment Performance Measurement (Cont d) NCRIEF Property Index (NPI) Reports aggregate performance of individual properties comprising the index Start date December 31, 1977 Number of properties: 235 Market value: $550 M NPI database March 31, 2013 Number of properties: 7,181 Market value: $329.1 B NPI return since inception through March 31, 2013 Income 7.17% Capital 1.55% Total 8.80%
Mandated Investment Performance Measurement (Cont d) Other NCREIF indices in existence or in development Timberland Index Farmland Index Open-end Diversified Core Equity Index (ODCE) All Open-End Fund Index TBI Index Closed-End Fund Index Global Property Index
Summary Impact of Institutional Capital Real estate today is an established investment asset class Investors can participate i t in Public market Private market Both Investors can look to professional real estate investment managers to invest and manage their real estate capital Ready access to vast amounts of information Market fundamentals Investment information
Properties in the NPI Located in the Portland Metro Market Property Type Number of Properties Market Value Apartments 26 $1,437.0 B Industrial 86 834.1 M Office 19 810.1 M Rtil Retail 11 1,008.1 1 B Total 142 $4,089.3 B Source: NCREIF