By Christopher Doman '15 and Lauren McDermott '15
Moderator: Michael Giliberto, Ph.D., FRICS, Adjunct Professor, Columbia Business School
Panelists:
A.J. Agarwal, Senior Managing Director, Blackstone
Adam R. Schwartz, Managing Director- Head of U.S./Europe Real Estate Group, Angelo Gordon & Co.
Joshua Scoville, Senior Managing Director- Investment Management, Hines
The panel discussion, "Where are we in the Real Estate Cycle," moderated by Michael Giliberto of Columbia Business School, and including A.J. Agarwal of Blackstone, Adam Schwartz of Angelo Gordon, and Joshua Scoville of Hines, focused on where to find investment opportunities in the current market environment. Each panelist discussed how value will have to be created primarily by driving NOI growth, rather than through cap rate compression, as has been the case over the last 3-4 years. Opportunities for high risk-adjusted returns will primarily come from renovating and repositioning well-located properties with significant vacancy or pending lease roll.
Mr. Agarwal mentioned that firms will need to achieve rental growth and or occupancy growth in order to compensate for potential cap rate expansion over a 5-8 year horizon. The panelists touched on the trend of foreign capital pushing cap rates down during the current recovery. Mr. Scoville mentioned that foreign capital has certainly driven up prices in gateway cities such as New York City and San Francisco, as investors search for a safe haven for their capital. Mr. Agarwal also mentioned that we are in the beginning stages of the foreign capital movement, as recent legislation such as insurance company reform in China will allow even more foreign money to be invested in U.S. property markets. Overall, the panelists expect foreign capital to continue to support property prices for years to come.
The panelists also spoke about areas in the real estate sector that have been unfairly overlooked as cap rates have compressed during the recovery following the financial meltdown of 2008. Mr. Agarwal mentioned Blackstone’s strategy to buy single-family homes at foreclosure auctions at significant discounts to both pre-crisis levels and replacement costs. He mentioned that many firms focused only on multi-family and not on single-family homes because they did not have the existing infrastructure to manage those types of investments. Blackstone also did not have the infrastructure, but created it in order to capitalize on the opportunity. Mr. Scoville mentioned the attractiveness of secondary markets, where property values may only have increased 15% from their lowest levels, while investments such as San Francisco multi-family are up 99% since the bottom. He specifically mentioned investing in Phoenix, which is one of the top 10 metro areas for job creation in the country and is a market where prices have not recovered materially over the last few years. Mr. Schwartz mentioned that while a significant amount of their capital is spent on urban real estate, Angelo, Gordon sees some opportunities in certain suburban spillover markets. Areas such as Oakland and San Mateo are attractively priced due to strong employment fundamentals and minimal available supply in San Francisco and offer historic discounts at which properties are trading.
Though the panel did not specifically say where they thought we were in the cycle, there seemed to be a consistent theme: things are certainly starting to look frothy, but barring some catastrophe, the peak is likely years off.