Even in as tumultuous a year as 2022, some private real estate organisations are still getting massive transactions done. Just ask Roy March, chief executive at real estate investment bank Eastdil Secured, whose name has been invariably attached to the industry’s biggest deals.
Two of these, in fact, were announced this year: Blackstone’s €21 billion recapitalisation of its pan-European last-mile logistics company Mileway, the largest-ever private real estate transaction, and Singaporean sovereign wealth fund GIC and Chicago-based manager Oak Street’s $14 billion privatisation of STORE Capital, a net-lease real estate investment trust.
Known to some as the industry ‘whisperer,’ March is focused on getting clients comfortable with accessing the capital markets and investing during this period of uncertainty. “We’ve come out of a momentum market where there had been a lot of capital and it had been searching to deploy as actively as it can, into what we call ‘FOMAM’, which is the ‘fear of making a mistake’ in an environment of volatility,” March tells affiliate title PERE.
That fear of making a mistake is driven primarily by the fact that “people are very concerned right now because of where the financing markets are today”, he says. But “given our dealflow and transaction volume, we’ve got information to help people make good decisions about investing in volatile times and during times of disruption”, says March, whose firm advises on average of $250 billion of transactions globally a year.
That data get clients more comfortable with making investment decisions, March explains: “It’s about being informed versus emotional.”
Unsurprisingly, the most requested data point from clients is on the affordability and cost of financing. “Financing costs, given what the Fed is doing in tightening, has significantly been impacted during this period of time,” explains March, whose firm places $80 billion a year in institutional financing. “As you go up the loan-to-value metric, how is that all being priced today?”
Ranging from CMBS, US and non-US banks, debt funds, life insurance companies and government agencies, “you have this whole matrix of who’s in business and how are they pricing everything”, March says. “That today is the number one piece of information that we’re sharing, because it drives so much of the valuation.”
In pricing debt, Eastdil Secured also looks at monthly lease trade out reports, which examine lease turnover and how current rents compare to previous time periods and mark to market. While those reports continue to show rental growth in the mid-to-high teens, “people are less sanguine about betting on that growth, given what the Fed is trying to do”, March explains. “So pricing has changed somewhat as interest rates have gone up. And the concern is that these reports won’t continue to show the kind of growth that they’re showing. That means cap rates move up until you can get to what we’ll call a neutral within 12 months.”
Concerns over complacency
On a related note, March’s own biggest worry is complacency from both a regulatory and industry perspective: “As I look at it from a macro perspective, my biggest concern currently is that the Fed doesn’t go far enough, fast enough to keep [inflation] under control and that it gets complacent.” This is despite the fact the US central bank has already delivered three consecutive interest rate hikes of 75 basis points over the past six months, with a fourth such increase expected next month.
At the micro level, owners that are looking to recapitalise, sell or finance will look at the forward curve and anticipate interest rates will come down over the next 12 to 24 months as the Fed works to stem inflation. “The impact, though, of higher interest rates is that it does do what it’s intended to do, which is to stabilise and diminish inflation, which means growth will slow down,” he points out. “And growth is a much more impactful element to overall value than interest rates are.”
March warns against such parties waiting to do deals on the basis that fundamentals will remain strong and interest rates will be lower in the future. “If they wait, it’s likely those fundamentals erode pretty quickly, because the Fed’s getting the intended outcome, which is to slow growth down specifically,” he says. “If you look at the income and the bottom line of these assets, their values are ultimately going to be impacted by slowing growth.”
He, therefore, is advising clients: “Don’t become complacent with the fact that it looks like interest rates will be lower in the future, because they’ll be low in the future because the growth has ultimately been stemmed.”
Stress, not distress
Despite concerns over slowing growth and rising rates, potential opportunities arising from distress is not a frequent topic of conversation with clients. “I don’t think people feel like distress is in the wind,” March notes. “I think people feel like there is stress, and there is an important distinction with all that: stress is something that one can control and distress is out of people’s control. And so there’s a lot less discussion around distress than not.”
Although some may point to real estate companies getting hammered in the public markets as a sign of distress, March argues such poor performance in large part reflects the composition of the public market investor base today rather than intrinsic property values. “There are fewer and fewer dedicated real estate investors in the public markets, and a lot more of it is dominated by index funds,” March explains. “As a result, they tend to trade based on these indices, as opposed to the underlying real estate.”
He also does not necessarily view a borrower unable to secure bank financing for a property as a distressed situation either. “There are structures that bridge that bid-ask spread between a buyer and a seller, a lot of it’s coming back,” March says. While such structures are not new, they had fallen out of use “because we came out of a momentum market where capital was just chasing anything with yield and not underwriting risk as acutely”.
To stay calm during volatile times, March stresses the importance of looking “through the lens of practical data”. For example, during three-year periods of time in 1994, 1999, 2004 and 2015, when the US Federal Reserve’s rate cycles were tightening, real estate outperformed virtually all other sectors with the exception of energy and utilities.
“During those three-year periods of time where there’s been a Fed tightening, real estate has outperformed to the extent of 41 percent during those rate hike cycles,” March observes. “Hotels, industrial, multifamily, and even office have shown returns of 60 percent to 70 percent in a rising rate environment, because of its ability to adapt to, in essence, those costs and pass those costs on as long as demand is being driven.” He added that while an economic slowdown driven by Fed tightening will naturally affect demand, “real estate has proven to be more resilient.”
Eastdil Secured is the largest independent commercial real estate investment bank in the world by transaction volume with more than $2.7 trillion in transactions completed over the past 15 years, according to the firm’s website. Of that amount, roughly half – $1.3 trillion – has closed over the last five years, the firm’s data showed.