April 2010, Center News
On March 10, a group of real estate industry leaders met at the University Club in Milwaukee to discuss public and private capital markets as part of the Graaskamp Center's new "Graaskamp on the Road" roundtable lunch series.
The event featured Tim Pire, managing director of Heitman Real Estate Securities, and Brian Newman, managing principal of Ceres Real Estate Partners LLC, discussing the public and private real estate capital markets and where they are headed in 2010. Moderator Michael Brennan, executive director of the Graaskamp Center, and Stephen Malpezzi, academic director, kicked off the event with news from the Center and introduced the speakers.
Tim Pire started the discussion, noting the extraordinary run-up in REIT values over the last year (REIT indexes have risen 90% since March 2009). The surge is especially remarkable in this "the worst of times," but by historic standards, he believed they're still fairly valued. They owe their rise to the return of the unsecured debt market and, in part, to the effect of government intervention.
From the private equity perspective, Brian Newman observed that while there is more equity available now than in the 1990s, the total available has been overstated. LPs and GPs are hanging back for now. It may not be the "right" time for investing, given that a lot of real estate is facing significant asset management challenges. For those looking to make a move, private real estate operators may be at a disadvantage when it comes to the cost of capital and frequently lose out to REITs in competition over investment targets.
Current investment is focused primarily on top 10 markets, driving up prices there. At the same time, this focus has left a lack of competition for opportunities in secondary markets. Where there is more distress, there are more opportunities.
Pire and Newman fielded a range of comments and questions from southeastern Wisconsin and northern Illinois area leaders in real estate. Asked about the carried interest legislation now before Congress, Newman responded that the private equity industry will likely lose that battle and carried interest would be taxed as ordinary income in the future. Regarding other changes in the industry, he noted that full sponsor discretion, with no input from the LP, is a thing of the past. LPs are now asking for a seat at the investment committee table.
On the public side, Pire was asked whether the REIT industry would condone or condemn investment opportunities outside of traditional nodes. He said that the REIT industry had been very adaptable, citing blind pool IPOs.
The fundamental strength of the industry was a frequent topic during the briefing. Malpezzi commented in particular on the increasing spectre of foreclosure and the risk it poses to economic recovery. Participants were also concerned with how a prolonged recovery would change the strategy of public and private investors. Newman commented that acquisition characteristics simply have to withstand a down market scenario. Pire thought principles of good management and strong balance sheet would hold. A long slump would affect the underlying growth rate but not the viability of a company or sector.
The "Graaskamp on the Road" series provides a venue for deep and thorough discussion of topics of the day. Previous roundtable luncheons have been hosted in Chicago and Minneapolis. Based on positive feedback from participants, the events were a real success. The next roundtable discussion will be a dinner event in Madison on June 3rd.