I recently connected with Aviva Fink, Reonomy’s VP of Business Development and Partnerships, to discuss the current topics of interest among Reonomy’s investment management clients and emerging trends within the commercial real estate asset management space. The following are excerpts from our conversation.
At a high-level, what are some trends you are seeing across investment and fund managers?
Even though the commercial property transactions are down around 40% from prior years, there are clear signs of continued and significant interest in commercial real estate as an asset class. Many investment companies and fund managers that we speak with have expressed an increased interest in the debt securities backed by commercial real estate – such as whole loans and commercial mortgage backed securities (CMBS). Despite new issuance for CMBS trailing 2019, total trading volume for CMBS is up over 26% on the year through August. These companies see the opportunity to gain exposure to commercial real estate assets through the debt and aim to do so at a discount. For these firms, it is a really interesting time because there are more opportunities now than pre-COVID. Not only is there a potential discount on the debt, but this is the first time in nearly a decade that distressed strategies, such as loan-to-own, are being discussed at such a scale. A recent example of this was seen when Pacific Retail Capital Partners and Golden East Investors were able to gain control of the underlying mall portfolio from Starwood, after Starwood defaulted on some of its debt.
Are these mostly new firms entering the market or existing firms launching new strategies?
Both, really. Given Reonomy’s product offering and positioning, we have a pretty decent view of both the established and larger incumbents, as well as the newer entrants. Through our conversations with these firms, we’ve heard how many have been waiting for and expecting a phase change in the cycle to create greater opportunity to enter into their security and asset positions. I haven’t heard any claim that they predicted COVID-19 far in advance, but many were quick to recognize the significance and acted quickly when it did hit. And even though we are now close to six months past the start of the pandemic here in the US, many of the investment managers still see the opportunity ahead – and there is still a lot of money on sidelines allocated and ready to be deployed into the market.
Are there any noticeable differences in strategic shifts seen across institutions of different sizes?
While it is not entirely clearcut, smaller managers making shifts appear to be focused more on property type characteristics, while larger managers with more capital seem to be participating more through securities markets and up and down the capital stack. For example, some of the smaller investment managers we support are looking to pivot their mostly equity investment strategies based on market and property type – perhaps away from office properties in gateway cities to storage in Sunbelt markets. Whereas many of the larger institutions we serve have expressed even greater interest in our debt data – both loan and CMBS data.
How has the pandemic affected these investment managers and their strategies?
On one hand, the pandemic has sped up many of the trends in commercial real estate that were already underway. Most notably, the shift in consumer preferences for how and where they buy. This trend can be seen as more purchases are done online, contributing to retail properties struggling while distribution centers and industrial properties show continued strength. While the headlines prefer to read: “Retail is Dead”; it is likely more accurate to say that retail is changing. People are still buying stuff, and a lot of big money is still counting on that to continue. Take Simon and Brookfield’s recent acquisition of JC Penney as an example of this shift. Also, while the hospitality sector was showing some signs of weakness leading up to the pandemic, COVID really exacerbated the sector’s problems, and what we have heard from many investors and fund managers confirms these trends are still underway.
What questions are investment managers posing to shape strategy decisions and direction?
The big question that many are trying to answer is whether this pandemic is a long-term game changer or a challenging episode before the market returns to something that resembles normality. So far, there’s been evidence of both potential outcomes. Just look at Facebook, which in May announced that employees could work from home permanently, a move that was viewed as a major negative for office owners as the popularity of remote work is a direct threat to office occupancy. But then at the start of August, Facebook signed a 730,000 square foot lease in Manhattan, which was a strong positive signal for office.
Reonomy will be rolling out an enhancement to the ownership portfolio product in the coming months – how might this be used by our investment management clients in the current environment?
Currently, users are able to search for or analyze different characteristics of individual properties and the debt on the property. For example, some of our clients find it very helpful to look at tenant exposure on specific properties by searching for specific tenant names or by the NAICS or SIC codes. However, when the ownership portfolio enhancements are made, they will be able to do this similar search, but at a portfolio level – so across all properties owned by an entity. The ownership portfolio enhancement will really give these investment managers a tool to more easily test investment theses and explore risk exposures at an aggregated portfolio level – which will allow them to see a more complete picture.