BY DAVID KEMPER
“Capital Markets and Investment Strategies: Lessons from Industry Pioneers,” brought together Cynthia Foster, President of National Services at Colliers International, Kara McShane, Managing Director at Wells Fargo, Bethany Logan Ropa, Executive Director in Real Estate, Lodging and Leisure at UBS Investment Bank and Lauren Hochfelder Silverman, Managing Director and Co-Head of U.S. Acquisitions at Morgan Stanley, and was moderated by Margaret Blakely, Partner at Rhodes Associates.
In the morning’s discussion, the group began by describing optimistic trends in merger and acquisition activity as valuations rise and more capital is available; they described an expansion of investment to secondary markets, increasing yields from management services for foreign investments, and new demand for formerly B class office space. All suggested a market peppered with signs of strength but marked by an underlying tone of concern. All made a point of distinguishing now from the enthusiasm of the last cycle.
The panelists began by discussing some of the more optimistic signs in the market, starting with trends driving the increase in merger and acquisition activity. All agreed that rising valuations and having more capital available are drivers, along with firms monetizing on their 2007 stakes. Alongside these trends has come an increase in shareholder activism, starting in the REITs, along with more board attention to management.
Logan Ropa noted that she has seen more activity in the industrial portfolio as private equity and foreign capital has taken interest in distribution systems in the United States. That same expansion of interest, Hochfelder Silverman noted, has led to an expanding definition of core plus. While some core plus investors are now increasingly chasing core products in second or third tier markets, others are interpreting core plus as otherwise traditionally core properties with a risky proposition or factor included.
Prompted by Blakely to discuss change beyond the five gateway cities, McShane explained that capital is chasing trophy products and has been encouraged to expand its sights due to lower interest rates and the United States’ role as a safe haven. This kind of increased foreign activity and movement from investing through funds to direct investment with operators has created an opportunity for American companies to profit more from managing properties. All of the panelists agreed on the volume of capital present in the current market. “There is so much capital for so little yield,” remarked McShane, while Logan Ropa pointed out that given risk premiums, yield could be higher than historical averages.
Alongside these kinds of changes, there were tempering statements about the consistency of the market. Despite the anecdotes, Foster reminded that suburban office investment is still a majority of investment; “the anecdotes are wrong.” Foster also explained that even though “it feels like there’s a crane on every block,” new development in New York represents just a 5% addition to the current supply.
This marked a kind of tempering of the portrayal of the current market as a bubble. McShane noted that although leverage is creeping up and there is margin squeezing, it is nowhere near 2007, especially when it comes to transparency and the rating agencies. At the same time the percent of debt compared with overall GDP is low. Foster used the metaphor of a baseball game, and said that while the general consensus was that the market was in the 7th inning, Colliers was more optimistic, viewing this as the 5th. This was the cautious optimism Blakey emphasized and that ran through the panelists’ discussion Thursday morning.