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head of Americas,
Global Real Estate
|James G. Martha|
Global Real Estate
|Michael O. Schwaab|
Global Real Estate
Institutional Investor recently interviewed three TIAA Global Asset Management executives about opportunities in the multifamily, student housing and retail sectors. Here are their responses.
Should institutional investors continue to invest in real estate given the maturity of the cycle?
McGibbon: Commercial real estate has a healthy spread versus U.S. Treasuries and offers inflation protection as well, since the rental income stream is tied to the economy. In the U.S. we are well into the recovery phase. However, market timing is not a major factor for clients with long-term, 20-30 year investment horizons.
Are there strong correlations across global real estate markets?
McGibbon: While the major developed economies tend to move together, there are variations in their real estate markets. For example, office buildings in Germany and Sweden did lose value during the 2008-09 downturn, unlike those in New York and London. For investors with a total return perspective, we often recommend meaningful diversification overseas. We have 18 offices around the world, helping us identify markets that still offer relative value, such as Spain, Portugal, Poland and South America.
What is the size and strength of the U.S. multifamily market?Martha: Today, approximately 36 percent of all U.S. households consist of renters, and the multifamily segment enjoys demand from a wide variety of consumers. The fundamental drivers of growth remain strong, as millions of Millennials are entering the rental market every year. They have delayed major life decisions, such as buying homes, and are far more mobile than their parents generation in terms of moving from job to job. On the supply side, multifamily construction is increasing but remains well below the level of demand.
How long have you been active in this market?
Martha: The sector has become an increasingly key focus for our firm. We currently manage more than $11.4 billion in multifamily assets, including $9.2 billion in direct equity comprising 117 properties.
Where do you see current opportunities?
Martha: Rental housing is such a large market that there are many opportunities for strategic diversification within it. We believe in owning housing that meets the demands of the middle class, the most durable component of the multifamily sector. One of our series of funds focuses on workforce housing with an emphasis on value-add repositioning and specialty low-cost financing strategies.
Please describe your multifamily strategy.
Martha: Our strategy is based on acquisitions and repositioning, rather than new development. We look for properties that are well-positioned geographically, but are undercapitalized or need better management. We then upgrade those apartments to provide high-quality housing at a value price in the workforce housing market, generating strong returns for our investors.
What about senior housing?
Martha: We believe there are good opportunities in serving both Millennials and the other end of the demographic spectrum. Currently we are evaluating investment opportunities and potential partnerships in senior housing and plan to cater to this growing demand from the Boomer generation.
Why did TIAA start investing in the sector?
Schwaab: We have participated in the sector for about two decades and continue to like the demographic underpinnings that drive demand for student housing. With the younger Millennials and older members of Generation Z entering college, enrollment is expected to increase by another 3 million students in the next five to ten years. Another advantage of student housing is its counter-cyclical nature. Enrollments tend to rise when the economy turns down, helping to stabilize a commercial real estate portfolio.
Where do you make your investments?
Schwaab: We focus on serving students at top-tier public universities that have Division I athletic programs and enrollments above 15,000. Public institutions are more transparent with regard to their housing policies, and they are more affordable than private institutions, so this strategy also caters to the middle-class market.
What is your student housing strategy?
Schwaab: We acquire existing off-campus privately owned housing with stable cash flows and, for select investments, valueadd potential. In 2015, we closed about $115 million in transactions and plan to acquire $300 to $500 million in 2016. We are also a lender in the space.
What are the challenges with student housing?
Schwaab: Student housing has a leasing cycle that ends once the academic year begins. Our rental management partners begin preleasing early in the school year, aiming to fill up all the beds in these units before the start of the next fall semester. Because the leasing risk is higher than other types of rentals, these properties tend to generate a yield that is typically 50 to 100 basis points higher than conventional rental.
What are your thoughts on the retail sector, including regional malls?
McGibbon: In my view, supply constraints are the most important drivers of returns in retail, as well as other real estate sectors. Therefore, we look carefully at the regional malls that own the retail trade area in an already developed market, where there are significant constraints on new projects.
Why do you look at the market leaders?
McGibbon: The malls that are number one or two in their trade areas, based on sales production and rent levels, have ongoing market momentum. New tenants want to rent space in the mall, and the outparcels offer potential development opportunities.
What about repositioning older malls?
McGibbon: You can expand a 600,000-square-foot regional mall to 800,000 square feet, add new restaurants or other lifestyle segments on the periphery for an incremental investment of capital. We believe thats a much more effective strategy than trying to renovate and reposition an older mall with questionable anchors. It is very hard to turn around a regional mall thats number three or four in its market.
Are there retail opportunities outside the U.S.?
McGibbon: We are looking at outlet mall opportunities in Europe, and partnering with a Spanish operator to create a development pipeline in markets outside the major European metro areas. Having a local partner is crucial, because you need to have those boots on the ground.
About TIAA Global Asset Management:
TIAA Global Asset Management provides investment advice and portfolio management through Teachers Insurance and Annuity Association (TIAA) and more than a dozen affiliated registered investment advisers. Collectively managing $854 billion in assets, as of 12/31/15, the business provides access to innovative investment strategies through expertise that spans traditional and alternative asset classes, generating new investment opportunities for clients through a wide array of vehicles including funds, customized strategies and solutions. TIAA has been an active investor in direct real estate for more than 60 years, and with our global real estate platform which includes London-based affiliate TH Real Estate, is the largest real estate manager of U.S. tax-exempt assets and the third largest manager of worldwide real estate assets with nearly $92bn AUM* as of 12/31/15.
* Pensions & Investments, October 19, 2015. Rankings based on TIAA Global Real Assets institutional tax-exempt assets under management as of June 30, 2015 reported by each responding asset manager. TGRA has nearly $100 billion in AUM consisting of mandates covering timber, agriculture, energy, infrastructure, real estate and related financing investments.
Jennifer M. Pedigo, CFA
Managing Director, Head of Asset Management Institutional Business Development, Americas
TIAA Global Asset Management, 200 N. LaSalle Street, St. 1600, Chicago, IL 60601
Director, Asset Management Business Development - Asia/Pacific
TIAA Global Asset Management, Level 46, Gateway, 1 Macquarie Pl, Sydney, AUS 2000
Director, Business Development, Europe/Middle East/Africa
TH Real Estate, 201 Bishopsgate, London, UK, EC2M 3BN
The opinions expressed are subject to change at any time as market conditions vary. This material should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. C30984