Click or swipe to read our partners’ perspectives on:
- Global Trends
- Hospitality
- Environmental Demands
- Fund Formation
GLOBAL TRENDS
How steady is the global real estate recovery? What are the stay-awake issues for investors?
Philip Feder
Los Angeles
For 2013, the global real estate recovery is a tale of two vast contrasting markets: the Americas versus Eurasia.
Real estate markets in the Americas — particularly the U.S. — are now enjoying the fruits of interventionist central bank and government-led economic recovery policies. Europe and Asia, by contrast, continue to suffer from austerity measures that exacerbated the real estate downturn, making near-term economic recovery less likely. U.S. debt markets have awakened; there is abundant liquidity available for real estate in nearly all asset types. Demand for commercial mortgage-backed securities is so fierce that yields are lower than they have ever been. As values increase and interest rates remain low, once-troubled real estate projects are attracting interest from equity investors.
At the same time, liquidity in Europe and Asia remains low; investors worry about high inflation that never arrives and a Euro crisis that never seems to ebb. Eventually, investors will return in a renewed race for yield — provided that European and Asian banks are willing to take some write-offs. Our clients remain optimistic about 2013, but vivid memories remain of Greek bond defaults, Middle East catastrophes, and interest rate spikes that can paralyze the real estate markets.
Next, read about Hospitality
HOSPITALITY
Do you share the view that there will be major growth in investment in the hospitality sector? What will drive this?
Rick Kirkbride
Los Angeles
At the beginning of 2012, the global hospitality industry faced significant uncertainty through U.S. government gridlock, economic and political instability in Europe and the Middle East, and slower growth in Asia. However, investors found their footing in the U.S. and abroad. Our and other private equity clients took over from REITs as the most active buyers. We expect this to continue in 2013, with predictions of investment reaching US$15B.
Both better fundamentals and, perhaps more importantly, the availability of cheap financing are fueling this. Debt is expected to reach its highest level since 2007, provided by a variety of sources, including commercial banks, CMBS, mortgage REITs, and debt funds.
It is not just single asset transactions in major gateway cities that are driving investment. We have seen a dramatic uptick in portfolios, many comprised of mid-market hotels in secondary markets. Even new development is on the rise after a five-year drought, as investors and lenders seek higher returns with less risk than existed immediately before the Great Recession.
Unless political or economic events trigger a meltdown, investment in hospitality will continue to grow worldwide throughout 2013 and quite likely for at least another year or two.
Next, read about Environmental Demands
ENVIRONMENTAL DEMANDS
How are environmental demands and expectations changing in the real estate sector?
Thomas Mounteer
Washington, DC
Nearly all clients — including those who historically operated in sectors in which environmental liability risk was a lesser concern (like shopping centers or office buildings) — are now very aware of the value of assessing environmental liability risk before closing a deal. Perhaps as a result, clarity of communications and quantification of risk have never been more valued. There are a few contributing factors to the premium that clients put on these skills. Industrial and real estate portfolios more and more frequently include properties in multiple countries, or the buyer of U.S. properties might be based overseas. Providing comfort with respect to the U.S. environmental liability regime is a must. Developers and lenders are increasingly comfortable acquiring property that has some environmental legacy. They need help, however, interpreting activity and use limitations imposed on property as part of risk-based clean-ups.
Deborah Schmall and Gordon Hart
San Francisco
Over the past several years, we have witnessed the increasing role of climate change and energy regulatory developments on the real estate sector. Land use development permits, not only in California but elsewhere, must increasingly consider the air pollution and greenhouse gas impacts of the project. A growing number of operating businesses must not only report direct and indirect greenhouse gas emissions to regulatory agencies, but they are, as a group, at the beginning of the mandatory greenhouse gas control curve. Climate change regulation and associated government programs to encourage renewable energy have also created business opportunities. As the market for new large-scale residential and commercial developments has decreased over the last several years, many of the largest land development deals in the United States have been for utility-scale solar and wind power plants. These projects are often several thousand acres in size, and raise complicated legal issues involving federal land management laws, federal and state endangered species laws, and other environmental impact review laws, local planning and zoning ordinances, and federal and state energy and utility regulations.
Next, read about Fund Formation
FUND FORMATION
What changes do you expect to see in cross-border real estate fund formation?
Joshua Sternoff
New York
There has been continued acceleration of the globalization of institutional investment in real estate funds and other ventures over the past several years.
The vast majority of the private equity real estate funds that our team has closed over the past three years involved cross-border transactions — significant capital has flowed into U.S. real estate from offshore. Whereas the pre-Great Recession years saw a lot of outflows of U.S. and European capital into Asia’s emerging markets, the last two years have seen a greater appreciation of the risk-adjusted return potential in the United States. U.S. and non-U.S. investors alike (including Middle Eastern, Asian, and European sovereigns and other institutional investors) have invested significant amounts in funds pursuing a variety of strategies (including debt/equity, core/value add/opportunistic) to participate in ownership of U.S. real estate. We expect that this will continue in the near future, though we also expect to see increased interest in Latin America and Europe.
The greater diversity of investor types and investment jurisdictions dramatically increases the complexity of these funds from a tax and partnership perspective. We see that complexity continuing.
