September Issue: CFO Corner—Capital Magnet

Deloitte’s Steven Bandolik and Brian Ruben analyze investment trends in the monthly CFO Corner column.

As domestic and foreign real estate investors alike look increasingly to the United States and domestic players profit from strong capital flows, the nation’s commercial real estate market is on its most solid footing in years. Tremendous opportunity awaits savvy investors, especially those in the REIT space. As we head into the final third of 2015, the rebounding economy is creating favorable conditions to buy assets and transaction activity is expected to lead CRE recovery.

The U.S. economy is rebounding from a difficult first quarter. Employment growth remained strong and wage growth began to pick up. With U.S. markets continuing to grow stronger, the commercial market has stockpiles of cash available for investment. That is generating large, creative deals like Blackstone’s $2 billion all-cash acquisition of Excel Trust, which closed in July. Blackstone paid $15.85 a share for the San Diego-based retail REIT, a nearly 15 percent premium over Excel’s closing price on April 9.

The Blackstone-Excel deal illustrates a larger shift that has emerged over the past five years. Companies are willing to pursue growth outside of their organizations if organic growth proves insufficient. No longer is the trend to acquire only smaller companies and platforms; deep-pocketed players are going after bigger fish, as well.

Safe Haven
This is also the case for foreign investors, who are seeking to diversify by expanding their U.S. portfolios, increasing market share and effectively deploying capital. The U.S. continues to serve as a safe haven, notably for Chinese investors, who have flocked here during the past two years. Limited options at home and the easing of restrictions on outbound investment are driving Chinese investors to scout opportunities elsewhere, notably in the stable U.S. market.

Another marquee example is Global Logistic Properties’ acquisition of IndCor Properties Inc. from Blackstone. That $8.1 billion deal, which closed in February, marked the U.S. debut of the Singapore-listed sovereign wealth fund. In July, GLP agreed to buy Industrial Income Trust’s 58 million-square-foot portfolio. Valued at $4.6 billion, the deal established GLP as the second-largest U.S. logistics property player less than a year after its debut in the market.

With foreign investors finding core and opportunistic options, markets such as Chicago, Houston, Dallas and Seattle are attracting attention. This new phenomenon is helping to clear distressed assets from the pipeline in secondary and tertiary markets. This spring, Blackstone paid $1.3 billion for Chicago’s Willis Tower, a record for an office asset outside of Manhattan.

However, many of these international investors lack experience with non-traditional U.S. markets, entitlement, regulations and tax laws. That creates an opening for domestic companies to leverage their knowledge and build long-term, mutually beneficial partnerships. U.S. players can also leverage those relationships to expand their international footprints.

Another trend influencing investment and all corners of commercial real estate: Corporate clients are reversing direction. After decades of leaving big cities for the suburbs, the likes of Motorola and Heinz are moving back to urban centers or opening satellite offices in nearby cities. Much of this stems from Millennials’ well-known preference for dynamic urban settings.These are some of the trends shaping real estate capital markets and investment.

For more insights, download Deloitte’s Global Economic Outlook: 3rd Quarter 2015.

Steve Bandolik

Steven Bandolik

Steven Bandolik is a director with Deloitte Services LP and a senior leader in
Deloitte’s real estate services practice. He advises clients in such areas as capital markets, mergers and acquisitions, investment, corporate reorganization and asset recovery. He can be reached at sbandolik@deloitte.com.

 

Brian Ruben

Brian Ruben

Brian Ruben leads Deloitte’s national practice for non-listed REITs and has significant experience serving partnerships, investment managers, property managers, institutional advisers, private equity firms, developers, hotels, homebuilders and other clients. Reach him at bruben@deloitte.com.