More than 800 real estate professionals convened in Laguna Beach, California, last month for the 10th Annual Winter Forum on Real Estate Opportunity & Private Fund Investing. Although not every speaker had a view as pretty as the setting, there was a sense of optimism throughout the conference. From a real estate fund perspective, there appear to be many opportunities to evaluate, and that capital is flowing back into select markets forcing private investors to evaluate alternative opportunities.
The conference format—a moderator and panel of typically five industry experts—allowed for a variety of opinions on the topics covered. With more than 100 speakers at this year’s conference, a lot of information was shared on what real estate funds are looking for in the coming year. Here are some of the key takeaways and advice.
In the discussion on the macroeconomic view of the real estate market, the overall theme was that U.S. real estate is too much of an institutional asset class to be overlooked. Because the equity markets have recovered to near their all-time highs, institutional investors will have more of an appetite for additional real estate. The belief is there's currently a lot of institutional capital currently sitting on the sideline. Coupled with the fact that investors are looking for yield, many believe this will put some pricing pressures on quality assets.
Concerns & Risks
There were many items of concern addressed and, as one would expect, the ongoing budget and deficit discussions in Washington were on top of everyone’s list. The lack of real growth always has been a concern, and some worry that if governments around the world do not fix their problems, we could be headed to another recession. As is often the case in the real estate world, it was clear that one real estate developer's concern is another's opportunity.
There was a lot of discussion between fund sponsors and investors when it came to general partner (GP) compensation. Although no two funds are the same, most limit GP compensation by some type of clawback to ensure an adequate rate of return for capital. Currently, the preference is for an 8 percent to 9 percent return, although some are looking for returns in the low teens. In terms of fund structure, some discussions included the proposed changes to tax-carried interest. BKD was represented by real estate tax Partner John Cook, who participated in a discussion on tax law changes.
Opportunities Away from the Coast
With most of the funds having some type of short-term liquidity needs (typically four to five years), there is pressure on these funds to look at non-core assets in Tier 1 markets. Because of this, opportunity funds are looking at secondary and tertiary markets. There was a lot of discussion on residential funds that have started acquiring single-family houses throughout the country. There were some good things said about real estate outside the Tier 1 markets, especially in the energy or technology spaces.
There was a very bullish attitude on the industry, with fund managers knowing that investors' demands are going to be different than before. If you have additional questions about the conference or the industry, contact your BKD advisor.