Commercial real estate comes in four varieties: Office, Industrial, Retail and Multifamily.
Office buildings range from single story to skyscrapers.
- Highest profile “trophy” properties
- Fundamentals most impacted by employment
- Highest costs upon lease rollover
- Trends towards larger floor plans, open working spaces, mixed-use environments.
- Distribution Warehouse Space
- Trend towards larger spaces, higher clear heights
- Driven by demand for storing and distribution
- i.e. BNSF Intermodal – Gardner, KS
- Just-in-time delivery drives demand for location
- i.e. UPS Worldport – Louisville, KY
- Manufacturing Space
- Diminishing demand
- Most functional obsolescence
- Potential redevelopment opportunities (i.e. Paseo)
Retail buildings are the most glamorous of the product types.
- Most quickly evolving
- Post WWII strip center development
- 1960’s and 1970’s grocery anchored model
- 1980’s and 1990’s enclosed mall model
- Current trend toward lifestyle centers
- Live, work, play
- Highest credit risk
Multifamily have the least correlation to performance of other property types.
- New household formation improving apartment demand
- Fundamentals highly linked to job growth
- Most subsidized form of real estate
- Affordable housing increasing in importance
- Section 42, section 8, LIHTC, etc.
- Trend toward sustainable housing.
Private Equity Buyers
- Individual Ownership
- Syndicates or Partnerships – LP or LLC
- Based on individual transaction
- Private Equity Funds – LP, “Reg D” structure
- $25 to $500 million of equity
- Institutional Advisors
- Advise pension funds, large endowments, etc.
- $500 million to $1.25 billion
- Minimum deal size of $25 million
- Mix of domestic and international holdings
- Real Estate Investment Trusts (REITs)
- Similar to institutional advisors
- Access to capital (debt and equity)
- Broad reach to emerging markets
- Public reporting – competition can monitor strategy
- Long-term nature of real estate not well understood on wall street which emphasizes quarterly returns
- Decisions made to boost short-term earnings may not maximize long-term investor returns