How taking a global view of real estate is a buffer to the volatile public markets
How are market conditions impacting real estate?
There's systematic market volatility and no region will be immune to the impacts. What does vary is central bank action to tackle inflation. The US has continued to perform well; the currency is strong and is a lot more stable than in other regions. While the public markets have been highly volatile, real estate within certain sectors such as industrial, housing, and alternatives (which includes healthcare, single-family rental, and self-storage) has performed extremely well. The fundamentals – leasing and rent growth – are incredibly strong. We anticipate that within certain sectors, the fundamentals will continue to outweigh the capital market dynamics.
Where do you expect investors to allocate through 2023?
Most investors are over-allocated to real estate because public equity is declining in value. Where they are committing, we’re seeing a preference for value add and opportunistic strategies. This may be more form over substance. Most of these strategies are closed-end, so funds with dry powder can deploy capital when the timing is good, as opposed to core strategies, which tend to be open-ended.
Investors are, on balance, pursuing higher-return strategies. It's partly because of return prospects elsewhere and partly due to the expected timing of deployment. They would rather deploy in a closed-end structure where the manager will be deploying over the next 24 months, than buy in today in an open-ended structure.
How is your strategy changing for 2023?
Nuveen Real Estate’s strategy is not changing. We are still bullish on industrial, housing, and alternatives. Our tactics, in terms of how and when we deploy, are changing. We're looking for off-market opportunities where we can find strong value, and where, because of our size, scale, and expertise, we have a competitive advantage.
Are market conditions affecting how you structure investments?
Most of our larger strategies are core, so the maximum allowable leverage is low to the point where you are not tipping your cyclical risk at any point in time. You can manage risk very moderately if you have a leverage level of 40% or below.
A tremendous amount of capital has been raised over the past five years, with a lot of new managers, new operators, and niche players. Many are reliant on go-forward financing at higher leverage levels, not only at the corporate level but also at the asset level. Those managers and operators are going to be very challenged.
Which segments of real estate do you find most attractive?
Different forms of housing. Increasing mortgage rates in the US will create an opportunity for investors like us in single-family rental. We also are very positive and optimistic about affordable housing, not just because it's under-supplied, but also because there’s an impact overlay that we really like and a lot of downside protection.
We take a service-oriented mindset into how we operate these investments. Nuveen’s goal is to influence positive environmental impacts on these properties and the tenants, and improve accessibility to things like healthcare, finance, and savings, which aligns with our parent company TIAA and our mission and values as an organization.
What are the prospects for office?
Technology and e-commerce disrupted retail and it took a while to recover, but I've been bullish on retail for a few years. It'll take time to figure out how the technology disruption we've just experienced affects office long term. I think a hybrid scenario is much more likely than a return to gateway cities and, ultimately, there is going to be a decrease in demand overall.
Are you targeting emerging asset types?
It's absolutely an area for us. In self-storage, for example, we bought two operating businesses last year in Europe and we're building out our internal expertise and skill set. Healthcare is a similar situation, where we have a partnership with the largest medical office developer in the US, which has very strong relationships with healthcare systems. We’re incredibly bullish on healthcare. There's a lot of downside protection and historically there’s been very low volatility in performance.
How important is ESG in real estate?
It's incredibly important, particularly the E. It’s different in different regions, but there’s going to be continued pressure from a regulatory perspective on carbon usage. The built world is a massive contributor to carbon emissions. There is a lot of transition risk in older, capital-intensive properties. New York office, for example, is going to be incredibly costly to transition which, combined with expected lower demand, means you may have a lot of stranded assets.
Will the US and APAC catch up with Europe on ESG?
The cultures in those three regions are different. What European investors want is not necessarily a leading indicator of what US investors want.
I do think there is going to be continued pressure, and it is becoming much more front and center in the US, but not in every state. There is a consensus view across Europe, but it’s hard to envision that fully transferring to the US anytime soon.
Do you see ESG as a cost or a benefit in real estate?
A lot of the ESG measures we deploy into investments are to protect their reversion value when we come to sell. But these measures also result in cost savings, such as through lower energy use. Overall, ESG is value-protective.
How are you using proptech to drive value?
Proptech is a very broad term. It can include anything from breaking ground on construction to how you deploy tech in your day-to-day operations, such as using phones instead of badge swipes. There’s going to be an expectation, particularly from early career movers, about how they use office space and their apartment buildings, and how they shop and live. So, tech is going to be essential in how you operate property.
What do you see as the threats to performance?
The rising tide of low rates over the past ten years has served investors really well. But the increased cost of debt and the fact that many allocators are now overweight will have a significant impact on less solvent managers and operators.
We haven't been relying on that. We’re not over-leveraged and we have dry powder – you need to keep some cash in hand for a rainy day. We generate our returns from changing, operating, and repositioning investments. That's our DNA. That's why we have a sector specialist model and a very local model with 30 offices across the globe.
About
Carly Tripp is Global Chief Investment Officer and Head of Investments for Nuveen Real Estate. Nuveen Real Estate is one of the world’s leading investment managers with $156bn in assets under management. Globally, she leads a team of 200+ investment professionals responsible for all transactional and asset management functions. Carly is also a member of the Global Executive Leadership team.