Speaker 1: You're listening to Bloomberg Business Week with Carol Messer and
Speaker 1: Tim Stenebek on Bloomberg Radio.
Speaker 2: We wanted to get some thoughts on the world of
Speaker 2: private market opportunities and with us as Margaret McKnight, partner
Speaker 2: and head of real Estate Portfolio Solutions over at Stepstone Group,
Speaker 2: they focus on the private market, and she joins us
Speaker 2: on zoom in San Francisco. Margaret Height, nice to have
Speaker 2: you here.
Speaker 1: How are you.
Speaker 3: Fabulous? Pleasure to be here.
Speaker 2: Thank you, Well, it's good, good to have you here.
Speaker 2: I feel like it's really timely. Give us a little
Speaker 2: bit more insight on your firman, who you guys are
Speaker 2: typically investing for and or working with.
Speaker 3: Yeah, so we are leading capital allocator to the private market,
Speaker 3: and we work across real estate, which is my specialty,
Speaker 3: private equity, private debt, and infrastructure on behalf of large
Speaker 3: institutional clients and also private wealth clients.
Speaker 2: So what's the demand that you're seeing right now for
Speaker 2: these type of investments? Has it kind of tapered off
Speaker 2: a little bit, especially within a higher rate of environment.
Speaker 2: I'm just curious about the impact.
Speaker 3: I would say that new commitments have tapered off, and
Speaker 3: interest has not because a lot of the conditions are
Speaker 3: riped for these to be some very good years to
Speaker 3: deploy new capital. For our institutional investors. First of all,
Speaker 3: the appraisals are very slow to catch up with the
Speaker 3: price changes, so they're still carrying a lot of their
Speaker 3: real estate at relatively high values. And also they make
Speaker 3: commitments to funds that then call the capital to make investments,
Speaker 3: and that whole process is very much slowed down. So
Speaker 3: for example, over the last year, capital calls are down
Speaker 3: sixty or down twenty five percent, and the return of
Speaker 3: capital is down sixty eight percent, So don't have money
Speaker 3: to redeploy and they're kind of full up, but not
Speaker 3: for lack of interest.
Speaker 1: So is that a cause of concern or something, especially
Speaker 1: if you're looking, for instance, in the private credit space,
Speaker 1: it's around one and a half trillion dollars in that corner.
Speaker 1: But when you're looking at other areas like private equity,
Speaker 1: private debt, real estate, does it make sense that you'd
Speaker 1: see this happen at this point or is it a
Speaker 1: cost for concern?
Speaker 3: It is a natural part of the real estate cycle
Speaker 3: which is kind of slow to adjust, and it creates
Speaker 3: a lot of dislocation and a little bit of a
Speaker 3: shortage of capital on both the debt and the equity
Speaker 3: side at the same time as people are motivated to
Speaker 3: sell and raise capital so it can create That is
Speaker 3: the opportunity emitted the turmoil right now.
Speaker 2: So I'm curious, like for our audience who are listening,
Speaker 2: because I think real estate we're trying, we're a little
Speaker 2: bit on trying to see if it's another shoe to
Speaker 2: drop right as you would imagine, we certainly talk about
Speaker 2: office real estate a lot. Let's go there in terms
Speaker 2: of that segment of the market. We talked about law
Speaker 2: firms earlier that they are kind of helping out fill
Speaker 2: up some of the office space here in New York
Speaker 2: City because of their return to office mandates. But for
Speaker 2: commercial office real estate, what's the outlook there, what's the demand,
Speaker 2: what's the interest, what's the concerns?
Speaker 3: So first, it's really important to understand that what's happening
Speaker 3: to office is part of a bigger trend of changing space.
Speaker 3: He was partly driven by technology, and office is a
Speaker 3: loser in this game. But it's really important to note
Speaker 3: that there are winners and we can come back to
Speaker 3: those later. Those make interesting places to invest. Office is
Speaker 3: getting hurt by both the cyclic weakening, particularly the tech
Speaker 3: tenants pulling back, and it's also had really a big
Speaker 3: step down in demand because of work from home, which
Speaker 3: is here to stay. Employees and employers are in a
Speaker 3: giant experiment to figure out what hybrid work looks like
Speaker 3: and also what it means for office leases. The capital
Speaker 3: markets saw this and they basically shut down on office,
Speaker 3: and they are the grease that keeps the engine moving.
Speaker 3: So on the office side, it's pretty seized up. That
Speaker 3: is not true of the rest of real estate, which
Speaker 3: is just going through an adjustment to higher interest rates
Speaker 3: amid mixed signals with the downdraft from the economy and
Speaker 3: then real secular support, and then you have to get
Speaker 3: down into the details to figure out what is more
Speaker 3: and less interesting.
Speaker 1: Who do you think are the winners.
Speaker 3: So when we look at the big trends, e commerce
Speaker 3: kind of hurt me tell and that actually went through
Speaker 3: a correction much the same as office, by the way,
Speaker 3: and it took about ten to fifteen years to weed
Speaker 3: out the successful tenants and formats and now it's back
Speaker 3: in favor, and I think office will take a while
Speaker 3: more like ten to fifteen years than two to three
Speaker 3: years to get fixed. But the winner there was industrial.
Speaker 3: E commerce hugely benefited industrial, and industrial is also benefiting
Speaker 3: from deglobalization. Residential is benefiting from a general housing shortage
Speaker 3: of affordable homes. And again details matter because in the
Speaker 3: high growth Southeast markets we have had a lot of
Speaker 3: new deliveries that need to get absorbed. But it's actually
Speaker 3: benefiting this cycle because high interest rates make it hard
Speaker 3: to buy homes and so there are more people you know,
Speaker 3: staying in the renter pool unfortunately unless they want to
Speaker 3: be there right. And then also technology is helping to
Speaker 3: bring a lot more formats into the institutional arena, like
Speaker 3: single family homes for rent, where you need technology to
Speaker 3: effectively manage a large portfolios, and that's property type. I
Speaker 3: think even the bigger winner this cycle is kind of
Speaker 3: the pricing opportunity. We think that we have some of
Speaker 3: the best conditions set for potentially the best buying years
Speaker 3: of the cycle.
Speaker 2: You're talking about for an investor in particular, because okay,
Speaker 2: because of some distressed opportunities and I know you guys
Speaker 2: play into certainly in a big time in recapitalization. So
Speaker 2: I am curious how much of that you're already seeing
Speaker 2: where they need to kind of rethink a certain asset.
Speaker 3: We are at the leading edge of kind of a
Speaker 3: two to three year workout of existing commercial real estate debt,
Speaker 3: and we're focused on the interesting property types of course,
Speaker 3: but the higher rates mean that outstanding loans are bigger
Speaker 3: than the new loan that you're going to get because
Speaker 3: the properties can't support as much debt when it's more expensive.
Speaker 3: So if you're an owner with a promising property and
Speaker 3: you want to keep your property, you have to fill
Speaker 3: that gap. Not everybody has that money, and so they
Speaker 3: are raising it and doing Our sort of favorite way
Speaker 3: to do this is what's called GP led secondaries, where
Speaker 3: you work with the GP to provide the gap equity,
Speaker 3: and then you also take out any LPs that want
Speaker 3: to move along. So it really solves two problems, and
Speaker 3: we are starting to have flow that's at the similar
Speaker 3: pricing to what we saw in the post GFC period,
Speaker 3: which then led to really and trusting returns.
Speaker 2: Margarete, let me help help me in because I know
Speaker 2: you guys play in the private equity the private debt.
Speaker 2: You know part of the thing, are you are you
Speaker 2: creating new funds specifically from investors real estate funds to
Speaker 2: put that money to work, or you're not doing it
Speaker 2: in that way.
Speaker 3: We do it in a variety of ways depending on
Speaker 3: the needs of our clients.
Speaker 2: Yes, but I'm just curious, is there demand for new
Speaker 2: funds and for investor money to come into it. I'm
Speaker 2: just curious if you're investor saying we've got money, we
Speaker 2: want to put it into a real estate fund.
Speaker 3: Investors do understand that this is a very interesting thing
Speaker 3: to do, and not everybody is tapped out, and you know,
Speaker 3: we have a global business and investors around the globe
Speaker 3: are affected in different ways, so that so there is
Speaker 3: capital available and it is a great time to be
Speaker 3: playing it in this manner in our opinion. And also,
Speaker 3: you know, institutional investors do keep to a generally consistent
Speaker 3: base over time, So doing this and then also just
Speaker 3: doing value added and opportunistic funds, they are going to
Speaker 3: buy the things that can't be saved. You are very interesting.
Speaker 1: Today, if you're looking at a particular portfolio strategy, how
Speaker 1: should investors allocate that particular segment to the construction of
Speaker 1: their portfolio?
Speaker 3: Really lean into where they see potential buying opportunities, good
Speaker 3: pricing combined with a relatively resilient outlook for fundamentals. We
Speaker 3: published twice a year our house used that summarizes our
Speaker 3: opinions on where this will be in some amount of detail.
Speaker 3: So that's a resource that's available. And obviously we are
Speaker 3: pretty excited about the RECAP and gp LED secondary opportunity.
Speaker 2: All right, you're certainly in it, and it's interesting to
Speaker 2: kind of get your perspective on a topic that comes
Speaker 2: up so often, especially in this higher rate environment. Margaret McKnight,
Speaker 2: thank you so much. She is partner and head of
Speaker 2: real Estate Portfolio sous over at Stepstone Group, joining us
Speaker 2: on Zoom from San Francisco, and interesting to get our
Speaker 2: thoughts just in terms of weighing in, especially when it
Speaker 2: comes to the office side of things as we try
Speaker 2: to figure out our way forward.
Speaker 1: And we've been talking about the office space it seems
Speaker 1: like all afternoon as well as in the last couple
Speaker 1: of years. In addition to that, but obviously how things
Speaker 1: have changed so much because of COVID