The real estate platform of TIAA-CREF combined with the recently acquired London-based investment management firm TH Real Estate represents one of the largest global real estate players in the world with approximately $89 billion in assets under management. This alliance enables a broad and long-term view into global market trends. To discuss those trends, TIAA-CREF’s Tom Garbutt, head of global real estate, Mike Sales, head of TH Real Estate, and Phil McAndrews, CIO of TIAA-CREF global real estate, sat with CIO’s Kip McDaniel.
Q CIO: Where does global real estate stand now, seven years out of the crisis?
McAndrews: Seven years into the recovery, we’ve seen a very robust stretch of growth and appreciation in real estate values. There’s speculation that we’re near the top, but the reality is cycles don’t have a definitive life span. There can either be an exogenous shift—such as a geopolitical or a financial crisis—that causes change, or something more endogenous within the four real estate sectors themselves, like oversupply or other factors that cause downward pressure on rents or valuations. We feel confident that 2016 looks like another very, very strong year for valuations.
Q CIO: You mentioned the four sectors: commercial, retail, multifamily, and industrial logistics. What are the megatrends driving them?
Garbutt: ‘Gateway cities’—like New York and London with youthful, educated populations and employers across a wide variety of industries—present the most appealing dynamic. If anything, the focus for investors is becoming more concentrated in certain cities around the globe. We like to be in locations where barriers to entry are enormous and there are future drivers for upward movements in rents. The multifamily sector is historically interesting here in the US. It’s a growing market, meeting housing demands especially for millennials and many on the other end of the spectrum. We’re also finding it very interesting in other parts of the globe such as the UK and Germany.
Sales: If you look at that market and percentage of home ownership, it will be a slow build in Europe. We’re looking at some spinoffs of multifamily—cheap housing, senior care, and other adjacent spaces—as we anticipate where we’re going to focus our efforts.
Q CIO: Given the trend towards urbanization, are you seeing that some cities are winning out over others?
Sales: It’s interesting. Phil, Tom, and I were brought up on location, location, location. Now it’s people, people, people. You invest in places where people want to be. The cities that win will be those who can provide the space and environment that talent want to work in.
Garbutt: Given that we run multiple strategies, we always look at each opportunity as it applies to that particular mandate but also through the lens of macro-data combined with local expertise. With 18 offices globally we are very well situated, and as the cycle has matured we have invested in some new geographies such as Krakow and Warsaw in Poland and Melbourne and Sydney in Australia. We’ve also begun investing in niche sectors like outlet malls across Europe and student housing in the US. And in Europe we’ll be focusing on tier-1 cities like London, Paris, Munich, Hamburg, Frankfurt, and Berlin for our $4 billion Cityhold office joint venture with the Swedish pension funds AP1 and AP2 and also considering tier-2 cities such as Madrid, Milan, and Amsterdam that hold up to our analysis process.
Q CIO: You talked about millennials coming into cities. What are the other global drivers?
Sales: If you look at how retail’s changing in the US and Europe, our preferred investment focus is the prime, dominant, experience centers. They have evolved considerably as a result of the internet and mass consumers shopping online. For a lot of them, rather than having diminished the bricks and mortar opportunity, ecommerce is instead just an additional route to market, which some have played incredibly well. Retailers that would have traditionally been in every city are now looking at the profitability of those stores, asking, “Where do we really need to be?” Then, they’ve adapted the consumer experience so it becomes a destination that can’t be experienced online. This has had a dramatic impact on retail hierarchy.
Q CIO: Any significant trends outside of the US?
Sales: One megatrend we consider important is the shift of the economic path from the west to the east. The constitution of the top 30 cities in 30 years’ time is dramatic in terms of population growth and economic drivers. It will include names you won’t even recognize: cities in China, India, and Turkey with 10 million people. It will create a new city hierarchy. If you’re a sovereign wealth fund investor, you’ve got a long duration. Of course, there are good reasons why investors on the whole are generally reluctant to invest in some of these emerging cities—risk and governance issues, for example. However, you are beginning to see more forward-thinking sovereign wealth funds put their toes into the water and utilize local partnerships. We are probably Europe’s largest investment manager in designer outlet malls and we’ve taken that concept to China. That’s playing to one of the other major trends, which is the rise of the middle class and the spending power they will have in China.
Q CIO: You mentioned that you don’t think real estate is at the end of the cycle—but does that worry you?
McAndrews: An intelligent concern is where and when interest rates may go. The interesting thing about interest rates with real estate is that it’s not necessarily a one-to-one relation. If rates move up 50 basis points, cap rates and real estate don’t move up 50 basis points. The sensitivity to concerns about real estate is somewhat muted relative to other asset classes such as equities and bonds. Nonetheless, we’re watching things like oil pricing and markets that have oil concentrations, like Calgary or Houston. We’re always looking at real estate fundamentals. This is an information age that allows us to glimpse upcoming trends and gives us a very clear view of the pipeline of opportunity. The data we can rely on today didn’t exist 30 years ago.
Q CIO: Technology has changed every industry but, beyond the online retailing we’ve discussed, how is it changing the real estate sector?
McAndrews: It’s contributing greatly to the management of the assets themselves. Even 20 years ago, it was literally ledgers on paper and using a calculator for the rent roll. For example, intelligent base systems can highly manipulate data and run a vast amount of scenarios modeling the portfolios and the properties. We have that at our fingertips now as an industry, but particularly at TIAA-CREF. This firm has a lot more proprietary technology. For example, we can model the risk of a given city, sector, and tenant exposures. At the end of the day, information improves risk management.
Q CIO: Can we end this discussion by looking to the future? Specifically, back to millennials. What is so different about them versus previous generations, and how that is driving the future of real estate?
McAndrews: Interestingly, the perception we have of millennials who are only into hip urban areas like NYC isn’t necessarily true. In the US, there are millennials rocking San Antonio, Texas, and Columbus, Ohio. There are waves in other cities that we urbanites think aren’t hip but are happening. It means designing and composing real estate in reaction to their demands and creating lifestyle opportunities that appeal to them. It’s this whole concept of live, work, and play—the ability to get on a bike and go to work instead of driving, taking the subway or a cab. Serving this population means being more ecologically sensitive. Designing and maintaining buildings for energy, water, and waste efficiency appeals to modern tenants and is also good for the bottom line.
Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, TIAA-CREF Alternatives Advisors, LLC, and Teachers Insurance and Annuity Association of America. Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and TIAA-CREF Alternatives Advisors, LLC are registered investment advisers and wholly owned subsidiary of Teachers Insurance and Annuity Associations (TIAA).
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