Where would you invest your $ in RE if you had $100M?
Interviewing with a major REPE fund and got hit with the 'where would you invest' question. I was able to articulate a decent response, but looking back I definitely could have given a better answer. I know that someone else asked this a few years back, but wanted some fresh perspectives on how to approach this question given the craziness in the markets over the past two years.
What was your response?
Speculative land
40% agriculture (a portion of this being forestry) - 20% renewables - 20% office - 20% residential
Only if it was my own money though...I'm definitely not capable of putting a coherent slide deck together to justify the above splits!
Metal mines, fresh water resources, agriculture, and an island in the middle of the ocean to flee to when the shit hits the fan!
Project Based Section 8 Housing. Huge leverage, guaranteed rent roll, essentially zero economic vacancy, fills a major and growing need in the market, has widespread bipartisan support, etc etc.
Who are some billionaires in the section 8 housing space? I feel like I’ve heard of ultra wealthy people in literally every other sector of real estate except for affordable / LIHTC / section 8 whatever
Stephen Ross started his career building low income housing in NY
Yeah but now he has a multi billion dollar PE fund, billions in commercial development, etc.
How much capital can you put to work in section 8? Can’t you only put a sliver of equity? That equity gets a good return but it’s practically no equity
Sure, but that’s how he got his start. I don’t play in the affordable housing world, but knowing how many checks and balances there are to getting a deal done, it’s probably very difficult to scale to a considerable size doing just affordable housing.
Yes, and Elon Musk is known for Tesla but made his first couple billion through Paypal and other tech startups.
Even beyond that, I think it's a strong likelihood that Mr Ross' legacy affordable portfolio is the bedrock of the profitability of his company. Yes, Hudson Yards is gargantuan and sexy and maybe profitable, but the boring assets that provide consistent revenue are what allows Related the ability to do those kinds of projects.
You can put in as much as you want. As with everything else, leverage will juice returns, so people take a lot of leverage. And you can lever up Section 8 more than basically any other asset class.
More to the point being made in general, however - you don't hear about hyper-wealthy affordable developers because their business doesn't revolve around self-promotion. Quite the opposite! People like Mr Trump may boast about every deal they're in, even if they own none of it and just license their name, because at that point their only actual success is the perception of being successful. Whereas if I'm a major affordable developer, bragging about my money is a good way to invite a lot more scrutiny into my margins and my underwriting assumptions by my public sector partners. It is self defeating in a way it isn't in luxury development, where the reputation for success can actually count for more than the quality of the product you build.
It's not hard to find, in the public record, liquidity statements for some of the major affordable developers in this country. Many of them are worth mid to high nine figures, if not more, on the value of their real estate interests alone. When you consider alternative investments that wouldn't be reported, those numbers could easily climb into the billions. You just don't hear about this stuff because real estate is inherently a more private business than public equities.
For another way to look at it, there are probably families that own half a dozen high rise buildings on the Upper East Side of Manhattan, because the patriarch built them in the 40s or 50s. And they're debt-free, and probably worth a hundred million bucks each. You never hear about those families, of whom there are many, because they don't want to be in the public eye. The only folks who make a Forbes list are those whose money is mainly in quantifiable public securities, or who are actively lobbying to be included.
No wonder you think every landlord is a slumlord, if you deal with section 8 housing.
I don't? Many are. Many aren't. Some people are greedy shitheads, that's just the world. I think some systems incentivize or reward people who act in an unscrupulous manner and poison the well for everyone else.
-30% Cold storage related to logistics and transportation at strategic (stop gapping; fixing a break in the logistical link; an area that has logistic point outages and fill-in that outage with this property ---with extra points if the area is slowly up and coming in 10-15 years leaving an adaptive reuse conversion down the line to whatever becomes the highest/best use for these industrial sites) hub-and-spoke points catering to broad array of blue chip (credit tenant) e-commerce providers (think where Amazon and its affiliates rent space to keep delivery trucks and vans or well located cold storage micro-fulfillment centers). Likely credit tenants and demand will possibly expand as tech advances and customers get more comfortable with the "all necessities in life delivered on demand in hours not days" model; and
-70% Life science and lab space facilities (located near major research institutions) which accommodate the client/tenant's needs in the following areas - cellular biology, genetics, biochemistry, bioengineering, and AI. That $100mm probably won’t cover the entire tab given the last aspect so perhaps a JV with a long term/seasoned player in the space, if possible.
Most practical, smart and geometric use of capital: Ozymandia’s above idea for affordable housing (in an area with near and long term favourable supply/demand dynamics and a supportive local government).
VC funding is just one of many funding sources for life science. I believe the largest source of funding for most life science companies is the NIH. Not arguing for or against investing in life science spaces, but the funding is not reliant on VC.
This ain’t it…
Cold storage is super specialty and you can even build spec and cap rates have compressed stupidly.
And the life science play is near end of life in my opinion, which is one that well informed. Shits gonna start hitting the fan in that sector soon enough and people will get burned as they’re playing catch up to get the tail end of the wave.
Really depends on what firm your interviewing for. Interviewing at an industrial REPE? You'd be an idiot to mention retail. Are they opportunistic? Don't mention core.
Safest answer would be a diversified mix of various different asset classes with a heavier allocation/bias towards the strategy and structure that the fund focuses on and then explaining why.
Multifamily, data centres, land
Depends what the objective for the capital is... Personally, distressed hotel in vacation destination (not business district with conference heavy traffic)
Merchant Industrial and multi developments… seems like fundamentals are sound enough for them to stay at crazy high pricing in the near term… but would not want to buy a core deal with my own money in this market
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