Quick recap: Ares & RXR are teaming up to acquire Class A-/B+ office, SL Green has raised a debt fund, and others are starting to jump in on the action.
Unless if is the creme de la creme, which is already fairly priced, I just can't follow their investment thesis. At the end of the day, I am just a dickhead, but I really can't understand the logic.
I wanted to poll others and get different thoughts. Thanks.
| +52 | Leave brokerage to be GP | 12 | 1d | |
| +46 | New Comp Database - Google Form (Now with Data Validation) | 24 | 1d | |
| +24 | Seeking Career Guidance in Real Estate Development Post-Graduation | 3 | 2d | |
| +23 | Spreads over SOFR/UST | 5 | 6h | |
| +23 | Going out on your own | 4 | 1d | |
| +22 | REPE/Development GPA | 15 | 4d | |
| +21 | Real Estate = complicated + underpaid | 15 | 1d | |
| +18 | High achiever that doesn’t want to work weekends | 9 | 4s | |
| +17 | Fisher Brothers | 6 | 1d | |
| +17 | MSRE/MSRED with no RE experience; Naive to think I’ll land a job afterwards? | 4 | 5d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Fees. Asset management fees and leasing commissions…
What is your question...? Are you asking why some firms are delving back into office?
What's the policy on buying an office & sleeping there/using it as a large personal mansion? ( no conversion) Some of these offices are considerably cheaper than SFH in the same area.
If you can get the basis low enough, split the cost between a couple of friends and you'll have a personal urban paintball court. Get a building that has a few showers and bring in some weights and a bench and you have your own personal gym, too.
A lot of people believe Class B+ and better office in major urban centres will return to thriving performance long-term as people continue to return to the office, and they view today's valuations as a market dislocation to be taken advantage of, particularly through distressed debt. It's as simple as that.
And as somebody else said, remember that these companies are all investing almost entirely other people's money and ultimately survive off fees - if they see a thesis that investors are willing to buy into and other shops are pursuing, they can raise a fund and increase fees generated and because everyone else is doing it if it goes wrong they can't shoulder all the blame.
Its been said many times before here, but ultimately REPE funds are a fee-based business investing OPM.
Honestly I feel like so many RE folks run off herd mentality. Not too many batted an eye buying the hot product types at negative leverage and needing aggressive rent growth just to get to positive leverage and historically low exit cap rates to make a profit. But now most in RE want to label buying office as still way too risky when the basis on a lot of this stuff is nearing $0 and new supply of it is grinding to a halt and probably not returning any time soon. There's a reason for that though, it's because the sources of institutional capital tend to run off the headlines and no one wants to risk losing their capital trying to be the guy going against the headlines. The firms doing it (such as Ares) have so much capital that they aren't worried about losing it by taking a relatively small risk going into office again.
Seeing this at my firm. We’re dealing with a bunch of sour office deals from a legacy fund. Now that we have a new fund to deploy, our IC has said that we’ll never do another office deal. Seems like a missed opportunity to me for the right asset.
Same at my firm. But I guarantee you they'll do another office deal - only after all the good deals are gone and it's 100% obvious that office is back (but value in buying office is gone)
Missing the forest for the trees. It's not that your IC doesn't realize there will be good opportunities for that strategy, it's more about appeasing the hand that feeds you (your fund LPs). Imagine going to your LPs and saying hey I know we incinerated boat loads of cash on office deals, but hey do we have a deal for you! This one will be better we promise! Even beyond that all the, JV LPs lenders and rest of the capital markets will know about those same deals, and banking that track records becomes another hurdle you will pay for on way or another. From your partners perspective going back to the well would be the equivalent of revenge trading - and they are experienced enough to know you don't that. Take your L, move on, and rebuild in a new strategy with a clean slate.
I sent a few office deals to one of the new debt funds targeting office refinances. Feedback from all groups was that it was going to be a week or two for any feedback bc they have so many requests in...
Biased cause I am doing this strategy now. Logic is the following:
1. Class A+ office supply/demand dynamics are in balance as evidenced by PSF rental
2. Class A is now reclassed as A- and lumped together with B
3. Value has gone down due to a combination of demand declines from WFH and/or shifting to nicer Class A+ offices and oversupply coming in major mkts in 2015-17 factors
4. Price destruction exacerbated by the credit markets drying up
5. This results in the prices of building declining markedly from the 2017-2019 pre-covid period.
Now to make money you need to provide that basis is cheap. This means having a very clear-eyed view on how to intensively manage the asset and lease out the building including knowing exactly which tenant base and mix you are doing to. Candidly, I am very excited.
What is your timing on lease-up as vacancy continues to go up? You are going to have to stomach an enormous and possibly never ending amount of operating costs until the spaces are leased.
As for Ares/RXR, this better be an open ended fund, because if they think things are getting better in the next 2-3 years, I dont think that's likely. I definitely think long term office will be back, but realistically I think its going to take another 3+ to bottom and then maybe occupancy starts to drift a bit higher.
Contingent on the tenant mix you're targeting. We've fully leased out a single-tenant recently vacated building 16mths after acquisition and with a full refurbishment. Admittedly most won't be able to replicate what we do. If you want to find a big bank that'll lease 250,000+ square feet then you are in a highly competitive market.
This is a real estate crisis and it'll take a few more years for the distressed to work it's way through the cycle. It won't be a quick turnaround even if people start coming back to the office. I don't know about taking another 3+ years to bottom out, I think this is the year where we will start finding the floor with distressed office prices but it does not mean a V-shaped recovery but possibly a reversed 'J' shape where it eventually starts to recover but doesn't go back to the heights of the past.
However I have no particular or spectacular insight into the future. Just using whatever judgement I've developed.
Class A office in NYC (on broad strokes) is currently renting at ~$150 PSF with ~$150 PSF of TI. This would be ~$71 PSF in LCs. These numbers still make sense whereas class B and C is more like $50 in rent and $150 in TI (plus LCs). These don’t make sense. Class A has people actually in the buildings. If you believe the capital markets will believe and buy into the bifurcation of the market, you can make a lot of money. But TBD on that thesis.
Eos id repellendus a dolorum rem autem autem. Distinctio deserunt accusantium voluptas soluta dicta deserunt voluptas. Dignissimos blanditiis provident blanditiis. Eum ex qui molestiae et officiis in voluptatem. Mollitia saepe ipsum beatae modi dicta. Assumenda nihil repellendus voluptatem suscipit molestias sed dignissimos enim. Possimus vel dolorem earum aliquid.
Voluptas iure eligendi corrupti. Qui aut pariatur voluptatum et. Odio labore quam debitis necessitatibus quos accusantium porro.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...