Although Mack Real Estate is a newcomer, you have been a leading investor in this field for decades. Could you describe your latest venture?
In 2013, after selling the real estate private equity business AREA – formerly known as Apollo Real Estate Advisors – our family’s aspiration was for a new firm that would think like a family office and operate like an institutional investment firm. I run Mack Real Estate Group together with my father William and brother Stephen; we do not want to invest or sell unless it is optimal. While pension and insurance companies are obliged to deploy capital at all times, I hope our new venture can benefit from the luxury of disciplined investing; because it is not always a good time to be an investor. Sometimes it may be better to simply not invest. One could certainly consider that a family office should only acquire or develop real estate in five of a fifteen-year cycle. The remaining decade should be devoted to active asset management and preparing a successful exit strategy.
What is your investment philosophy?
I have always been attracted to real estate – I grew up with the asset class. Real estate is in the Mack family DNA. We have been engaged in the business for most of the last century. But that does not mean that I am a traditionalist – my passion is venturing off the beaten path. I have a track record of calculated risks: I dove into Central and Eastern European markets before they joined the European Union, invested in downtown Manhattan post 09/11, and got involved early on in the regeneration of South Beach, Miami.
But it is not just locations and the real estate asset class that excite me. Debt can be even more compelling, if timed right.We were early buyers of distressed real estate debt in 1993 from the Resolution Trust Company. We were amongst the first people buying junior Commercial Mortgage-Backed Securities in 1998 after the Russian Debt crisis and we have consistently delivered equity-like returns as direct lenders.
I have been fortunate to have been involved in approximately USD 75 billion worth of real estate transactions over the last 25 years. These have shaped my perspective on real estate investment. My goal is to find new investment structures and markets early and to hold assets long term where rents are likely to rise faster than inflation.
Do you see increasing allocations to Real Assets as a secular trend or as a defence against a low interest rate environment?
It is a secular trend driven by investor demand and greater real estate practitioner professionalism and transparency.
But real assets have always played a large role in portfolios, especially those of Family Offices. What has changed is the professionalisation of the asset class. Before the 1980s real estate was dominated by family developer/builders and construction companies. On the debt side, banks were the providers of capital and often lent too much. As a response to the real estate depression of the 1990s many new pools of capital were created. Suddenly, investors had real estate funds, public real estate companies, or securitised debt to choose from. Further, time has produced seasoned real estate experts running these vehicles with transparent, verifiable track records for investors to evaluate.
Of course, within the context of low interest rates and an environment in which other assets are so richly priced, real assets may be a useful way to lock in higher returns; by utilising long-term debt, cash-flowing real assets, can provide stable long-term returns and can be a defensive play in the event of inflation.
Real Estate lending is currently one of your main strategies. Why?
Banks across the US and Europe have been forced to reduce risk because of Dodd Frank and Basel III regulations designed to ensure their stability. Unless enough alternative lenders are created to fill this void, arbitrage opportunities in the real estate debt market will exist. However, contrary to many preconceptions the key here is not simply replacing but working together with banks, so that they may maintain exposure to real estate through the ownership of less risky tranches of the capital structure. Alternative lenders then are not only real estate investors and asset managers, but also structure and syndicate debt. In the end, hopefully this is better for the economy, because they should be better placed to manage risks of both lenders and borrowers, while taking risks themselves.
The dynamics of real estate debt markets may have changed irrevocably. We believe that real estate lenders have the potential of equity-like double-digit returns but benefit from lower risk than must be stomached in today’s equity markets. Debt investors are protected by the buffer of equity.
Real estate debt is still a nascent strategy and lacks recognition. Large fixed income investors are rarely real estate experts, and do not typically invest in real estate debt. It is going to require education – but there is plenty of time for this. The alternative lending trend is an enduring one.
What are some major challenges for Real Estate markets today?
Technology is having an impact on all real estate sectors. Thanks to technological disruption, we anticipate a great deal of volatility. The rise of e-commerce in the US contributes to retail unit oversupply. Spaces will need to be demolished or repurposed – as distribution locations, for example.
Office space is experiencing secular decline. In recent years, the density of many space users quadrupled – from 800sqft to 200sqft per person. Properties that cater well to contemporary ways of working – high density, high levels of facilities and services à la WeWork – are set to do well. Office spaces of the future may look more like hotels – another segment which technology has not spared. With more Airbnb units than any hotel chain in the world, a single concept has transformed all residential real estate into hotel room competition.
Where is the volatility still moderate? I would wager residential. The current and likely future demand for urban housing means that the residential market, especially in cities with strong population growth, is far less at risk from disruption. Co-living concepts are poised to take some share of the residential market, but this is not likely to be enough to have a significant impact on the residential market.
Sustainability is now understood as a key element of Real Estate investment. What are your views on that?
For me, sustainable real estate is developing and investing in buildings that can physically stand the test of time. The economic and environmental costs of re-building or re-purposing are huge. Replacing, or rebuilding decaying or poorly maintained buildings, like infrastructure, has real social, ecological and economic costs.
Urban environments are arguably one of humanity’s most impressive anthropological accomplishments. Cities are the drivers of ideas, networks, efficiency (in terms of resources, transportation and space), as well as cultural and economic growth. However, post-WWII, the US was very much about suburbia. It took decades until we finally saw the pull of the city take hold, but not before many of these US cities were impacted by suburbanisation. Many urban areas grew underpopulated, prompting a vicious cycle of underinvestment, crumbling infrastructure and dark streets. Former industrial areas in the US have met similar fates. Developers have the power to regenerate these places through facilitating a liveable urban environment. Well designed and thoughtfully considered, quality public urban planning, and private real estate developments are key to sustainability.
Approaches to urban space are changing – for example the growing popularity of ‘green roofs’. What is the impact of these trends on the Real Estate market?
Green roofs, urban farms, energy efficient properties – Mack is engaged in this. In fact we are currently working with Chef Marcus Samuelsson in Brooklyn on a project for our building, The Greenpoint, that we hope will integrate more than an an acre of green space, outdoor common areas and rooftop planting space. Marcus’s concept is to harvest fresh produce from our roof for his restaurant below.
‘Green’ considerations are being integrated and many of our developments have been LEED certified as ‘Green’ but ultimately, we need palpable tenant demand if we are to be fully carbon neutral. Tenants must accept the implications of carbon neutral properties such as fewer windows that open, limited air-conditioning, and higher prices. While tenant habits adjust, Government may play an important part in helping to encourage sustainable and environmentally friendly projects. For example, we are in the process of installing co-generation plants. They produce their own electricity; some might even store it for use during peak hours. Government incentives allow us to install these in a cost-effective way.