Scott Dennis: We see a range of performance in private market sectors, which is an opportunity for investment managers to overweight and underweight different sectors. For example, multi-family has performed very well since the global financial crisis as home ownership rates have decreased. Supply has been constrained and there has been tremendous demand for apartments. Rents have increased and performance has been very good. But now new supply has come on the market and the opportunities for apartments to outperform are probably not what they were a few years ago.
Like Heitman, we have a long-term underweight to the office sector, but in the short term, we think that the sector will outperform, so we are actually overweight the office sector today. That's primarily because we are seeing very little new construction in office. We're seeing tenant demand increasing so occupancy is increasing in specific markets – markets driven by industries like energy, tech, healthcare and new media that are doing well in the U.S.
Pat Halter: We are big believers in looking at ways to manufacture core, whether it's through buying or leasing properties that may have leasing, vacancy or ownership issues, and
developing these properties. We think that the fundamentals of some markets are giving us the confidence for investors with fortitude to take on these opportunities. Many of our clients still want to be in core real estate for the long term. This is a way for us to enhance that objective though the client does need a higher risk tolerance. There is more leasing or development risk involved. We expect this will be an increasing part of our activity as we go forward.
Relative to private debt, we think there's a lot of opportunity in mezzanine financing. This is the ability to provide financing behind first mortgage lenders in order that properties can be levered at a little higher leverage point than what banks or life insurance companies are willing to offer. On a risk-adjusted basis, it facilitates the ability of an investor to provide some gap financing. There are equity investors who would rather leverage out their properties at 75% or 80%, allowing a mezzanine investor to provide gap financing that bridges from 60% loan-to-value to 75% or 80% loan-to-value. It's an opportunity that can meet some of the actuarial return assumptions of pension plans – generally between 7.25% and 8%. We like this high yield strategy because it's conservative when compared to other high yield strategies.
Frankly, we also like the public markets. We think there's some very good value in global real estate securities. Year-to-date performance is in the 4.5% to 5% total return range for global REITs, relative to the S&P500 or Dow Jones Industrial Average, which is between -1% and 1%.
Maury Tognarelli: We agree that there is significant opportunity in the debt space. Private market capital has been rewarded for structuring and taking positions in debt, both in the stretch senior secured and mezzanine segments of the market. The total returns are equal to, if not somewhat greater than what can be achieved on the equity side, and in a lower risk area of the capital structure. These investments are attractive to investors because a large part of the total return is income and the supply of capital is in better relative balance to demand in this market segment. That being said, more capital is coming in each year, so asset selection is critical. I think the opportunity will continue in 2014 and beyond.
We are also observing outsized rewards used for the creation of prime real estate. This includes the development of multi-family residential, office and industrial properties, though less so for retail. If normal rewards to capital for developing were about 15% to 20% in the past, we're seeing considerably larger rewards today. This is a timing situation, where the fundamentals are strong yet there isn't a lot of supply being created. It's an area that attracts a select group of investors.
We are also taking advantage of interest in the CMBS market, where we believe the traditional fixed income investor operates at a disadvantage. They simply don't understand the strength of the underlying collateral to those securities. We've been implementing a strategy with a fixed income specialist for the last 12 months, using our real estate expertise to assess the underlying collateral. This provides our partner with insight into those assets that it then uses to establish the best entry point for the securities. It's a combination of new issues and existing securities. The goal is to deliver a result that exceeds that of a traditional CMBS portfolio on a better risk-adjusted basis. Although there is improvement in the new issue market, we see underwriting standards that we think will allow us to continue to take advantage of mispricing in this space.