MIAMI—How have the capital markets changed in the past year? And how are they likely to change through the course of the year? What about the flow of capital from global sources into the U.S.? We caught up with Jahn Brodwin, senior managing director in the FTI Real Estate Solutions practice in New York, to get his expert insights.
GlobeSt.com: How have the capital markets changed in the past 12 months and how are they likely to change throughout the course of the year?
Brodwin: Public markets have been fairly stable and assuming interest rates stay where they are—and they are expected to—there should be no meaningful change this coming year although it is still difficult to do an IPO right now as I assume the market feels like there are enough REITs so any new players would have to have something interesting to offer. Other international public markets are receptive though to US based offerings. The Canadian market comes to mind and have had some successful IPOs.
Private equity is very abundant but very disciplined. With a few exceptions, only the big “name brands” are raising capital from domestic sources. A few deals are getting done in the “old fashioned” way, but the volume is off substantially. In the old fund models fees are paid based on committed capital and sponsors have substantial discretion in how they deploy that capital. This is tough to do today. Most deals that are getting done are on one-off basis where equity has full discretion and each deal is negotiated on a stand-alone basis.
GlobeSt.com: Talk to me about the flow of capital from global sources into the U.S. What is going on there?
Brodwin: There is ample capital from foreign sources looking for a home in the U.S. However, the equity is very patient and disciplined. Reminders of yesteryear are still in everyone’s memory. There is great reluctance to give U.S. funds a blank check. The foreign money wants more control and better alignment of interests.
The Canadians have been very active. Koreans are looking for a home here as well. Persian Gulf wounds are starting to heal and they are selectively coming back to the U.S. market. Big downward pressure on fees and the funds that are getting done today have belts and suspenders wrapped around governance issues and control.
The foreign equity today wants much more say in what is bought, how deals are structured and how fees and promotes get paid. Some foreign equity are making deals with emerging managers where they fund start up and get a piece of the platform in exchange for coming in early and big; the new variation on “most favored nation” status.
The problem with foreign money is they tend to want the class A properties in class A neighborhoods and the price is very high and it is difficult to make the numbers work. The foreign money want properties that provide liquidity. They want to be able to exit when they want to exit. We’re talking about prime properties in New York City, Los Angeles, San Francisco, Chicago, and to a lesser extent Miami, Houston, Dallas, and Atlanta.