Why Investors Are Bullish on Build-to-Core Deals

AECOM and Canyon Partners are bullish on build-to-core investment opportunities. The two have formed a partnership to develop institutional quality assets across product types, including multifamily, mixed-use, office, hospitality, and condominiums. In terms of geography, the joint venture will focus in the top 25 markets across the US. The firms believe that this niche offers the best investment opportunity in today’s market.

“In today’s market, we believe build-to-core offers one of the best opportunities across commercial real estate due to a structural supply/demand imbalance,” an unnamed source at AECOM-Canyon Partners tells Globest.com. “There is significant demand for new core assets, but supply is constricted as a result of a constrained capital markets environment this cycle, in large part driven by tightening lending restrictions, including those related to Basel III. This supply/demand imbalance has created opportunities where there is a material spread between the cost to build core projects and the valuations for those core projects once built and stabilized.”

As we move further into the cycle and interest rates continue to increase, investors are focusing on asset classes that provide stable yields. This dynamic is driving increased interest in build-to-core properties. “Historically low interest rates have created a thirst for stable yield, while a substantial amount of investment dry powder targeting commercial real estate has been accumulating over the course of several years,” says the JV source. “At the same time, we have witnessed greater demand for newly built assets as a result of technological change and changing user preferences.”

This partnership is able to provide equity funding for these projects, providing an alternative option for developers. AECOM specifically has two construction managers to advise on the early stages of development. “Historically, after the early stages of development, developers would then seek equity and debt capital in order to bring a project to fruition,” says a source with the firm. “That funding process often takes a significant amount of time and has become increasingly difficult in today’s regulatory environment. Identifying the need for this development capital, AECOM established its AECOM Capital group in 2013 and has invested in over $4 billion of projects, providing capital, balance sheet support, and development expertise. AECOM Capital was interested in identifying an experienced partner with whom to grow this investment business.”

Canyon has nearly three decades of experience and a similar culture to AECOM, making them the perfect fit for the partnership. Canyon’s investment philosophy—a preference for complexity versus simplicity as simple assets are easier to access and therefore tend to be more expensive and for markets undergoing some type of disruption, in this case, driven by regulatory constraints on capital availability—is fully aligned with the opportunity identified by AECOM Capital,” says the source. “The resulting joint venture is a differentiated combination of construction, design, engineering, development and investment expertise, as well as considerable balance sheet resources.”

Over the next 12 to 18 months, the joint venture plans to place $4 billion in project capitalization. “Already the platform has committed over $65 million of equity capital across three investments totaling approximately $730 million in aggregate capitalization, including a full service, 250-key hotel in Menlo Park, CA, a 525-unit multifamily project in the NoMa submarket of Washington, DC, and a large-scale mixed-use project in the Culver City submarket of Los Angeles, CA,” says the source. “AECOM-Canyon Partners continues to target large-scale build-to-core opportunities in the top 25 US markets.”