July 13, 2017
Chinese firms for several years have aggressively bought up U.S. commercial real estate and entered into development deals, but over the last several months that tone has changed, with many firms seeking to bring in joint venture partners in attempts to gain more liquidity and, among other things, less exposure to the market.
Market insider suggests that Anbang Insurance’s recent decision to convert the majority of the rooms into condominiums in Waldorf Astoria is a prime example of adding liquidity and monetizing investment. Another example is Forest City Ratner and its joint venture partner Greenland Group are seeking strategic opportunities to recapitalize their equity investment. They move to offload a major stake in some of its Pacific Park developments. Indeed, after a six-year run of recovery there is a measured tone of cyclic expectancy – that markets inevitably rebalance themselves – and a gathering sense that a slowdown is inevitable.
Projects that are under construction are difficult to offload stakes since there is considerably more risk in offloading a construction project, and hence most of the current activity involves completed or largely completed commercial properties. Many deals are so-called club deals, or common deals in China. Such deals involve selling a portion of the project to other China-based investors.
Another interesting observation is that deals come in various structures. One way to structure the deal is to set up offshore Cayman Island funds, fold the real estate assets into those funds, and market those funds to institutional investors, many of whom are in China. Firms are also looking to sell off mezzanine debt, which can be packaged in an offshore entity and also marketed to investors in China. Firms are also selling LLC interests in the project itself, bypassing the offshore fund approach.
As we get deeper into the cycle, investor focus will shift from yield motivation to capital preservation. They will be less willing to take real estate risks. Many will start to prune their portfolios and pursue long-term investments to prepare for what may come when the cycle ends. But the slowdown we are starting to see is not a reaction to fear, rather an evidence of disciplined and responsible growth at work.
Brooklyn: The Epicenter of Hip
- How millennial consumers created the model for urban cool
In Oakland, California the new commercial real estate tagline is “Oakland is the new Brooklyn.” In Tokyo, Brooklyn-born concepts Gorilla Coffee, Mister Donut and Brooklyn Charm are all extremely popular. In Paris, “haute cuisine” has been replaced as the hottest dining trend by ‘Tres Brooklyn’. Once thought of as one of New York’s least glamorous boroughs, Brooklyn now has global brand cache.
For the retail world, Brooklyn has emerged as an incubator of sorts. While local residents may just think of them as neighborhood boutiques, a slew of independent merchants have been instrumental in creating a unique mix of funky and chic known as Brooklyn style. Both medium-sum private and big-dollar private equity investors are on the lookout for funky, fresh retail concepts they can take national. Meanwhile, mainstream chain buyers continue to roam Brooklyn’s boutiques looking for mass-market inspiration and the next big thing.
The explosion of Brooklyn as both a national and global icon of ‘hip’ may be a relatively new occurrence though most native New Yorkers will note that the borough’s revitalization of cool culture has been an ongoing trend for most of the past decade. Most of this movement has to do with the rise of the Millennial consumer.
According to the U.S. Census Bureau, Brooklyn’s overall population has increased by about 8% over the past 15 years, this has largely been driven by the influx of Millennials. There is no clear definition for “Millennial Hipsters”, though Brooklyn is certainly known for them. What we know anecdotally is that they tend to be in their 20s and educated. A few are quite affluent and most not so much. Rapidly increasing housing costs in key neighborhoods in the borough are impacting this unique crowd.
Urban renewal often follows the same path whenever it occurs. Real estate in challenged neighborhood becomes comparatively cheap to lure more affluent and adventurous residents. Sometimes it starts with the “creative” or the arts crowd, and sometimes the initial wave of urban adventurers is a mix of groups harder to describe. Regardless, the chain reaction begins. Neighborhoods move from blighted to edgy to cool to upscale. This process can take a very long time or it can move extremely quickly. In Brooklyn, this process is now on steroids. The borough has become a hub of artisanal production whether it is high quality food, apparel, home goods or other products. But all of this gets back to those key demographic shifts mentioned earlier and can be summed up in one word: Millennials.
The one constant about ‘cool’ is that it always changes. The revitalization of Brooklyn may have resulted in the borough becoming linked with ‘hipness’ and a certain global cache. But that is not what drove the process in the first place. The reality is that the same primary force that drove Brooklyn’s resurgence, affordability, remains in place. Housing costs in Brooklyn are still just one-half to two-thirds of those of Manhattan. That gap in costs is going to continue to drive interest and in-migration to the borough from new residents. The concept of ‘cool’ may be fleeting, but the underlying fundamentals that are in place in Brooklyn should continue to drive robust growth as this borough continues to reinvest itself in the years to come.