FEATURE: Brokering an evolving relationship

Private equity firms have been a big part of the brokerage industry’s business for a while and, in terms of transaction volume, will continue to be a major source of business. Still, for a group that prides itself on off-market deals, brokers can provide more value than most fund managers may think. PERE magazine, February 2012.

Last spring, New York-based real estate investment firm Paramount Group purchased an additional 49 percent stake in 1633 Broadway from Morgan Stanley Real Estate Investing (MSREI) and Bank of America. This effectively gave Paramount a 75 percent ownership share in the 2.4 million-square-foot Manhattan office property. The deal valued the building, which has Allianz Global Investors as a tenant, at $2 billion. 

How did this deal come to be? Well, it wasn’t done off-market, as about half of the deals in private equity real estate are done. Rather, it was mediated by New York-based commercial real estate broker Cushman & Wakefield (on behalf of Paramount) and US brokerage Eastdil Secured (on behalf of the sellers). 

More recently, at the end of 2011, Shorenstein Properties was seeking to make its first acquisition on behalf of its tenth and latest real estate fund. Last month, it was announced that it acquired 350 West Mart Center, the 1.24 million-square-foot office property in Chicago that houses The Chicago Sun-Times from a subsidiary of Vornado Realty Trust. This transaction took place courtesy of Eastdil, which represented the seller. 

Although firms like Morgan Stanley and Shorenstein will buy or sell a distressed property or portfolio on behalf of one of their opportunistic real estate funds in an off-market deal to maximise the value, oftentimes these firms will employ the services of an intermediary, such as a real estate broker or investment bank, to facilitate a deal. And while some suggest that brokerage firms need private equity real estate companies more than the other way around because most private equity shops would prefer to avoid the fees and additional charges inherent to a deal mediated by a third party, the Eastdils, Cushman & Wakefields and Jones Lang LaSalles of the world can provide added value to the likes of MSREI and Shorenstein.

From a broker’s perspective, the importance of private equity real estate firms continues to be high. In fact, in terms of transaction volume, private equity deals can equate to nearly a third of a real estate broker’s business (depending, of course, on the year and state of the market). Furthermore, this figure shows no signs of diminishing anytime soon. 

“Private equity has been a very large piece of our business since the 1990s,” says Arthur Milston, a managing director at the US arm of global financial services firm Savills. “It’s only grown in importance since.”

A long-standing history

Private equity real estate firms have been a large and important piece of brokers’ businesses since the emergence of real estate opportunity funds in the 1990s. Financial firms with real estate brokerage components have always been eager to work with private equity fund managers on both the buy-side and sell-side of the equation. 

The reason for the allure of these fund managers to brokers was the fact that they were generally more willing to enter into high-risk transactions and provide capital to a deal that many traditional buyers wouldn’t go near. Not only that, but they also were able to move faster on high-risk deals because the profits connected to opportunistic deals were dependent on moving forward quickly. 

From their inception up to 2008, there was a surplus of private equity real estate funds in the market, many of which were seeking deals via brokers like NAI Global, Richard Ellis and DTZ. But after the market collapsed in 2008, the number of funds in the field diminished considerably. 

Now, brokers are very eager to do business with the players that are still around and able to successfully invest because, according to Glenn Rufrano, president and chief executive officer of Cushman & Wakefield, “it’s important to have risk capital.” Indeed, large fund managers that survived the financial crisis of 2008 and which have the confidence of their investors to move forward are the best way for brokers to bring that risk capital to the market.

Real estate brokers are often eager to facilitate non-prime or distressed asset transactions, where an opportunistic fund would be the ideal buyer, as private equity shops are more willing to engage in risky transactions, provide more capital to an illiquid market and can turn around product faster than traditional clients. In turn, brokers can bring a lot to the table for private equity shops. 

Big figures

Indeed, some industry observers go as far as to say that private equity real estate funds are becoming almost essential to brokers. There are many properties on the market — and on brokerage firms’ plates — that require a big value-added or opportunistic fund to serve as buyer. 

“Real estate-driven private equity firms are absolutely vital to the market because they tend to be the first movers,” says Jeff Oram, executive managing director for Colliers International’s investment services group in the New York Tri-State area. “They engage in risk.”

In fact, in addition to working at Colliers, Oram also serves on the New Jersey State Investment Council, so he has an added familiarity with private equity firms and their needs. “Not only are real estate-focused private equity firms important to companies like Colliers, but other private equity strategies, particularly buyout shops, are becoming more important.”

Oram added: “As hold periods become extended, buyout shops increasingly are looking for operational efficiencies within their portfolio companies, and real estate is an area where significant cost savings can be achieved.” 

Rufrano, who prior to helming Cushman & Wakefield worked at private equity firm The O’Connor Group during the ‘90s, says private equity represents about 10 percent to 15 percent of Cushman & Wakefield’s total capital business. Although the percentage has remained in that range for the past few years, the dollar volume has risen considerably on a year-over-year basis. In 2009, discounting leasing and marketing deals, Cushman & Wakefield brokered $2.6 billion in private equity sales transactions. In 2010, the firm saw that figure go up to $3.2 billion, up 23 percent from the prior year. Last year, it reached $4.5 billion, up 41 percent from the year before. 

“Private equity has been increasing its dollar allocation and is an important component of capital-raising for Cushman & Wakefield,” adds Rufrano. “I believe it will grow again in 2012.” 

Savills, which has seen private equity account for anywhere between 25 percent and 30 percent of its business each year for the past three years, also predicts transaction volume figures to go up. After all, Savills did more than twice the private equity business in 2011 than it did in 2010, and eight times that of 2009. However, Milston notes that, although he believes Savills’ private equity transaction volume will go up in 2012, the percentage range won’t necessarily change too dramatically. 

Ultimately, many real estate brokers work with private equity fund managers because, quite simply, they’re ideal clients. “They’re good to work with,” adds Oram, who notes that private equity comprises roughly 20 percent of Colliers’ business activity. “They’re smart, there aren’t a lot of layers of bureaucracy and they’re agile.”

Bringing the deals

With roughly half of private equity real estate sales being done off-market, it could be argued that brokers need private equity more than the other way around. However, it turns out that fund managers may need brokers more than one would expect. Even though private equity firms enjoy the freedom of not using a third-party to mediate a deal, brokers can come in quite handy. 

Sure, private equity firms love off-market deals if they can find them, since it means acquiring or selling a property for less money. But according to David Webb, senior managing director of Cassidy Turley, more developers want to shop around for the best deal, so they usually hire an intermediary or consultant. This means that quite often, fund managers are finding the better distressed deals through the aid of a third party. 

“The owner’s going to get the better value if they go through a broker,” says Webb. In addition to connecting the private equity firm with the buyer or seller, depending on which side of the transaction they’re on, brokers like Cassidy Turley help private equity firms with research and due diligence. “We all work together in these situations for everybody’s benefit.”

Also, the use of a broker is quite often not just beneficial, but essential. The rather speedy sale of large loan portfolios often are completed with the aid of a broker, with Eastdil facilitating Anglo Irish Bank’s sale of a $10 billion US loan portfolio to a consortium led by Lone Star Funds serving as a recent prime example. The troubled Irish bank wanted to dispose of this portfolio quickly, and the hiring of Eastdil enabled that expediency. 

In fact, expediency is one aspect where both brokers and private equity fund managers share a mutual goal. Both businesses want to either acquire or dispose of assets — particularly if the assets are distressed — as fast as humanly possible. More often than not, brokers can facilitate the purchasing or disposition of subprime properties and/or portfolios faster than if the transaction were attempted off-market. 

In addition to offering due diligence and added research, not to mention leasing and property management services, brokers can connect private equity firms to potential investors. In other words, these real estate firms don’t just broker asset deals; they can broker relationships. 

This is particularly true for American-based fund managers seeking offshore investors, and vice versa. With many of the large fund managers scoping out Europe and Asia, global brokerage firms with on-the-ground presences on these continents can connect fund managers with potential local investors, buyers and developers. 

“Because of our presence on the ground in Asia and our knowledge of owners and investors operating throughout the Pacific Rim, we’re able to make a lot of important introductions to private equity shops,” says Milston.

“We’re the firms that bring them deals,” adds Rufrano.

Partnering into 2012

As the industry looks toward the fledgling new year, the role of private equity to real estate brokerage firms will continue to be essential for moving capital. Indeed, brokers are keeping an eye on where private equity capital is going so they can provide fund managers with opportunistic deals and help foster relationships between GPs and LPs.

Most notably, several brokerage executives agree that many US-based private equity firms have used what they’ve learned from investing in the US and are exporting their staff and expertise into Europe (where it’s anticipated that the debt crisis will create additional investment opportunities) and Asia. As PERE recently reported, Brookfield Asset Management recently moved senior managing partner Barry Blattman to London and Starwood Capital Group moved its head of acquisitions, Jeffrey Dishner, to Europe. Meanwhile, MSREI relocated global co-head Olivier de Poulpiquet to Asia.

“The large funds typically are active all over Europe and Asia,” says Milston. “A lot of them are looking at Europe today because of the lack of capital there and because the banks are in such disarray.” 

Colliers, which represents a great deal of real estate capital coming out of Canada, is seeing those Canadian dollars going toward the United Kingdom and the US, Oram notes. Specifically, that capital is going towards trophy office properties in the UK and multifamily properties in Florida. 

“In [Continental] Europe and the UK, there is a lack of liquidity available to finance new deals and refinance existing ones. Private equity is pouring in to fill that void,” says Oram, suggesting that real estate brokerage firms are eager to continue bringing this capital into the market.

Additionally, in the US, Rufrano believes that private equity will continue to be a leading contributor to the recapitalisation of overleveraged deals, like the previously mentioned situation with 1633 Broadway.

Most real estate professionals would agree that the importance of private equity to the brokerage industry is unlikely to increase in 2012. However, that’s only because a) other aspects of the real estate business (i.e., traditional buyers and sellers) are growing proportionally, and b) its role is already quite important. In other words, although the percentage isn’t likely to change, the transaction volume is very much expected to continue to grow. 

“They certainly have been growing over the last 10 years, but other kinds of investors have been growing as well,” says Webb. “They were big players during the credit crisis, and they remain so.” 

Adds Milston: “I don’t think there’s going to be a dramatic shift in the importance that they play because they already play a significant role. And it’s going to continue that way.”