You're listening to Bloomberg Business Week with Carol Messer and Tim Stenebek on Bloomberg Radio.
We wanted to get some thoughts on the world of private market opportunities and with us as Margaret McKnight, partner and head of real Estate Portfolio Solutions over at Stepstone Group, they focus on the private market, and she joins us on zoom in San Francisco. Margaret Height, nice to have you here.
How are you.
Fabulous? Pleasure to be here.
Thank you, Well, it's good, good to have you here. I feel like it's really timely. Give us a little bit more insight on your firman, who you guys are typically investing for and or working with.
Yeah, so we are leading capital allocator to the private market, and we work across real estate, which is my specialty, private equity, private debt, and infrastructure on behalf of large institutional clients and also private wealth clients.
So what's the demand that you're seeing right now for these type of investments? Has it kind of tapered off a little bit, especially within a higher rate of environment. I'm just curious about the impact.
I would say that new commitments have tapered off, and interest has not because a lot of the conditions are riped for these to be some very good years to deploy new capital. For our institutional investors. First of all, the appraisals are very slow to catch up with the price changes, so they're still carrying a lot of their real estate at relatively high values. And also they make commitments to funds that then call the capital to make investments,
and that whole process is very much slowed down. So for example, over the last year, capital calls are down sixty or down twenty five percent, and the return of capital is down sixty eight percent, So don't have money to redeploy and they're kind of full up, but not for lack of interest.
So is that a cause of concern or something, especially if you're looking, for instance, in the private credit space, it's around one and a half trillion dollars in that corner. But when you're looking at other areas like private equity, private debt, real estate, does it make sense that you'd see this happen at this point or is it a cost for concern?
It is a natural part of the real estate cycle which is kind of slow to adjust, and it creates a lot of dislocation and a little bit of a shortage of capital on both the debt and the equity side at the same time as people are motivated to sell and raise capital so it can create That is the opportunity emitted the turmoil right now.
So I'm curious, like for our audience who are listening, because I think real estate we're trying, we're a little bit on trying to see if it's another shoe to drop right as you would imagine, we certainly talk about office real estate a lot. Let's go there in terms of that segment of the market. We talked about law firms earlier that they are kind of helping out fill up some of the office space here in New York
City because of their return to office mandates. But for commercial office real estate, what's the outlook there, what's the demand, what's the interest, what's the concerns?
So first, it's really important to understand that what's happening to office is part of a bigger trend of changing space. He was partly driven by technology, and office is a loser in this game. But it's really important to note that there are winners and we can come back to
those later. Those make interesting places to invest. Office is getting hurt by both the cyclic weakening, particularly the tech tenants pulling back, and it's also had really a big step down in demand because of work from home, which is here to stay. Employees and employers are in a giant experiment to figure out what hybrid work looks like
and also what it means for office leases. The capital markets saw this and they basically shut down on office, and they are the grease that keeps the engine moving.
So on the office side, it's pretty seized up. That is not true of the rest of real estate, which is just going through an adjustment to higher interest rates amid mixed signals with the downdraft from the economy and then real secular support, and then you have to get down into the details to figure out what is more and less interesting.
Who do you think are the winners.
So when we look at the big trends, e commerce kind of hurt me tell and that actually went through a correction much the same as office, by the way, and it took about ten to fifteen years to weed out the successful tenants and formats and now it's back in favor, and I think office will take a while more like ten to fifteen years than two to three years to get fixed. But the winner there was industrial. E commerce hugely benefited industrial, and industrial is also benefiting
from deglobalization. Residential is benefiting from a general housing shortage of affordable homes. And again details matter because in the high growth Southeast markets we have had a lot of new deliveries that need to get absorbed. But it's actually benefiting this cycle because high interest rates make it hard to buy homes and so there are more people you know, staying in the renter pool unfortunately unless they want to
be there right. And then also technology is helping to bring a lot more formats into the institutional arena, like single family homes for rent, where you need technology to effectively manage a large portfolios, and that's property type. I think even the bigger winner this cycle is kind of the pricing opportunity. We think that we have some of the best conditions set for potentially the best buying years of the cycle.
You're talking about for an investor in particular, because okay, because of some distressed opportunities and I know you guys play into certainly in a big time in recapitalization. So I am curious how much of that you're already seeing where they need to kind of rethink a certain asset.
We are at the leading edge of kind of a two to three year workout of existing commercial real estate debt, and we're focused on the interesting property types of course, but the higher rates mean that outstanding loans are bigger than the new loan that you're going to get because the properties can't support as much debt when it's more expensive. So if you're an owner with a promising property and you want to keep your property, you have to fill
that gap. Not everybody has that money, and so they are raising it and doing Our sort of favorite way to do this is what's called GP led secondaries, where you work with the GP to provide the gap equity, and then you also take out any LPs that want to move along. So it really solves two problems, and we are starting to have flow that's at the similar pricing to what we saw in the post GFC period, which then led to really and trusting returns.
Margarete, let me help help me in because I know you guys play in the private equity the private debt. You know part of the thing, are you are you creating new funds specifically from investors real estate funds to put that money to work, or you're not doing it in that way.
We do it in a variety of ways depending on the needs of our clients.
Yes, but I'm just curious, is there demand for new funds and for investor money to come into it. I'm just curious if you're investor saying we've got money, we want to put it into a real estate fund.
Investors do understand that this is a very interesting thing to do, and not everybody is tapped out, and you know, we have a global business and investors around the globe are affected in different ways, so that so there is capital available and it is a great time to be
playing it in this manner in our opinion. And also, you know, institutional investors do keep to a generally consistent base over time, So doing this and then also just doing value added and opportunistic funds, they are going to buy the things that can't be saved. You are very interesting.
Today, if you're looking at a particular portfolio strategy, how should investors allocate that particular segment to the construction of their portfolio?
Really lean into where they see potential buying opportunities, good pricing combined with a relatively resilient outlook for fundamentals. We published twice a year our house used that summarizes our opinions on where this will be in some amount of detail. So that's a resource that's available. And obviously we are pretty excited about the RECAP and gp LED secondary opportunity.
All right, you're certainly in it, and it's interesting to kind of get your perspective on a topic that comes up so often, especially in this higher rate environment. Margaret McKnight, thank you so much. She is partner and head of real Estate Portfolio sous over at Stepstone Group, joining us on Zoom from San Francisco, and interesting to get our thoughts just in terms of weighing in, especially when it comes to the office side of things as we try to figure out our way forward.
And we've been talking about the office space it seems like all afternoon as well as in the last couple of years. In addition to that, but obviously how things have changed so much because of COVID