Carlyle’s Stuckey: Great Time To Sell

Significant and sustained capital flows into core U.S. real estate mean it’s a good time for value-added and opportunistic managers to sell – but only when they’ve done their job, says Rob Stuckey, The Carlyle Group’s U.S. head of real estate. With cross-border capital flows into the U.S. hitting $43B in 2014, almost double the volume of 2011, property prices have already exceeded peak levels, with cap rates near or below 2007 levels.

However, in an exclusive interview with PrivcapRE, Stuckey argues that income-producing real estate still affords attractive risk-adjusted returns for investors. “Even with low cap rates, real estate in the U.S. has become attractive on a risk-adjusted basis because it offers a spread relative to the risk-free reference rate,” Stuckey says. “Think about the total return. The risk premium is still wide by any historical measure.” For value-added and opportunistic managers, “it’s a good time to sell when we have done our jobs,” he adds. “We work to deliver premium returns for our investors and we do that through the arbitrage between core and non-core real estate; taking non-core property, spending cap-ex, leasing it and selling it to a deep core investor.” In 2014, Carlyle exited almost 30 deals in the U.S., according to data provider Real Capital Analytics, including the $120M sale of 920 Broadway in New York, acquired in Feb. 2013 in a joint venture with operating partner ClearRock Properties, for $58.5M. After more than $10M of equity investment in the property, RCA data shows Carlyle and ClearRock sold the property for $1,113 per-square-foot, a record for the area, according to the New York Post. Explaining Carlyle’s philosophy in today’s globalized property markets, Stuckey says the firm’s continued focus is on “underpriced fundamentals”, particularly in traditional prime markets being driven by demographics and job growth. “The [U.S. real estate] market is dynamic, and just when you think it’s getting hard [to find deals], we find something,” he says. Functional obsolescence and historically low levels of new supply “certainly represents opportunity,” he says. But it is also the granular focus on demographics and job growth that are shaping Carlyle’s equity deployment in 2015, which historically has been approximately $900M a year. As part of that focus on the millennials and baby boomers, Carlyle is currently developing 88 condominium apartments in Long Island City, Queens, as well as a 157-unit apartment building, including affordable housing units and retail space, in downtown Brooklyn. “Demographic shifts have resulted in very different real estate needs, and that’s true whether you are talking about apartments for millennials or senior living for baby boomers,” says Stuckey. “Are we seeing different demographic dynamics than before? The answer is ‘Yes,’ and [that’s why] it’s important to pay attention to demographics.” The slow pace of job growth, however, has presented challenges for the real estate industry, and as Stuckey explains, the protracted recovery in the labor market has made the post-financial crisis recovery “much different than any other cycle. It’s been the most protracted recovery for jobs lost in economic history.” As a result, it was incumbent on real estate managers and investors to always be mindful of when the cycle may turn, says Stuckey. “We have already had a long recovery and that’s been unusual. I think there’s more runway. But it’s not a question of if we’ll have another recession, but when. The longer we wait for the next one, the more severe it will be.”