AEW is realizing deals for its latest opportunistic fund, even though it only held a final close on the vehicle last month. Marc Davidson, portfolio manager of the $550M AEW Partners VII fund and the Partners fund series, told PrivcapRE the firm was exiting two deals, comprising 20 properties acquired in 2013. The deals include a portfolio of 19 industrial assets, which AEW recapitalized, and a CBD office property, originally bought in December 2013. Davidson says there is much more “confidence in the economic recovery,” which is translating into greater demand for industrial and logistic properties. But the exits were a simple fact of the current real estate cycle and of “achieving strong returns” thanks to the amount of capital in the market. Marc Davidson, AEW Partners “Real estate fundamentals are probably as good as they’ve been for a long, long time,” Davidson says. “The problem is the entry point people are paying to get access to some assets. The challenge in this market is how you buy attractively priced assets.” He says opportunistic managers can still find deals, however, owing to the scale of the recession. “You still find a lot of deals haven’t come back from their pre-recession levels for several reasons. People were overleveraged or had capital restraints. People did things outside their core competencies, moved into markets they didn’t know or asset types they didn’t have experience with,” says Davidson. “Around 75 percent of [the AEW Partners VII] deal flow is about finding those assets that are in the wrong hands for some reason.” AEW Partners VII is 50 percent invested in 22 investments, with an average deal size of less than $50M. Davidson says the fund’s investments will be split roughly between CBD office, particularly creative office space, transit-oriented multifamily, senior housing, and industrial. Davidson says an “attractive arbitrage” was building in senior housing, “as you are underwriting at historic cap rates.” He raised concerns about the pricing for multifamily, saying rental rates were “easily past prior peak rents. People are paying very low cap rates on peak earnings. That can work, but it also adds a significant amount of risk to a strategy.” As a result, AEW Partners VII wouldn’t “be doing much more multifamily development, because of the low stabilized return on cost.”
Real estate fundamentals are “as good as they’ve been,” says portfolio manager Marc Davidson. The challenge now is pricing in certain property sectors.
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