With the world getting used to living in a low interest rate environment for the foreseeable future, institutional investors that are starving for yield have had to rethink their portfolios in order to achieve long term return objectives. There has been a rapid shift in allocations away from traditional asset classes such as bonds and stocks, and into higher generating ones such as real estate and private equity. Real estate private equity fund managers are capitalizing on this trend, with a record 1,284 real estate funds seeking to raise a combined $365 billion of capital as of the third quarter of 2021, according to data provided by Preqin. Pledges from U.S. pension plans to real estate funds have totaled $38.7 billion in the first nine months of the year alone, a figure that is 19% above the five-year average.
The investment universe of commercial real estate, however, is finite and the record amounts of dry powder chasing deals over the last few years has created an extremely challenging environment for fund managers looking to source new investment opportunities. This has forced some funds such as Drake Real Estate Partners of New York to think differently about their deal sourcing approach. Instead of waiting for individual opportunities to come their way, they decided to try a thematic style to investing and brought on Arash Barati, who was previously with AIG in New York, to lead those efforts. Arash was among a handful of candidates that has had exceptional success with that approach, having been able to combine his academic prowess with his quantitative skills picked up on previous jobs to deliver results that speak for themselves. While at AIG, his work led to his group completing one of the largest deals in its history.
What distinguishes him and helps his firms thrive is a top-down approach of investing by identifying trends through macro research, which can then be monetized through the implementation of different strategies around those themes. A few years ago, Arash was quick to determine through his work that the shift away from brick-and-mortar retail would be an incredibly powerful demand driver for the industrial property sector, which led to Drake significantly stepping up its efforts in the sector. “E-Commerce sales are projected to reach $933B in 2021, a 17.8% increase over 2020. This figure is expected to grow to $1.64T by 2025. Companies need to fulfill these online orders through their warehouses, creating an extraordinary level of demand for industrial assets” says Arash. A few years ago, based on Arash’s exceptional work, Drake took a giant step and acquired a 1.5 million square foot industrial distribution center in Greensboro, North Carolina for $45m which was their largest deal to date. They were able to sell the asset only two years later for $74m, generating an eye-catching profit for the fund’s investors.
As U.S. companies retool their supply chains and onshore a lot of their activities to deal with many of the issues caused by the COVID-19 pandemic, demand for logistics properties is expected to remain elevated in the short to medium term posits Arash. “Year to date, 280 million square feet of space was absorbed in the U.S., which is more than double the rate for the same period in 2020”.
