Stephen J. Furnary is chairman and chief executive officer of
, a real estate investment management firm with a 30-year history. Furnary, a ULI trustee, is the co-chair of the
ULI Real Estate Capital Markets Conference: Real Estate Finance and Investment 2012
in New York, New York, on June 6-7, 2012.
Headquartered in New York, Clarion Partners has $24.2 billion in total assets under management, 250 investors both domestic and international, and 260 employees. Clarion manages investments in both fund and separate account formats with a range of real estate strategies from core to core-plus and value-added to opportunistic.
Furnary was interviewed by Joshua Kahr, principal of Kahr Real Estate and an adjunct associate professor at Columbia University. This is the first in a series of interviews with leading real estate investors that is being undertaken by the ULI Center for Capital Markets and Real Estate. This article was summarized, condensed and edited by Dean Schwanke and Basil Hallberg of ULI.
Joshua Kahr: I thought today we could talk a little bit about the history of the firm as well as the recent buyout, where the partners bought the firm back. Let’s begin with the founding of the firm. You started in 1982, right?
Stephen Furnary: Yes, we started the firm in 1982. At that point, there were really only two of us, John Weisz, who is unfortunately deceased, and myself. We had a corporate partner—Jones Lang Wootton—and back then we did business as Jones Lang Wootton Realty Advisors [JLWRA].
Kahr: What was the original motivation back in 1982 when you got the whole show going?
Furnary: John and I worked together in the real estate investment management group at Citibank. He left Citi to work with Jones Lang to jumpstart this business. I joined Lazard for a couple of years before joining John at JLWRA. Frank Sullivan, who was also with us at Citi, joined us shortly thereafter. As the firm grew over the years, we added partners to handle our growing asset base and client roster.
Our vision was to establish an entrepreneurial real estate investment management firm. At that time, many of the investment managers were owned by banks or insurance companies. We believed that investors wanted to work with smaller, more nimble organizations rather than big institutions. The notion of getting out from under an institutional umbrella and moving to this business model was very appealing to us.
The business plan was to create a real estate investment management organization that would invest capital for principally U.S. institutional clients, mostly pension funds, and to principally invest through a separate account format.
Kahr: And fast forwarding a bit, the firm obviously went through some phases in the past 30 years. I understand that at one point, in 1998, the firm was sold to ING. Describe the motivation behind the sale.
Furnary: Our first ownership milestone was in 1995 when we bought out Jones Lang’s passive interest. We re-named our firm Clarion Partners and the existing partners had 100% percent ownership. A few years later, in 1998, ING, the Dutch insurance company, bank and asset manager, knocked on our door; we weren’t for sale at that point, they came courting. ING was then the sixth largest financial services firm in the world with a vision of creating a global real estate investment management platform. They had a global operation but their U.S. business was very small. To scale up their presence in the U.S., they wanted to put their existing operation into our firm so that Clarion would become the Americas component of their global platform.
Kahr: So you just bought yourself back in 1995 and in 1998 you basically partnered with ING. Why?
Furnary: It was clear to us that real estate investment was becoming an accepted asset class, both as a domestic investment and as a global investment. We realized that to expand our business and achieve the benefit of providing our clients with global options, we needed a global partner. There are really two benefits of having a global presence. First, you are positioned to raise capital offshore for domestic investment. At that time, we had zero offshore capital. Today, 20 percent of our capital is from non-U.S. sources. And secondly, we had zero ability to offer international investment options to our U.S. clients. When we partnered with ING, our ambition was to become global.
Kahr: So, a number of years go by, the economy goes through some changes and in 2011 you guys essentially bought yourself back from ING. Was it the credit crisis that caused it to happen or some other issue that motivated the decision?
Furnary: The real catalyst for the buyback was that ING got caught in the liquidity crisis and took a lifeline from the Dutch Government. As a result, they had a lot of money to pay back—$10 billion or so—requiring them to dispose of some of their non-core businesses. Real estate was one of the businesses targeted for sale. That essentially created the opportunity for us to buy back the Clarion Partners business. ING’s real desire was to sell the entire real estate platform in a single transaction, and ultimately, they identified CBRE as the buyer. There was a significant overlap between Clarion Partners and CBRE’s U.S. business, creating an opportunity for the management team here to become the buyer of the Americas business.
Kahr: And it feels good to be on your own again?
Furnary: It feels fantastic.
Kahr: So, where does the firm grow in the next three to five years?
Furnary: We are expanding all of our core businesses. We’re serving more clients in our open end fund space with both core and core-plus strategies. We are active in both Brazil and Mexico and we are looking to expand our footprint in both countries. We are expanding our available strategies with a focus on value-add and are planning to go back into the debt business. Fortunately for us, we have a fairly broad platform as well as the capacity within that platform for a significant amount of expansion within the spaces that we know quite well.
Kahr: What are you seeing in your crystal ball as far as the next two to three years?
Furnary: I am generally pretty bullish when I look at it simplistically. What’s nice about real estate is that we have pretty long cycles—seven to ten years. With the exception of a brief timeout in the latter part of 2011, I feel as though the recovery is underway after three years deep in the hole. There are some major macro headwinds that investors need to stay on top of and to hedge to the best of their ability. We all know what those are: The European debt crisis and deficits that are way too large for anyone’s comfort zone. All in all though, absent some cataclysmic event that causes a double dip recession, I think we will work through our issues. I think we have started an expansionary phase of the cycle.
There is some concern that core real estate is overpriced because cap rates are low; buying good assets is very competitive, particularly on the coasts. But you can still find and invest in these assets at prices below replacement cost. In many cases, occupancy is less than historic high water marks. Rents also are below historic peaks for the most part, financing costs are very low, and we expect return levels to be lower for all asset classes. So, I think that real estate can maintain its position in a global portfolio of investments that includes stocks and bonds, generating unleveraged returns at 5 percent real or better—basically an acceptable level. I actually feel sanguine about the real estate market. I even feel okay about core real estate investments because I don’t think we are going to end up overbuilding and the NOIs [net operating incomes] of properties are actually going to outrun a possible expansion in cap rates that we’ll have at some point.