Kyle Bolden, senior audit partner in the Real Estate Hospitality & Construction practice of Ernst & Young (second from left) with Brian Mutchler, managing director of Harrison Street; Jerome Nichols, president of Standard Real Estate Investments; and Jeff Rosen, a principal of Mag Partners.
Sibley Fleming
This is the third installment of Urban Land’s coverage of a special three-part capital markets series held at ULI’s Spring Meeting in New York City (March 9–11, 2024); you can read coverage of Part 1 here and Part 2 here.
The third and final capital markets panel held during ULI’s Spring Meeting, in New York City in early March, focused on borrower experiences. Kyle Bolden, senior audit partner in the Real Estate Hospitality & Construction practice of Ernst & Young, moderated a panel on raising equity amid ongoing market uncertainty. The panelists were Brian Mutchler, managing director of Harrison Street; Jerome Nichols, president of Standard Real Estate Investments; and Jeff Rosen, a principal of Mag Partners.
Observations from 2023
“In terms of the operating metrics of our sectors—especially when you take into account student housing, senior housing, storage, digital—rent growth has never been better,” said Brian Mutchler, managing director of Harrison Street. Despite sluggish capital markets, this investment management firm, which focuses exclusively on alternative assets, was able to do about $4 billion of new acquisitions and developments, with about $2.5 billion in debt originations. Through Q1 of this year, Mutchler noted that Harrison Street had done another $500 million in debt from money center banks, private capital, and regional banks, among other sources, and he believes debt markets are beginning to stabilize.
Jerome Nichols, president of Standard Real Estate Investments, a real estate private equity company that manages capital on behalf of institutions, said that because the capital markets were “effectively off” last year, it presented an opportunity for his young company to do business in cases of the right deals and right assets. “We trying to do more of that this year,” Nichols said.
Jeff Rosen, a principal of Mag Partners, an urban real estate company with decades of experience developing impactful, iconic, large-scale projects based in New York City, also noted that, like Standard, Mag, too, had an active 2023 and was actually able to close two development deals at the end of 2023, and to refinance a large loan on its existing multifamily assets. In contrast to the sluggish debt markets of last year, Rosen said he’s sensing a lot of talk about FOMO—fear of missing out now. “I don’t know if it’s just, like, a self-fulfilling prophecy that … we all sit here and want to be, like, hey, the markets are back open, let’s do deals,” he said.
Predictions for the next 12 months
Rosen explained that his firm is focused exclusively on opportunistic ground-up development. “Our typical LPs [limited partners] who come into those development deals are very, very tepid right now …. So, my prediction for 2024 is, there‘s a gap in the market and who’s going to fill that gap for those opportunities, because those opportunities are there.” He also called the risk-adjusted returns for those opportunities “generational.”
Nichols said, “I can get an equity-like return 13 [percent], 15 [percent], in a debt position. It works for rescue capital if the alternative is [that] the operator loses the asset, but for development, it doesn’t. Who’s taking that money?” He also noted that trying to time the market works but is difficult development-wise because, even if projects are “shovel ready,” it takes time to get them off the ground.
Mutchler rounded out the topic, saying that although there hasn’t been a ton of distress yet outside general office, he believes that “there’s going to be a little bit more across all sectors … this year,” especially as regulators have been kicking the can down the road and will have to start making decisions. He also stated that Harrison Street has capital access, from an LP perspective, from its partners around the world, so that even though U.S. markets have been less strong, international markets want to access those U.S. markets. “We expect to raise a lot of capital, whether it’s [from] Asia, Middle East, et cetera,” Mutchler said, adding that Harrison Street is bullish on the U.S. economy, with wildcards being the presidential election and interest rates.
Cause for excitement
Mutchler further detailed what gets him excited from a commercial real estate perspective. “We’re fortunate to have access to a lot of different buckets of debt capital, LP equity capital, and we’ll be delivering a lot of those senior housing communities into an environment where there’s no new supply,” he said, adding that in two or three years the company will deliver state-of-the-art communities as the demographic wave of baby boomers needing care and assisted living is hitting the market.
“Student housing continues to be awesome for us,” Mutchler said, noting that Harrison Street is seeing same-store rent growth year-over-year north of 7 percent. The agencies and banks want to be in that space. Harrison Street favors digital, according to Mutchler. “So, power, shell, hyperscalers—[you] can’t build enough of it right now, because [of] all the AI improvements, social media, et cetera. [Really,] the only limitations to that business are where you’re going to get the power.” Foreign capital is also interested in the data space, he said.
As a boutique institutional shop, Nichols said Standard allocates JV equity to developers, with a focus on industrial deals in the 100,000 to 500,000 square-foot (9,290 sq m to 46,450 sq m) range last-mile, and headquarters, among others. “We’re in Reno, Chicago, Orlando, Houston, and any market where it actually makes sense.”
On the multifamily side, Standard focuses on workforce housing, broadly defined as “regular people housing.”
Rosen said Mag has been exclusively on New York multifamily for the last few years. Reflecting on Nichol’s statement about timing on ground-up development, Rosen noted that Mag’s Ruby project at 243 West 28th Street started in late 2018 and now, in 2024, is at 73 percent leased. “I think what was really important to take from that is that you have to think when you’re in the ground-up space, you got to take a real long-term view, and you have got to have capital that is aligned with you that’s also going to take that long-term view.”
Like others faced with the challenging environment in New York, Mag has also gone outside the city to complete projects, Rosen explained, and has a 20-person team in Baltimore working on a 1.1 million square feet (102,190 sq m), which is a mix of commercial and residential that just welcomed a bank, one of its first large tenancies.
Experiences with lenders
Rosen continued, “In these markets, it’s very much about relationships, and it’s about being patient. And I think capital, whether it’s on the debt side or the equity side, they want to make sure you have an operator who knows what they’re doing.”
Mutchler concurred, giving as example a $100 million loan Harrison Street closed more that two weeks ago for a development at Texas A&M that was a follow-up deal with a development partner the company has probably done 30 deals with over a 15-year period. “Now, with the bank capital, everything is about treasury management. So, not only do you need to have the operating account set your investment with the bank, [there are] also typically requirements—call it 10 percent of additional treasury management deposits—on top of that from other sources.”
That additional requirement, according to Mutchler, is an ask, regardless of whether you have a long-term relationship with your lender, especially now that money is not on sale. “It’s an ask that comes with every bank financing,” he said.
Nichols explained that Standard has some large land sites in Washington, D.C. One project, in particular, Nichols noted, is a 1.5 million square foot masterplan with 1,500 apartment units and 2,000 square feet of retail.
“The success we’ve had financing that has been creating a project that people want to do for reasons that have nothing to do with the return they’re going to get from investing into it,” Nichols said, which translates into partnerships with community development banking groups and nonprofits, or working with the city.
Bolden summarized the panel saying relationships and patience matter, as does track record and experience. On the lender side, it’s now all about creativity and agility.
