When it comes to real estate investing, there are very few who have the insight, experience, and track record that Mike Fascitelli does. After receiving his MBA with highest distinction from the Harvard Graduate School of Business Administration, Mike joined McKinsey & Company. In 1985 he joined Goldman Sachs in its Real Estate Department. In 1992 he was named partner and selected to head Goldman’s real estate investment banking business. He also served on the Investment Committee for the Goldman’s Whitehall Real Estate Fund. In 1996 he became president of Vornado Realty Trust, then CEO of Vornado, a role he held for more than four years. Mike is a Trustee and Director of the Urban Land Institute and is past Chairman of the Wharton Real Estate Center, where he still serves on the Executive Committee. Mike is part owner of the Milwaukee Bucks basketball franchise. He is also Chairman of Cadre’s Investment Committee.
Q: Amid all the economic disruption caused by COVID-19, how is the real estate sector holding up?
Mike: I’ve been through many cycles and market dislocations before, but the current state of affairs is unlike anything I've ever seen. There are some similarities with past market downcycles. Typically, what happens in a market dislocation is that private market volume dries up. That's been consistent here. The overriding differentiator between this and other market dislocations is that now there’s no certainty, no clarity on the future. As a result, it's more difficult to predict the cash flow implications of COVID because COVID has not been solved. It's not as if the crisis is behind us or that we had anything like it to model off of. Ongoing uncertainty makes it difficult to predict cash flow. And the manifestation of the uncertainty is that there’s practically no transactions at the moment.
While that’s the overarching, general view, not all sectors are alike and they are behaving very differently. Hotels have been decimated. Retail has been hurt very badly. Office less so, but it’s still been nicked. Multifamily has been impacted the least, by and large, but there are pockets of trouble in some markets in regards to housing. All of these situations add up to broad discontinuity. And because of that, we’re seeing transaction volume dry up.
Q: Can you drill down a little deeper on your thinking of the different sectors?
Mike: The impact of COVID hasn’t been the same on any of the sectors and each has to be approached and underwritten in a distinct fashion. Let’s take retail first. Retail was suffering mightily before the pandemic hit - online shopping and store and mall closings and traffic were all posing huge issues. COVID accentuated and accelerated those trends. I don't think retail will revert back to where it was years ago. It’s a very difficult period for the sector and I think its appeal has diminished.
Hotels are an interesting case. They have suffered a lot, not unlike they did after 9/11. But they bounced back quickly back then and there’s not much sign of when or if they’ll rebound in a similar fashion. You can make the case that hotels will come back, perhaps not for a while and perhaps not as strongly. But, the supply side - as in new hotel construction - is likely to be under strain for a while. So, there might be some opportunities to buy properties at attractive prices that could generate strong returns.
Office buildings in major urban centers are being hit very hard; some of the occupancy rates in New York properties are down in the single digits now. But that doesn’t mean all properties are in the same boat, and some properties in fast-growing suburban markets are quite attractive.
Multifamily apartments have been less affected, but not unaffected. There are wide differences between properties from city to city and within metro areas. So, each sector has its own pattern and I think it’s critical here to be very selective in not lumping sectors together and then doing very detailed analyses on opportunities within each sector.
Q: As an investor, what are you looking for now?
Mike: Opportunities always emerge in market disruptions - and though the market for deals - is muted now, it won’t be that way forever. When you invest matters, of course. Fund performance does correlate to the entry price from when you are invested, and history has shown that an ideal time for entry is usually in - or emerging from - market dislocations. I suspect this time won’t be much different, and we’ll be looking for institutional-quality properties in high-growth markets, properties at a discounted basis for replacement cost value; we’ll be looking for price-per-foot value, and cap-rate-value.
There are a few important factors to keep in mind at this point in time. The first is that there is a lot of capital on the sidelines, a lot of investors with dry powder. And second, borrowing rates are very low, historically so. Those two factors combined make me think that there’ll be a shallower dip in prices during this market dislocation. I still think it’ll be a good vintage, but it’ll be very critical to be selective in making investments.
Q: When do you jump back into the market?
Mike: A lot depends on when we hit an equilibrium point. It’s important to remember that no one is likely to catch the absolute bottom. Of course, that’s the goal, but really you want real estate to generate value and strong returns over a long period of time. I don’t think people look back at the past decade and regret buying in 2009 when they could have hit the bottom in 2010, say. It’s more of an issue if you missed out on the down-cycle.
Q: From your perspective as Chair of Cadre’s Investment Committee, what drew you to Cadre and why did you want to become a part of the company?
Mike: I was excited to join the Investment Committee at Cadre because I thought the model was innovative. It might seem simple, but access to institutional-quality real estate deals have been historically restricted to a select few. And real estate has always lacked the prospect of liquidity in the secondary trading marketplace, and has been known for having illiquid assets. So I was personally drawn to the value proposition of providing access to institutional-quality real estate to accredited investors, integrating technology in a transparent way, and offering the prospect of liquidity in the secondary trading marketplace.
Q: Take us behind the curtain and into the Investment Committee. What goes on in there?
Mike: It’s within the Investment Committee that you can see the other facet about Cadre that is so innovative and disruptive, and that is the high-powered engineering staff and models that we use to guide and inform which sectors and markets to invest in. Make no mistake: intuition and experience are extremely important in this business and I don’t want to minimize either.
When we review an acquisition opportunity in the investment committee, we take data derived from proprietary algorithmic programs and formulaic approaches and we marry it with good old-fashioned underwriting and common sense and people's experiences. We’re not replacing human decision making, we’re augmenting it. We try to make one plus one equal more than two. It really defines the innovative approach that Cadre brought to real estate investing. Maybe others have tried this model, but I think they’re not even close in terms of the level of quality of the real estate experience and the technology.
Our push into multifamily is a good example. We started looking at macro trends and became increasingly concerned that we were at the tail end of a long, normal real estate cycle and began positioning our portfolio to overweight multifamily, which has proven over time to be an effective, defensive sector. The cycle started in 2011-2012; it was longer than usual, but understandably so since rates were so low. Yet the models we looked at caused us to recognize that we might be headed for a correction. Let me make clear that we didn’t see COVID happening - and, of course, the downturn was quicker and more devastating than what we expected. Even before COVID arrived, we’d decided to shift to a defensive portfolio. We’re focusing on multifamily because those investments tend to be less volatile, they tend to be a much more defensive class, and they tend to have more resilient cash flow than, say, office or retail.
Q: Any final thoughts?
Mike: The value proposition of real estate really comes through in an environment like our current one. It can be a stable, cash flow generator, which has become even more valuable in the very low interest rates environment we’re in. There’s a challenge when and what to buy and when we’ll emerge from COVID, of course, but I think we’re about to enter into what might be a good time to buy from a vintage standpoint.
Now is a challenging but exciting time, and I’m looking forward to what’s to come within real estate and on the Cadre Investment Committee.
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