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- 1. LaSalle Investment Management Spring 2016 Private Equity Project April 1, 2016
- 2. 2 Meet The Team Jake Hohlweg Sophomore Finance Managing Partner Hodges Markwalter Sophomore Finance Associate Sarah Riehl Sophomore Finance Associate Luc Joseph Junior Finance Vice President Peter Mark Sophomore Economics & Chinese Managing Partner Lauren Schmidt Sophomore Finance & ACMS Associate Stephen Jones Sophomore Finance & Economics Associate Tobias Hoonhout Freshman Liberal Studies & Economics Analyst
- 3. 3 1. Executive Summary 4 2. U.S. Macroeconomic Overview 6-7 3. U.S. Real Estate Market Overview 9-11 4. Fund Structure 13-14 5. Investment Strategy 16-17 6. Target Markets 19-28
- 4. 4 Executive Summary Economic Overview Real Estate Trends Fund Structure Investment Strategy Target Markets • The U.S. is continuing to recover from the Financial Crisis • U.S. Dollar has seen appreciable gains against the Euro and Yen • Interest rates and stock market performance remain risks • The overall trend is moderate growth and increased stability • Increased absorption and construction • The 18-hour city and tech space are emerging trends • Commercial space will remain most profitable in up-and-coming cities • Real estate will provide stability in light of recent stock volatility • $850 million, closed-end fund • Aggressive amount of leverage and 5 year holds • Targeting university endowments, pension funds, and HNW Individuals • Set up as a LP with 1.5% management fee and 80% payback on gains • Aggressive targets, yet stable backbone • Exploiting trends in Texas, Silicon Prairie, and the Southeast • Opportunistic investments also prime target • Targeting 13-16% IRR • Austin, Texas • Omaha, Nebraska • Charlotte and Raleigh-Durham, North Carolina • Atlanta, Georgia
- 5. 5 1. Executive Summary 4 2. U.S. Macroeconomic Overview 6-7 3. U.S. Real Estate Market Overview 9-11 4. Fund Structure 13-14 5. Investment Strategy 16-27 6. Target Markets 19-28
- 6. Source: Forbes; Bloomberg Business; the NY Times; the Wall Street Journal; IHS U.S. Macroeconomic Trends Key Stats for 2016 Factors to Consider Market Performance – S&P 500 Other Major Indices 2.6% 1.3% 0.5% 3.1% • Projected Economic Expansion • Stable and Sustainable Growth • Inflation Growth Rate • Sign of Growing Economy • Expected Rise in Interest Rates • Signals Confidence in the Economy • Projected Rise in Wages • Correlated with Corporate Success Unemployment Consumer Spending Interest Rates Strong Dollar Market Performance GDP Growth Projected economic growth and anemic market performance are creating a nurturing space for investment in alternative assets Symbol % Change (LTM) DJU -0.44% NDX -0.17% COMP -0.14% NYA 0.20% SPX 0.05% OEX 0.32% XAU -0.39% $0 $500 $1,000 $1,500 $2,000 $2,500 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013 1/3/2014 1/3/2015 1/3/2016 6
- 7. 7Source: tradingeconomics.com, YahooFinance U.S. Macroeconomic Trends Unemployment Outlook Strong Dollar GDP Growth (% Change) Comparative Perspective 0 0.2 0.4 0.6 0.8 1 1.2 0 20 40 60 80 100 120 140 30/03/2013 27/08/2013 24/01/2014 23/06/2014 23/11/2014 25/04/2015 22/09/2015 19/02/2016 USD:JPY USD:EUR -4 -3 -2 -1 0 1 2 3 4 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Jan-06 Apr-07 Jul-08 Oct-09 Jan-11 Apr-12 Jul-13 Oct-14 Jan-16 Stronger employment, dollar gains, and low interest rates are fueling sustainable growth in the United States economy which should translate to demand for real estate Region Interest Rate (Inter-Bank) Region Inflation Rate (Expected) Europe 0.00% Europe -0.20% United States 0.50% United States 1.30% Canada 0.50% Canada 1.40% Great Britain 0.50% Great Britain 0.30% Germany 0.00% Germany 0.30% China 4.35% China 2.30% Japan -0.10% Japan 0.30%
- 8. 8 1. Executive Summary 4 2. U.S. Macroeconomic Overview 6-7 3. U.S. Real Estate Market Overview 9-11 4. Fund Structure 13-14 5. Investment Strategy 16-27 6. Target Markets 19-28
- 9. 9Source: Emerging Trends in Real Estate 2016 survey, Moody’s and Real Capital Analytics U.S. Real Estate Trends Strengthening U.S. macroeconomic performance is bolstering absorption and improving occupancy in the majority of American real estate markets • Total nonresidential building completions exploded in Q2 2014, as 107.0 million square feet of new space was completed, mostly in the industrial sector 107.0M • Construction GDP is rebounding more quickly than overall GDP Q4 2014 2.6% • According to the NAHB, single family permits rose 6.7% from 2014. 2015 single family permits were 531,000, trailing 549,000 starts6.7% 3.78% • Vacancy Rates were 3.78% in 2015 Key Stats Distribution of 2015 Transaction Volume Vacancy Outlook 28.3% 17.0% 8.8% 27.7% 13.5% 4.6% Office Retail Hotel Apartment Industrial Dev Site 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 2012 2013 2014 2015 2016 Apartment Retail Industrial Office Market Breakdown 0% 5% 10% 15% 20% 25% 30% Revenue Population
- 10. 10Source: IBISWorld, US Treasury U.S. Real Estate Trends 10 Year Treasury Yield Real Estate Revenue and Valuation $- $200 $400 $600 $800 $1,000 $1,200 $- $100 $200 $300 $400 $500 $600 Value (billions) Revenue (millions) 1.75 1.8 1.85 1.9 1.95 2 Low interest rates, strong valuations, and increasing corporate profits are paving the way for subsequent profits in the commercial real estate space Change in Value by Market Category and Property Type 18.2% 11.7% 6.9% 26.9% 13.4% 12.1% 13.0% 13.5% 15.0% 16.8% 0% 5% 10% 15% 20% 25% 30% Apartment Industrial Retail CBD Office Suburban Office Major Nonmajor 12 months through June 2015 U.S. Corporate Profits $- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 CAGR: 2.6%
- 11. 11Source: PwC Emerging Trends in Real Estate U.S. Real Estate Trends The emergence of strong commerce in secondary markets makes them attractive markets for real estate investments Emerging Trends 18 Hour City Offices Housing • Strengthening employment numbers in this maturing recovery are contributing to demand for office space in many urban and suburban markets • Housing demand is increasing across all residential segments • Millennials buying first homes • Baby boomers moving or buying 2nd homes • Recovery from bubble burst • Technology offers the benefits of a larger urban area at a lower cost • 18-hour cities see more moderate cap-rate compression, and provide opportunities for superior yields Risk Factors Western US, affects agriculture, technology, and causes wildfires Came of age in the aftermath of the savings- and-loan crisis, in dire times for real estate Could alter where affordable housing is built, and where households in need of it move As we move into the era of increased labor shortages one great challenge will be planning for career paths Rising interest rates adds uncertainty and increased expenses to the market Big Data • Approximately 7% annualized growth in data center employment since 2010 • Rising wages for IT professionals • Estimated 14% growth in the North American data center market in the next two years Top US Markets to Watch Dallas/Fort Worth Charlotte Austin Omaha Atlanta Interest Rates Gen X Drought Fair Housing Act Income Mobility
- 12. 12 1. Executive Summary 4 2. U.S. Macroeconomic Overview 6-7 3. U.S. Real Estate Market Overview 9-11 4. Fund Structure 13-14 5. Investment Strategy 16-27 6. Target Markets 19-28
- 13. 13 Fund Structure Our Values Transparency Responsibility Client Focus Progressive Thinking Our Advantages Focused Approach Market Pioneers Fresh Perspective Rigorous Research • Specific investment criteria • Operational Improvements • Strategic capital allocation • Unique investments • Avoid saturating markets • Acquire desirable assets at possible discount • Managers that include millennials • Unique viewpoints and experiences • Dynamic market analysis • Quantitative and qualitative • Effective analysis • Leads to informed decisions Result: Maximum returns University Endowments • Leverage Notre Dame affiliation • Offer diversified, yet reliable portfolio Pension Funds • Note lower- risk targets • Offer stable, yet impressive returns High Net-Worth • Note opportunistic investments with core plus backbone • Offer high returns Target Investors Our firm will leverage our advantages and values to create value for a select group of investors
- 14. 14Investment Law Group; West Group Real Estate; NEPC; KPMG; Bard Consulting; CaIPERS; Russell Investments Fund Structure Fund Parameters and Rationale Managerial Considerations • Large amount of capital facilitates diversification • Allows us to compete in various segments Size: $850 million • Debt is currently cheap • Increases liquidity • Aids diversification • Increases returns Leverage: 60% • Investing and Exit Phases • Can reallocate if needed • Allows for optimal exits Commitment: 8 years • Fixed, one-time capital contributions • Allows to intimately cater to our select investors Setup: Closed End Fund: Single yet diverse option Legal Status: Limited Partnership Horizon: 5-6 year hold of assets Leverage: Investment-by-Investment • Managers: 1.5% flat fee on investor commitments • 20% of any profits after investor capital/premium paid back Compensation and Fees • Investors: 8% IRR Hurdle Rate; 80% after capital recovery • Back-end waterfall distribution Distribution Our closed-ended fund is structured for maximum returns on unconventional CRE investments
- 15. 15 1. Executive Summary 4 2. U.S. Macroeconomic Overview 6-7 3. U.S. Real Estate Market Overview 9-11 4. Fund Structure 13-14 5. Investment Strategy 16-27 6. Target Markets 19-28
- 16. 16 Investment Strategy Target ReturnAsset Class Market Type Value Add Opportunistic • Seek to provide ultimate quality to drive maximum revenue Class A • Within Value-Add, bring new value to older construction in rejuvenated markets Class C Secondary • Austin, TX • Atlanta, GA • Charlotte, NC • Raleigh-Durham, NC • Omaha, NE • Silicon Prairie 13-16% Diversification of risk, expenditures, and value propositions will balance our portfolio to provide lucrative returns Return drivers • Slightly more opportunistic investments • Profitable property types • More affordable markets • Levered Position Investment (% of fund) Leverage Target IRR Fund Return Core Plus Multifamily $425M (50%) 50% 9-12% 13-16%Value Added Office $212.5M (25%) 60% 12-18% Opportunistic Data Storage $212.5M (25%) 70% 15%+
- 18. 18 1. Executive Summary 4 2. U.S. Macroeconomic Overview 6-7 3. U.S. Real Estate Market Overview 9-11 4. Fund Structure 13-14 5. Investment Strategy 16-27 6. Target Markets 19-28
- 19. 19Source: JLL, CBRE Office Space - Overview Market Indicators Market Cycle Peaking Phase Rising Phase Falling Phase Bottoming Phase Austin Atlanta Charlotte Raleigh- Durham Omaha 1.3x 44.2m 6.7% • Rate at which occupancy rate is outpacing new supply • Vacancy is at lowest level in 8 years despite 44 million square feet of new construction • Office space typically sees a capitalization rate of 6.7% Market Drivers Market Comparisons Market Rental Rates (per sqft) Absorption (sqft) Vacancy New Con- struction (sqft) Atlanta $22.54 2,578,651 17.5% 885,000 Austin $32.26 2,253,197 12.4% 2,007,666 Boston $34.04 3,045,721 13.8% 5,573,171 Charlotte $23.03 453,466 12.3% 1,987,222 Nashville $21.68 204,416 6.3% 3,276,446 Dallas $24.38 4,794,274 18.7% 7,605,715 Seattle $34.77 517,986 11% 1,808,693 Declining vacancy rates and a growing economy will continue to make office space a wise and profitable investment Demographics Vacancy Rates Employment Job Growth Net Absorption Wage Growth
- 20. 20Source: Austin Business Journal, Colliers International, Transwestern Austin, Texas Market Indicators Wages have grown 15% since 2008 Expected job growth is 42.10% in the next 10 years No state personal income tax Only city with double-digit percentage job growth Growth Potential Vacancy Net Absorption New Construction Under Construction $27 $29 $31 $33 $35 $37 $39 $41 $43 $45 Q2-12Q3-12Q4-12Q1-13Q2-13Q3-13Q4-13Q1-14Q2-14Q3-14Q4-14Q1-15Q2-15 CBD Rents Suburban Rents Class A Office Rental RatesMarket Highlights 9.0m $495k $33.34 93.6% • Current inventory of Office Space • Supply will soon be below demand • Office Space occupancy rate • Room for absorption • Median Listing Price • Healthy asking price for buildings • Class A Gross Rental Rate per sqft • Compares well with other markets Demonstrated growth in office rental rates with further business expansion potential makes Austin a very attractive market for commercial real estate investment
- 21. 21Source: JLL Austin, Texas 193,598 1,188,889 453,581 422,188 1,369,744 896,877 683,724 1,164,121 2,253,197 10.00% 12.00% 14.00% 16.00% 18.00% 20.00% 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 Citywide Total Net Absorption (s.f.) Citywide Total Vacancy Rate (%) Citywide Indicators 32% 15%26% 7% 4% 4% 4% 2% 2% 2% 2% Northwest Southwest CBD Central East Citywide Southeast Far Northwest North Northeast Target Submarkets Market Activity and Opportunity Major Companies • Apple recently leased newly developed 217,000 and 350,000 sqft office developments in Austin • In 2015, Austin had the second highest absorption rate in the United States, while ranking third in construction deliveries • High level of education and nearby universities make Austin a low cost, high startup opportunity for tech • As the CBD becomes increasingly occupied and demand continues to grow, tenants will search for space in the emerging Northwest Austin market Constantly growing demand and absorption is signaling a disconnect between supply and demand where new value can be found Target IRR 12-18%
- 22. 22Source: Bloomberg, Department of Numbers, NAI FMA, LoopNet, Colliers Omaha, Nebraska Omaha Annual Absorption Silicon Prairie offers a lower cost alternative to the already inflated Silicon Valley, with equal potential for growth -137.933 225.788 62.833 273.651 151.255 197.762 341.851 -150 -50 50 150 250 350 2009 2010 2011 2012 2013 2014 2015 AnnualAbsorption (thousands) Market Overview Silicon Prairie Highlights Companies Based in Silicon Prairie 1st 2nd 3rd 9th • Fastest growing region for tech jobs • 2.9% unemployment is 2nd lowest • Ranking of best states to do business • Ranking of overall business climate • Omaha finds itself in what is being called Silicon Prairie, which essentially is the new tech hotbed in the Midwest • Its low cost of living, education, and healthcare combined with tax incentives make it an attractive area to do business as well as live • Central location of cities like Kansas City, Omaha, Lincoln, and Des Moines makes it a natural business center • Companies like Google have invested billions of dollars in data centers in Silicon Prairie Attractive business environment Increased demand for tech space Capitalizing on value added supply
- 23. 23Source: Colliers, LoopNet, Investors Omaha Omaha, Nebraska Inventory (SF) Vacancy Absorption (SF) Class A 6,708,870 5.3% 77,185 Class B 10,884,928 13.9% 14,026 Class C 3,676,724 22.6% (10,246) Totals 21,270,522 12.7% 80,965 Office Expansion and Development Capitol District •Construction of 150,000 sq. ft. building •125,000 sq. ft. of office and 25,000 sq. ft. of retail HDR •290,000 sq. ft. headquarter office located adjacent to Capitol District •16-stories with an estimated 60,000 sq. ft. available for lease The Yard •$50M redevelopment venture comprising of 63,000 square feet of office space, 110 unit apartment complex, and hotel space Market Indicators Vacancy Net Absorption New Construction Rental Rate Market Trends Inventory Breakdown • Median days on market has decreased 20.5% • Absorption was 40% above the 10 year average • Office vacancy is 360 basis points below the national average of 16.3% • $97.43 asking price per square foot for sale • Recent transactions in 2015 saw eight deals over $25 million • Unique demands of tech office space create an exciting opportunity in value-add projects Target IRR 12-18% The unique startup explosion in Silicon Prairie is also manifested in the Omaha market, which is seeing increasing demand for cutting edge office space and a lack of supply
- 24. 24Source: Ibisworld Cloud Computing & Data Storage Industry Overview Opportunity Major Players Percentage of Business Services Conducted Online • The industry’s main activities include: • Application hosting and service • Database management • $135.5bn industry with 5.5% growth • Key drivers include: • Percentage of Services Online • Number of Mobile Internet Connections • Internet of things: Growth in network of physical objects gradually gaining internet capability • Growth in data management • Steady annual increases in revenue • Low cost markets • Requires temperate climate like Silicon Prairie • Perpetually increasing demand • Driven by expansion of the “internet of things” Expected IRR 15+% Future demand for server space will be driven by increased growth in data management and fits well with cool climate of the Silicon Prairie 0% 2% 4% 6% 8% 10% 12% 14% CAGR: 7.11%
- 25. 25Source: JLL Research, Integra Realty Resources, Multifamily Housing - Overview Market Cycle 2016 Multifamily Bull Markets The StoryRegional Rates $130.7B in 2015 multifamily transactions – up from 2014 by 19.4% 2016 Rank City 1 Palm Beach 2 Broward 3 Minneapolis 4 St Louis 5 San Francisco 6 Inland Empire 7 Atlanta Class A Cap Rate Vacancy Urban 5.47% 8.85% Suburban 5.63% 5.57% Urban 5.23% 6.67% Suburban 5.49% 5.08% Urban 6.04% 7.61% Suburban 6.04% 4.05% Urban 4.62% 5.85% Suburban 4.80% 4.42% South East Central West the percentage of US markets in the expansion phase Expansion Indicators US Decreasing Vacancy Rate Moderate Construction Strong Employment Growth Med/High Rental Growth In short, as long as the United States continues to see steady employment growth the multifamily market will continue to be a smart investment. While some markets are showing signs of hyper- supply, the vast majority of U.S. markets are in the expansion phase. In particular, markets with a strong presence of millennials and young professionals hold many years worth of promise for the multifamily segment. Other top factors influencing multifamily cap rates, in addition to a millennial presence, are a market’s specific supply/demand interplay and future job prospects.
- 26. 26 Source: Cushman & Wakefield, REIS, PWC, Colliers International, **Market apartment rent divided by median mortgage payment, taxes, insurance, maintenance. Atlanta, Georgia The Market The Property Type Multifamily Indicators U.S. Atlanta Cost of Ownership** 0.8 0.9 Rent (as % of household income) 32.4% 23.3% Under Construction (as % of Inventory) 1.4% 2.1% Vacancy Rate 4.4% 5.8% Capitalization Rate 6.0% 6.4% • Atlanta’s low cost of living makes it an attractive place to live and work, which in turn makes it an exciting and profitable real estate market 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% $54,000 $55,000 $56,000 $57,000 $58,000 $59,000 $60,000 $61,000 $62,000 2013 2014 2015 2016 Household Income Unemployment Population Growth Real Estate National Rank Annual Rent Growth 6.8% 5th Transaction Volume $5.7 M 4th Expected IRR 9%-12% Atlanta Population Millenials Millenial Growth - 5 Years Other 10% cheaper – the cost of doing business in Atlanta vs the US Average • The millennial population drives the rental housing market. With millennials making up 37% of the Atlanta market in five years multifamily investments are strong investments Economic Indicators Major Companies in ATL
- 27. 27Source: JLL Research, Colliers Inc, REIS, Research Triangle Region, School Websites, **Market apartment rent divided by median mortgage payment, taxes, insurance, maintenance. Raleigh-Durham, North Carolina The Market The Property Type Multifamily Indicators U.S. Ral-Dur Cost of Ownership** 0.8 0.9 Rent (as % of household income) 32.4% 27.6% Under Construction (as % of Inventory) 1.4% 2.0% Vacancy Rate 4.4% 5.3% Capitalization Rate 6.0% 5.9% The Research Triangle Real Estate Total Units Asking Rent Vacancy Class A 29,135 $1,232 9.2% Class B 65,393 $990 4.3% Class C 33,467 $826 3.6% Expected IRR 9%-12% Academic Institutions • Duke University • UNC Chapel Hill • North Carolina State University • Over 253,000 students across 16 institutions Major Employers • American Airlines • IBM • Fidelity Investments • 3rd Best Labor Market in the U.S. 0% 25% 50% 75% 100% Total Population Millenial Growth Millenial Bachelors Degree or Higher Due to its heavy concentration of academic institutions, an enormous 45.7% of Raleigh- Durham’s 2.52 million person population holds a bachelor’s degree or higher Tech Sector growth in the United State’s 3rd best labor market drives an optimistic outlook high-tech jobs Annual high-tech job growth 53,665 3.7% Employment
- 28. 28Source: JLL Research, Cushman & Wakefield, REIS, US BLS, Statista, PWC, US Census Bureau, Charlotte Chamber, **Market apartment rent divided by median mortgage payment, taxes, insurance, maintenance. Charlotte, North Carolina The Market The Property Type Multifamily Indicators US Charlotte Cost of Ownership** 0.8 0.8 Rent (as % of household income) 32.4% 26.7% Under Construction (as % of Inventory) 1.4% 3.6% Vacancy Rate 4.4% 4.8% Capitalization Rate 6.0% 6.3% 0% 2% 4% 6% 8% 10% 12% 1.1 1.12 1.14 1.16 1.18 1.2 1.22 1.24 1.26 2012 2013 2014 2015 2016 Millions Labor Force Unemployment The Labor Market Charlotte is the United State’s - 22nd largest metropolitan area by Gross Metropolitan Product (GMP) - 13th cheapest city to do business Output Costs The 16th most populated city in America is also its 2nd fastest growing city behind Austin, TX 2015 2020 26.8% 33.8% In the next 5 years Charlotte’s proportion of millennials will grow 12% Real Estate Total Growth Market Rent $883.19 5.6% Expected IRR 9%-12% Fortune 500 Headquarters 1. Bank of America 2. Lowe’s 3. Duke energy 4. Nucor 5. Family Dollar Stores 6. Sonic Automotive 7. Domtar
- 29. 29 Executive Conclusion Economic Overview Real Estate Trends Fund Structure Investment Strategy Target Markets • The U.S. is continuing to recover from the Financial Crisis • U.S. Dollar has seen appreciable gains against the Euro and Yen • Interest rates and stock market performance remain risks • The overall trend is moderate growth and increased stability • Increased absorption and construction • The 18-hour city and tech space are emerging trends • Commercial space will remain most profitable in up-and-coming cities • Real estate will provide stability in light of recent stock volatility • $850 million, closed-end fund • Aggressive amount of leverage and 5 year holds • Targeting university endowments, pension funds, and HNW Individuals • Set up as a LP with 1.5% management fee and 80% payback on gains • Aggressive, yet stable backbone • Exploiting trends in Texas, Silicon Prairie, and the Southeast • Opportunistic investments also prime target • Targeting 13-16% IRR • Austin, Texas • Omaha, Nebraska • Charlotte and Raleigh-Durham, North Carolina • Atlanta, Georgia QUESTIONS?