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National Conference on Public Employee Retirement SystemsNational Conference on Public Employee Retirement Systems
Demographics and Real Estate: Redefining Core Strategies to Stay Ahead of the CurveWhitney Ifcher, Goldman Sachs Asset Management
NCPERS 2019 Annual Conference & ExhibitionMay 19 ‐ 22Austin, TX
National Conference on Public Employee Retirement SystemsNational Conference on Public Employee Retirement Systems
What is Core Real Estate?Definitions
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What Makes a Portfolio Core? What Makes a Property Core?
Diversification – geographic, sector, economic Liquidity Stability in Cashflows Staggered Debt Maturity & Lease Roll Lower Leverage Lower Volatility in Returns
Location Occupancy Liquidity Stability in Cashflows – longer term credit tenant leases, diversified
lease roll Value Preservation and/or Appreciation Potential – desirable vs.
competitive set, resilient to new supply, ability to attract strong tenant demand
Open‐end Diversified Core Equity (ODCE) Index Guidelines
> 80% of GAV in direct real estate > 75% of GAV invested in office, industrial, apartment and retail < 60% of GAV invested in any given property type > 75% of GAV invested in operating assets (> 75% leased) < 35% leverage
The ODCE index is comprised of private open‐end diversified core equity real estate funds in the U.S. The index includes 25 funds with total net assets of ~ $215 billion as of 1Q19
Sample Definitions
Stabilized property in major metropolitan areas with predictable long‐term cash flow. Office properties tend to be less risky as their cash flow tends to be more predictable given that tenants sign multi‐year leases
Assets that are 85‐100% leased with a rental stream secured by long‐term leases (over five years). These assets are located in primary locations with strong market fundamentals and are typically newer, requiring very little capital improvements
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Source: NCREIF
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Past Present
What Does it Look Like?Example 1: Office
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Past Present
What Does it Look Like?Example 2: Office
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Past Present
What Does it Look Like?Example 3: Retail
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What Makes a Location Core?San Francisco vs. Charlotte Office
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San Francisco Charlotte
Office Stock 174mm SF1 114mm SF1
Vacancy 5.8% vacancy with 9.7% rent growth over the past year and scarce availability of large block space over 50k+ SF1
7.6% vacancy with 6.1% rent growth over the past year1
Employers Home to some of the fast growing companies including Salesforce, Google, Twitter, Facebook, Airbnb and Slack; 58% of tenant demand from tech2
Home to Wells Fargo, Bank of America and Wal‐mart, as well as healthcare and biotech companies; recent expansions or relocations by Allstate, Sealed Air and Honeywell
Airports Major international airport and 7th busiest in the US by passengers boarded annually
2nd largest hub for American Airlines and 10th busiest airport in the US by passengers boarded annually
Population Growth 2.6% projected population growth over the next 5 years3 15.1% projected population growth over next 5 years3
Education Levels 56% of population 25+ with bachelors degree4 42% of population 25+ with bachelors degree4
Transaction Volume $4.4 billion average annual transaction volume 2009‐20181 $1.0 billion average annual transaction volume 2009‐20181
Class A Office Pricing 4.2% cap rate / $800 PSF1 6.4% cap rate / $250 PSF1
Class A Office Rents $66 PSF FSG1 $30 PSF FSG1
1 Source: CoStar, MSA level data as of 1Q19. 2 Source: Cushman & Wakefield. 3 Source: Moody’s. 4 Source: U.S. Census, 2013‐2017.
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Is This Core?San Francisco Office
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Class A Asking Rent vs. NASDAQ1
1 Source: Cushman & Wakefield
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How is the Core Landscape Evolving?Secular Shifts
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Technology / Disruption Changing Behaviors Changing Demographics & Preferences
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Technology / Disruption
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Augmented reality Artificial intelligence Improved data availability Shared economy
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Changing Behaviors
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E‐commerce sales have grown at ~15% per year over the past 9 years1
E‐commerce now represents up to 25% of overall sales for many traditional retailers2
Brick‐and‐mortar retailers will need to adapt to survive Focus on experiential retail
But… E‐commerce can’t be the whole solution
1 Source: CoStar Portfolio Strategy, as of Q4 2018. 2 Source: Urban Land Institute, January 2019.
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Changing Demographics & Preferences
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Millennials are expected to comprise 1 in 3 employees in the workforce by 2020 and 3 out of 4 employees by 20251
Employers, retailers and landlords must adapt to changing millennial preferences and priorities Boomers are living differently than prior generations
1 Source: US Census Bureau (2005‐2010). 2 Source: PwC US Commercial Real Estate Insights and Emerging Trends 2019. 3 Source: John Burns Real Estate Consulting, LLC.
81% of employers feel that theproper amenities are one of thetop 3 things they can offertheir employees2
63% homeownership rate represents the lowest level in 40 years3
58%of college degrees are earned by women and women earn more than their husbands 38% of the time3
1 in 9 households now rent a single family home3
2xas many people will turn 65 by the mid‐2020s than in the 1980s and 1990s3
1/3of population growth fueled by immigration; more immigrants legally moved to the US from 1990‐2009 than the prior 60 years combined3
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Population Shifts Projected Working Age Population Growth (Ages 25‐64)
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1 Source: U.S. Census, Moody's Analytics, CoStar Portfolio Strategy as of 2Q18. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.
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Employment Shifts Historical & Projected Job Growth
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1 Source: U.S. Census, Moody's Analytics, CoStar Portfolio Strategy as of 2Q18. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.
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Recent Employment GrowthMajor Corporate Expansions & Relocations since 2015
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Source: GSAM Private Real Estate, CoStar, CBRE, Cushman & Wakefield, JLL
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Millennial MigrationRevival of Suburban Living
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Source: U.S. Census Bureau, CoStar Portfolio Strategy, 2Q2018
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Big Picture
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MillennialsBaby Boomers
Climate Change Public Policy
Tax Reform
Immigration
Affordability
Education Disruption
Autonomous Vehicles
Labor Costs
Tariffs Public Transit
Artificial IntelligenceBig Data
Interest RatesTechnology
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Staying Ahead of the CurveInvestable Themes
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Renter‐by‐choice properties with rent rolls exhibiting strong income‐to‐rent ratios in locations with limited supply and strong public schools and/or access to public transportation
Unit composition that caters to young families that offers a discount to homeownership in the surrounding area
Multifamily
Office
Retail
Industrial
Creative office properties in emerging work‐live‐play environments in affordable urban locations with favorable pricing, rental rate upside and access to a skilled millennial workforce
Transit‐oriented, amenity‐rich locations that provide lower living costs and occupancy costs for employers
Infill locations with higher barriers to entry, proximate to ports, rail and interstates and U.S. population centers Flex‐office product and/or product with the potential for higher and better use (e.g. land value, office flex conversion)
Neighborhood centers within dense population nodes with strong demographics (population, wage and household income growth)
Tenant use that is defensive to e‐commerce and provides current income and site value creation opportunities
Source: GSAM Private Real Estate
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Disclosures
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This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.
Portfolio holdings and/or allocations shown above are as of the date indicated and may not be representative of future investments. The holdings and/or allocations shown may not represent all of the portfolio's investments. Future investments may or may not be profitable.
Real estate investments are speculative and illiquid, involve a high degree of risk and have high fees and expenses that could reduce returns. These risks include, but are not limited to, fluctuations in the real estate markets, the financial conditions of tenants, changes in building, environmental, zoning and other laws, changes in real property tax rates or the assessed values of Partnership Investments, changes in interest rates and the availability or terms of debt financing, changes in operating costs, risks due to dependence on cash flow, environmental liabilities, uninsured casualties, unavailability of or increased cost of certain types of insurance coverage, fluctuations in energy prices, and other factors not within the control of the General Partner, such as an outbreak or escalation of major hostilities, declarations of war, terrorist actions or other substantial national or international calamities or emergencies. The possibility of partial or total loss of an investment vehicle’s capital exists, and prospective investors should not invest unless they can readily bear the consequences of such loss.
Further, some real estate investments may require development or redevelopment, which carries additional risks relating to the availability and timely receipt of zoning and other regulatory approvals, the cost and timely completion of construction, and the availability of permanent financing on favorable terms.
Real estate investments will be highly illiquid and will not have market quotations. As a result, the valuation of real estate investments involves uncertainty and may be based on assumptions. Accordingly, there can be no assurance that the appraised value of a real estate investment will be accurate or further, that the appraised value would in fact be realized on the eventual disposition of such investment.In addition, real estate assets may be highly leveraged, which leverage could have significant adverse consequences to the assets and therefore an investment vehicle. In particular, an investment vehicle will lose its investment in a leveraged asset more quickly than a non‐leveraged asset if the asset declines in value. You should understand fully the risks associated with the use of leverage before making an investment in a real estate investment vehicle.
ConfidentialityNo part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.
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