Ronald Dickerman with GlobeSt.Com: Volatility Creates Opportunity



‘Volatility Creates Opportunity’

| By Paul Bubny
Published: May 2, 2016

In the formerly active London market, “almost any prudent buyer is frozen in place,” says Dickerman.

NEW YORK CITY—Madison International Realty’s founder and president, Ronald Dickerman, invests in both gateway US markets and in Europe, and therefore he’s keenly aware of the uncertainty and volatility at work in the global socioeconomic environment, as well as the caution creeping into the market. It’s an environment, though, that creates opportunities for prudent investors.

Within the past few months, the New York City-based private equity firm has taken stakes in St. Stephen’s Green, a shopping center in the heart of Dublin; the Sierra Portugal Fund, which owns interests in nine Portuguese shopping centers; and 550 Kearney St., a San Francisco office property popular with the city’s tech tenants. caught up with Dickerman last week to get his take on the current market. In what ways do you see the market softening?

Ronald Dickerman: There’s a variety of things going on out there. A year and a half ago, the US as an investment destination was looked upon as a little bit frothy and a little bit overbought, from the standpoint of global capital flows in real estate. Now, the US economy is shining bright as the leading growth engine of the world. Just the past couple of days, we’ve seen some signs of slowdown in growth, but one of the reasons that the stock market has been so strong is that over the past couple of months, quite the opposite has been true—all of the numbers coming out of the US have been extremely favorable. You have 190,000 jobs per month being created; the Fed is simply standing aside on any potential interest rate increases. That’s why you’ve seen the stock market hitting new highs going back over a week or so ago.

I was just down at the Zell Lurie conference at the Wharton School, and there was definitely a consensus that transaction activity is slowing; we are seeing the universe of buyer pools and broker transactions getting thinner. We are seeing most buyers underwriting some degree of cycle or recession in their numbers on a five- to seven-year holding period, and we have already been seeing cap rate expansion assumptions. So all of these things together are definitely slowing transaction activity.

The other thing going on is that you have things like Brexit, where almost any prudent buyer in the UK, in London, is basically frozen in place. So there’s been a significant falloff in transaction activity. I think what’s important is that real estate has become a global asset class. There’s so much of a connection between investors all around the world, so capital coming in from Norges or the Middle East or Asia is having a significant impact on the US commercial real estate markets. It’s all interrelated. But we’re definitely seeing a slowdown because of the caution that’s creeping into the market. From a geographic basis in terms of where this slowdown is most evident, would you say it’s across the board or in specific global markets? You mentioned London, for example, which had been enormously busy.

Dickerman: It’s definitely happening in London. There, you’ve got an extraordinary circumstance because of the Brexit vote at the end of June and the uncertainty that creates. But furthermore, you’ve got a lot of caution. You can go market by market, and the themes are generally the same. You may remember two months ago, Marc Holliday from SL Green Realty Corp. had an earnings call where he was calling for lower transaction volume and leasing velocity, and shares of SL Green went from $95 to around $82 in the course of two days. There’s one of the most exuberant CEOs of a public company, totally focused on New York, calling for a slowdown and his stock got hammered. Yet when you look at the results, the execution hasn’t been so bad.

Part of this is a self-fulfilling prophecy: everyone is calling for a recession, the end of the cycle, the end of the baseball game. Therefore, everyone is being cautious and taking their foot off the gas, and it becomes a virtuous cycle of being true. People are beating the drum for the death of China, but on the other hand, China seems to be finding its footing. There’s less volatility in their stock market than there was last August. People are beating the drum for the death of the US economic recovery, but the Fed isn’t going to raise interest rates. Aside from the past couple of days, the signals from the US have been very, very good. The mood at Zell Lurie was pretty positive—you had people talking about the economic overlay. Sam Zell always gives the concluding address, and he’s pretty bearish, but if you push him hard, he’ll say there’s definitely a recession coming but it’s going to be mild. Everyone has the memory of the global financial crisis of 2008; nobody is talking about anything like that occurring. Out of the current circumstances, where are the potential investment opportunities arising that may not have been evident a few months ago?

Dickerman: I think there’s a theme about investments. We’re getting a fair amount of traction; we have a differentiated investment strategy in that we replace existing capital partners who are looking for exit strategies. We also provide joint venture equity and are very active in the public to private space, and we do some investment in public companies through pipe investments and property joint ventures.

The reason I put that out there is that the flip side of lower-for-longer is fatigue. There’s more fatigue and dislocation in the market brought about by holding things longer and also uncertainty. If you think about where the world is right now, you’ve got global stock market volatility, sluggish economic growth in Europe and other places, a murky US presidential election that no one can make heads or tails out of and falling oil prices which have created a fair number of shocks. All that together creates volatility and uncertainty. Our view is that volatility creates opportunity. We’ve deployed upwards of $700 million of equity in the past 12 months, so for us, it’s been a very rich investment environment with a lot of opportunities. Do you expect this theme to continue throughout 2016, even as circumstances change? Of course, changing circumstances mean continuing volatility, and opportunities coming out of that.

Dickerman: That’s absolutely correct. You have to pick your spots carefully; you can’t get too far out over your skis. You have to be measured about economic growth; you’re not going to generate returns through rental increases and cap rate compression. You’re going to do it through one of the old-fashioned ways of real estate, which is harvesting a dividend yield. You can do that nicely today because of the spread between cap rates and interest rates. The spreads between the 10-year and cap rates are almost as big as they’ve ever been, certainly much bigger than they were in 2007. So locking in a high dividend yield with some rental growth is an interesting opportunity.

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