Active Private Equity Real Estate Strategy

Proven private equity real estate investing strategies

The subprime fallout and credit crisis have triggered a major transition in U.S. real estate. With tightening lending and underwriting standards, speculative investments and construction projects are likely to limited, resulting in constrained supply and healthier fundamentals over the long term. Looking forward, market participants anticipate that the coming years will be fraught with challenges as well as opportunities.

Active Private Equity Real Estate Strategy is a collection of abridged market analyses, forecasts, and strategy papers from the ING Clarion Partners' Research & Investment Strategy (RIS) group. Divided into two comprehensive parts, this practical guide provides you with an informative overview of real estate markets, forecasts, and recent trends in part one, and presents specific active strategies in private equity real estate investing in part two.

• Includes a simulation of the economy in recession and the expected effects on the commercial real estate industry
• Offers examples of portfolio analysis and recommendations using ING Clarion's forecasts and Modern Portfolio Theory
• Focuses on multifamily, hotel, land, and industrial investments
• Demonstrates the use of the various tools available to the private equity real estate investor

Written with both the individual and institutional real estate investor in mind, this book offers specific private equity strategies for investing in real estate during volatile times.

Preface ix

Disclaimer xiii

Acknowledgments xv

About the Authors xvii

PART ONE Market Analysis and Forecasts 1

CHAPTER 1 Overview of the U.S. Real Estate Market 3
Tim Wang and David Lynn

CHAPTER 2 Forecasting the U.S. Market 19
David Lynn

CHAPTER 3 Recession Simulation and Its Effects on Real Estate 25
Tim Wang, Alison Sauer, and David Lynn

CHAPTER 4 Subprime Fallout: The Impact on Commercial Real Estate 41
Tim Wang and David Lynn

CHAPTER 5 Capital Markets: Dramatic Shifts and Opportunities 47
David Lynn and Tim Wang

CHAPTER 6 The Bid-Ask Problem and Game Theory 53
Jeff Organisciak, Tim Wang, and David Lynn

PART TWO Active Strategies 67

CHAPTER 7 Residential Land Investment 69
Bohdy Hedgcock and David Lynn

CHAPTER 8 The U.S. Hotel Market and Strategy 103
Tim Wang, Matson Holbrook, and David Lynn

CHAPTER 9 Global Gateway Industrial Market Investment 125
Bohdy Hedgcock and David Lynn

CHAPTER 10 The Opportunity in Senior Housing 159
Tim Wang and David Lynn

CHAPTER 11 Active Portfolio Management Using Modern Portfolio Theory 187
David Lynn and Yusheng Hao

CHAPTER 12 Derivatives in Private Equity Real Estate 217
Jeff Organisciak, Tim Wang, and David Lynn

CHAPTER 13 Opportunities in Infrastructure Investment 239
David Lynn and Matson Holbrook

APPENDIX A Typical Land Development Pro Forma Analysis—Three Scenarios 247

APPENDIX B U.S. Hotel Chain Scales 253

APPENDIX C Modern Portfolio Theory in Real Estate Portfolio Analytics 257

APPENDIX D Commercial Real Estate Indexes 259

APPENDIX E Example NPI Forecast Methodology 263

Selected Bibliography 265

Index 267

DAVID J. LYNN, PHD, is Managing Director and Head of ING Clarion Partners' Research & Investment Strategy Group. He is also a member of the Investment Committee as well as the Operating Committee of ING Clarion Partners. Lynn is a Counselor of Real Estate (CRE), a Certified Portfolio and Investment Manager (CPIM), a Chartered Management Analyst (CMA), a Certified Planner (AICP), and a Homer Hoyt Fellow. Lynn earned his PhD in financial economics from the London School of Economics where he also earned a master of science degree specializing in finance. He also earned an MBA from the Sloan School of Business, Massachusetts Institute of Technology.

TIM WANG, PHD, is Head of Macroeconomic Analysis and Strategy at ING Clarion. He has an MBA from New York University and a PhD from the University of Georgia.

MATSON HOLBROOK is a former senior associate at ING Clarion. He holds an MS in real estate from New York University and a BS in cartography and geographic information systems (GIS) from the University of Wisconsin.

BOHDY HEDGCOCK is an Associate at ING Clarion. He holds a master's in urban planning from the University of Colorado.

JEFF ORGANISCIAK is a Senior Analyst at ING Clarion. He graduated from the University of Pennsylvania with a BA in economics and political science.

ALISON SAUER is an Analyst at ING Clarion. She is a graduate of Tufts University where she earned a BS in mathematics.

YUSHENG HAO is an Analyst at ING Clarion. He holds an MS in financial engineering from Baruch College, CUNY.

ACTIVE PRIVATE EQUITY REAL ESTATE STRATEGY

With the dramatic downturn in today's U.S. real estate market, individual and institutional real estate investors need a resource for meeting the challenges that lie ahead and seizing opportunities as they arise.

Written by David Lynn with expert contributions from ING Clarion colleagues Tim Wang, Matson Holbrook, Bohdy Hedgcock, Jeff Organisciak, Alison Sauer, and Yusheng Hao, Active Private Equity Real Estate Strategy offers a collection of abridged market analyses, forecasts, and strategy papers developed in 2007 and 2008 from the ING Clarion Partners' Research & Investment Strategy (RIS) Group.

This practical resource is divided into two comprehensive parts. Part One offers an overview of real estate markets, forecasts, and trends. Here you will find a summary of the national and major urban area markets and an analysis of each of the major real estate property types. In addition, this section contains illustrative examples of market analysis and forecasting that may set the stage for more detailed strategy development later on. The analysis also includes an early simulation of the potential effects of a recession on the commercial real estate industry.

Part Two presents examples of specific active strategies in private equity real estate investing. Each of these studies was developed to illustrate how an institutional investment manager may identify and analyze real estate investment opportunities under certain market conditions. The studies highlight key areas including multifamily, hotel, land, and industrial investment, and three niche plays: derivatives, senior housing, and infrastructure. The book also includes an example of the application of Modern Portfolio Theory to a hypothetical core real estate portfolio.

Active Private Equity Real Estate Strategy is an informative guide to the development of private equity investment strategies. “David Lynn’s collection of articles on real estate markets are applied research at its best. The analysis is thorough, concise, and to-the-point. The book leaves you with a richer understanding of real estate market dynamics. It is a must-read for serious real estate analysts.” —Peter Linneman, Principal, Linneman Associates (www.linnemanassociates.com), and Albert Sussman Professor of Real Estate, Finance, and Public Policy at the Wharton School of Business (www.wharton.upenn.edu)

“This is a fascinating look between the ears of one of the largest global real estate investment management organizations, providing a timely and incredibly comprehensive view of how these institutions fashion investment strategy. A must-read for both students and practitioners attempting to understand the nature of today’s commercial real estate investment markets and how large institutions like ING approach those markets for the benefit of their institutional investor clients.” —Geoffrey Dohrmann, President and CEO, Institutional Real Estate, Inc.

“David Lynn provides an analytical road map for private equity real estate investors, charting strategies in the next market cycle. Lynn’s methodology shows why he is recognized as one of the top forecasters in the industry. He covers all the markets and property sectors with a treasure trove of data to make sense of future trends. This book offers a big picture view with the detailed perspective investors crave.” —Jonathan D. Miller, Partner, Miller Ryan LLC, and author of Emerging Trends in Real Estate and the blog TrendCzar™ (in conjunction with GlobeSt.com)