The future of real estate: trends and strategies

The views and opinions expressed in this podcast those of the speakers at the time of recording and are subject to change as market and other conditions warrant. This podcast is for informational purposes only and is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise, regarding any specific product or security.

Stewart (00:00): Welcome to another edition of the InsuranceAUM.com podcast. My name's Stewart Foley, I'll be your host. Hey, welcome back. It's great to have you. And it's the day before Thanksgiving. So I want to go out. I know you're going to hear this podcast after Thanksgiving, but I want to wish everyone a happy Thanksgiving out there. And thanks to our audience for listening. The podcast topic today is real estate and I'm thrilled with that. We haven't done anything on real estate in a minute, and we're joined by Maggie Coleman, who's the Chief Investment Officer in North America for Real Estate Equity at Manulife Investment Management. And we're thrilled to have you on Maggie. I'm sorry to say that you're a little under the weather, I understand. So, thanks for being a trooper and hanging out with us today.

Maggie (01:07): Well, I'm thrilled to be here and wishing everyone a happy Thanksgiving as well. It's that time of year, when you've got little kids and they're home and they kind of bring the germs with them along with the holidays.

Stewart (01:19): Yes, that sounds hauntingly familiar. So, before we get going on real estate, we always like to know kind of where'd you grow up and what was your first job, not the fancy one, and tell us a little bit about how you landed in your seat today.

Maggie (01:37): So I grew up in Indianapolis, Indiana. So Midwest family is originally from Tennessee and Kentucky, so a lot of family in the Midwest and kind of southeast region. I went to Indiana University undergrad and University of Chicago grad school. My first job in high school was selling G.H. Bass shoes at the Glendale Mall in Indianapolis.

Stewart (02:04): Wow.

Maggie (02:04): So, a long time ago, the new buck suede shoes from G.H. Bass were quite popular, so I sold shoes. So that was my first job ever.

Stewart (02:13): Okay. So before we get going any farther than that, so first of all, I went to the Indy 500 for the first time last year, and what an amazing event that was.

Maggie (02:23): It's an amazing event.

Stewart (02:24): An amazing event, and I was shocked at how easily we got in and we got out. There are, I don't know, over 300,000 people that show up at that thing. And it was really terrific. We also share that we we're both University of Chicago grads, so we'll be able to geek out later.

Maggie (02:42): That's great.

Stewart (02:43): Yeah. But it's super cool.

Maggie (02:45): Yeah, Indianapolis is a great town. I mean, I think they did a lot of work when they had the Super Bowl. And yes, the Indy 500 is the marquee event every year and it just draws people from everywhere-

Stewart (02:55): Everywhere.

Maggie (02:55): ... And it's a source of pride for all of us Hoosiers.

Stewart (02:59): I'll tell you what, I had extremely, I'm a big racing fan and I would watch two guys race lawnmowers out in the parking lot. I mean, no qualms about it. I had really low expectations of that race and the whole event, because of how much hype it gets. Right? And I'm like, it can't be that good. And it was outstanding. The race was outstanding, the experience was outstanding. It was really, really good. I would just encourage anybody, even if you're not a rabid race fan, it's just so interesting to see that event. Super cool.

Maggie (03:36): Yeah, it's a great day.

Stewart (03:38): And also, Bass Weejuns were the shoe of choice when I was in high school, which I think goes back to, this is the first shoe. Nobody I went to high school with could afford that shoe, but that was, we couldn't afford it, but that was the cool shoe, was the Bass Weejun.

Maggie (03:57): Yeah, there was a moment, yeah, where G.H. Bass, they had the bucks and then they had the saddle ones with the leather and the suede and it was very trendy, so yes.

Stewart (04:07): Oh yes, yes. And that was like if you had those, you were way cooler than I was, for certain.

Maggie (04:15): Well, I was selling them. I was selling them.

Stewart (04:17): Right. No, no, no, I get it. But I mean, when I went off to college and I was like, wow, my shoes, my shoe game, I got to raise my shoe game. This is kind of sad. So, can you talk a little bit about the current macro environment. Just coming out of the election, a lot going on there, a lot of volatility, a lot of noise anyway. How does it influence your investment decisions as you look out into the real estate space?

Maggie (04:45): Yeah, and I can tell you, it's an interesting time within real estate investment management. It's a really interesting time for Manulife, specifically. Maybe just a little bit of background. I've been in this role for just over a year and joined after spending 15 plus years in real estate investments and advisory. So I've been through two or three cycles and taking on this role in the throes of a change in cycle, was really intellectually fascinating for me. But also, I think it was a really unique time to be thinking about scaling a strategy and scaling a platform the way that Manulife is seeking to scale real assets, and in particular real estate. So we've got a new global head of real estate, Mark Feliciano, who has joined a couple of years ago, and he has really recast the strategies and the platform for scale. And it's a very interesting moment for that process to be taking place against this macroeconomic environment, where we've had quite a bit of volatility and really liquidity challenges.

And so, when you think about capital and capital that has flowed into real estate at a time when the market is resetting, we have this period of illiquidity, where you've had higher interest rates, you've had lending market pullback, and really, as you and I were talking about early in our discussions, this lack of visibility in terms of valuation, it's a very unique moment. Real estate, post-GFC, when you think about real estate performance, about 46% of attribution and an attribution analysis was attributed to cap rate compression. And so, when you extract inexpensive debt and you extract that liquidity from the market, you really now have to think about what factors are going to drive performance. And so, it's long-term income growth, it's operational expertise, it's deriving alpha and deriving differentiation in terms of how you're thinking about real estate.

And so, that's, like I said, it's a very unique time to be investing. And if you have liquidity, you can be a solution provider to operators and developers and partners, where they have great track records, great pipelines, but just are caught in this high interest rate environment and this refinancing conundrum with the lending markets in pullback mode. So it's affecting our investment decisions from the standpoint that we are excited to be putting capital out at this vintage. We are looking across the risk spectrum. We are again looking at entry points that allow us to be achieving outsized yields right now for not taking on some additional risk. So, a lot there, but again, I think we're in a period of reset, which makes it really exciting and interesting.

Stewart (07:40): Yeah, it seems like it's a great time to be a buyer or a deployer of capital. So when you look out for the long term, where do you see the best opportunities and what are you cautious on?

Maggie (07:57): So, I think real estate's been transitioning in terms of opportunity set for a while. We're very focused on how the use of real estate and the built environment has transitioned in expanding sectors. And when you combine that with, again, I think what LPs are looking for, which is diversification of return, a path to liquidity and really again, income growth and alpha, we think that the opportunity is really in analyzing real estate sectors from how are we using the built environment and where are we contributing longer-term income growth and maybe misunderstood demand. So when I say that, I mean we are research based, so we take both a macroeconomic and microeconomic approach to how we look at markets and we are expanding our purview from across real estate sectors. So, industrial and multifamily have been strong performers, but looking at underneath those kind of headline sectors, where specific use might lead you to what have been traditionally called more niche sectors.

So, industrial outdoor storage, within industrial, within residential, looking at affordability in terms of housing, looking at single-family rental, looking at mobile home, thinking about those sectors more broadly. And then obviously saying long-term opportunity and other niche sectors, self-storage, data center, all of these are really driven by really big macro themes that are at the top of everyone's mind when you go to all the real estate conferences. And that's demographics, digitalization and AI. Looking at the de-globalizing process that's happening, the on-shoring of manufacturing, the reconfiguration of supply chain, which is impacting industrial and retail and all of those factors, I think have expanded really the sector spectrum from an investment perspective. So that's long term what we're excited about. And then again, in this near term, these entry points that, to your point, if you can be deploying capital right now, you really do have an opportunity to find the right partners and again, be achieving enhanced yields at this moment in time as being a source of liquidity for investments across the spectrum.

Stewart (10:23): It's interesting, I mentioned this before we got started today, our annual meeting in June, we had a panel of five people on real estate and no one mentioned office and no one asked a question. Is that just how it goes as far as, has anybody had to sell anything yet? Or are we just sort of waiting and seeing how it plays out? Because it seems like there's not a lot of selling in that space. Can you get us just current on what's going on there?

Maggie (10:58): So, we have not redlined office. We, personally from my seat, and then again, spending a lot of time with our global research team, think that there is a role for office in a diversified portfolio. So we have a house view that we work on every year. And so, the perspective of office, I think shares a lot of characteristics similar to what retail went through 10, 15 years ago with the transition to e-commerce. And so, you're seeing that transition happen within office. It is true. I think that there has been a lack of precision and clarity from evaluation perspective, because there hasn't been a tremendous amount of trade volume and transaction volume happening. We own office, we have been sellers of office recently, and I think from our perspective, it's always an asset-by-asset analysis. Is it an office asset that would be deemed commodity or not?

Is it an office asset that could trade to a user, an owner-user? Is there an opportunity for conversion play? And again, all of these themes, I think, within the office discussions that you're probably having and that you're seeing, is they kind of come in waves. So there was a big wave of discussion around how all the office assets could be converted to multifamily. And then, we started to hear, well, it's not the catch-all solution for every office. And it does work, sometimes it doesn't. There are people who have developed great track records with office conversions, others have struggled. There's new office that's being built in really strong markets, that are leasing up in places like New York at record rents. So, there's clearly a story for new high-amenity office space in markets that are supporting rent growth. Again, it's an asset-by-asset analysis when you're thinking about acquisitions and dispositions of office and portfolio construction. I don't think that it's been on the top of every panel discussion.

I think there was a lot of talk during the post-pandemic about return to office, and I think people intellectually kind of grew, I don't want to say tired of the topic, but I think it was again, landing on a hybrid situation. So you have, we're back four days a week and there's somewhere between three and four days a week that most are back. There's I think a reckoning around where occupancy sits on paper versus actual occupancy in chairs. But I think it's certainly not gone away. It's not going to go away. I think it's going to get a little bit more granular and portfolio owners will have to reconcile every office asset for what that looks like within their portfolio and what the opportunity set is. But again, we haven't redlined it. We are investing in new office and new economy office. And so, our long-term perspective is there's going to be a role for the assets in a portfolio.

Stewart (14:03): I mean, to your point, I live outside of Austin and there's cranes.

Maggie (14:08): Yes.

Stewart (14:08): There's cranes in Austin.

Maggie (14:10): Yeah. And there's headquarter relocations to Austin. And I think when people talk to their teams, there is the camaraderie, there's the training of junior team members, all of that takes place within the office setting. I think, again, I mentioned I have young kids. I love going into the office. I am more productive. I'm one of those individuals who are more productive in an office setting. So, I think it's had a lot of headlines, but it's being the reconciliation will happen asset by asset. And I do think LPs are recognizing the challenges with valuation. I think many of the larger Odyssey funds have been gated, because of the valuation questions, but I think LPs understand the challenges with valuations and I think are seeking liquidity from that perspective and really trying to get to what the real numbers are, so that we can kind of reset the table and move on.

Stewart (15:04): I really appreciate your willingness to talk about it so thoroughly. Thank you so much. When you think about risk management in the portfolio, can you talk about your approach and also where the portfolio is now in terms of your risk appetite?

Maggie (15:22): When we think about risk management, I think it spans from the approach to risk from a portfolio construction perspective. And again, I think we've made tremendous shifts within our own portfolio to diversify across asset classes within real estate, to support some of that risk management and mitigate some of the dispersion in performance by diversification. We also, from a just investment process and governance perspective, have a fairly rigorous risk management process within Manulife that I think is reflected in our portfolios and in how we think about investment decisions. And that means thinking about risk from the portfolio level to the asset level, whether it's income risk, obsolescent risk, in a fairly detailed ESG and climate risk program that has been long-standing within Manulife across the real estate platform. So, it is interwoven from our research and strategy through our transactions, through our investment decisions, into our portfolio management.

And ultimately we look across our portfolios quarterly and have risk hold cell analysis that we do. And again, our continually assessing risk in this feedback loop that we have created in our process. So it's certainly central to everything that we're working on. And again, I think we feel like within the real estate sector more broadly, this time within the cycle, diversifying your income, diversifying your sectors, is a way to manage risk. Along the risk spectrum, we have strategies that are core in nature, all the way to opportunistic. And we think about, again, this ability right now, if you can be cognizant as a liquidity provider and structure the right entry points, you're going to be paid well for maintaining a focus on that area of the risk spectrum and able to get some additional couple hundred basis points maybe without taking on additional risks. So your risk adjusted returns right now I think are very strong, given the volatility and given just the lack of liquidity in the real estate capital markets right now.

Stewart (17:43): You mentioned ESG just a moment ago. It's funny how something like that gets politicized at times and it's the sustainability and impact investing and whatnot. I think somehow or the other, the election results kind of come up with this. So, how do you incorporate those ESG sustainability, impact investing? How do you incorporate that into your process?

Maggie (18:10): Yeah, so Manulife, it's a longstanding Canadian firm in the Canadian markets. We've been active for over a 100 years. We have a presence in North America and APAC. And I bring that up to say, I think ESG has been a part of our investment philosophy for a very long time. ESG considerations and performance indicators are now, from a real estate standpoint, integrated pretty deeply into our due diligence. I think I mentioned just the heightened level of focus around climate risks. So we are assessing forward-looking climate risk into all of our underwriting, but broadly, I'd say 90% of our global portfolio has third-party green building certifications. Our two Canadian funds have a 100% green building certifications. Our general account, our balance sheet was ranked first for GRESB North American in diversification, in diversified sectors. So it's something that's been part of our DNA for a long time, to get to those levels.

We have greenhouse gas targets, I think it's up 40% by 2035. And so, we are moving those targets through our footprint now. So it's part of a longstanding tradition, regardless of the politics and administration changes over time that we've been implementing. I think it's important for LPs to see, and I think there is a lot that can be said about headlines, but I think at the end of the day it impacts performance. And so, when LPs can understand what those risks that we're assessing could do to exits or performance, I think that that is really important for them to be able to underwrite and understand how ESG can enhance performance, as well as what considerations are important for mitigating risk.

Stewart (20:02): That's super helpful and I really think that's true, that you can't reach the milestones that you've reached by starting recently. It's got to be ingrained in your firm. And I think that it's interesting that you're like, the politics of it is not part of the program. This is what we do. So when you look out today, that's kind of a hard question, but what is the top challenge that you're facing at present and how are you navigating it? And then, we've got a couple more, but I want to give you the chance to just talk about challenges going forward.

Maggie (20:38): Look, I think every investment manager, there's a myriad challenges, and so it's hard to pick what you would say is the top one. I think what's top of mind for us right now, is really two things. One, we have ambitious goals to scale our platform globally. And so, with that comes a drive towards how do you differentiate yourself in the market? How do you differentiate your portfolios and your platforms? We talked a little bit of how we're doing that with our pivot to increasing exposure to the alternative sectors, et cetera.

I think it's also, it's really, at the end of the day, taking a step back and with every decision, treating your LPs and your partners with a partner led approach. And so, with that comes difficult decisions and decisions that I think ultimately are long-term in nature, but may have short-term implications. So it's just kind of that balance of really not wanting to just stifle the scale and the growth with really managing to what we call, like I said, a partnership led approach, as part of our DNA. So it's not really, I think, an immediate challenge. It's just an ongoing philosophy that we have. And so, just managing an understanding, what does that mean as that plays out day to day, is something that we think about quite a bit. Otherwise, I think there's, like I said, the challenges of volatility, the challenges of risk management that we've talked about, that we're cognizant of and being very, very, very mindful of right now.

Stewart (22:15): That's terrific, thank you. So what emerging sectors, or what emerging markets do you think represent good opportunities over the next, I don't know, 5, 10 years forward? Where do you think the opportunities are going to be outside the US?

Maggie (22:34): Outside the US we're heavily focused on APAC and the growth in the APAC region. And I think it's a lot driven by, again, population and demographic shifts that are occurring in those markets and the growing institutionalization of sectors there, including data centers and multifamily and residential. I think we touched on just a little bit, but thematic around housing and affordable housing, whether that's multifamily or single-family rental, or manufactured, or mobile homes. All of that I think is, it's manifesting globally. And so, I think this focus around affordability and living is something that presents long-term demand drivers across the globe, and particularly in APAC as well.

And similarly, the shift into regional nodes for industrial, certainly is manifesting in Asia as well. So, it's the similar themes, but the emerging markets, I think that we're focused on right now, in addition to North America, would be in APAC. We take from a research perspective, as I said, a micro market kind of block by block analysis of demand. So sometimes it's looking at the big picture headlines of what's emerging, but also finding sub-markets and locations where there's just misunderstood demand. And so, you find opportunity there as well when you are starting to get access to data that may be unique data or data in segments that haven't been institutionalized and you can start to put that data together.

Stewart (24:17): That's interesting, because I just assume that when you were addressing emerging markets, that it was going to be outside the US. But are there areas inside the US that you think are emerging opportunities as well?

Maggie (24:28): Yes. I mean, it varies sector by sector and it varies, like I said, block by block. I think it's in a lot of communities that may not have had, for example, access to great medical care and or quality food sources. There may be a great case for grocery and retail or medical office. And again, it's going beyond the headlines of oversupply in X market and really understanding where's that supply gone, where has that supply been missed, but where's the demand? So, we look at emerging driven by the data versus by big swaths of headlines. We are active in all markets, we're active in the sun belt, we're active in along the coast, we're very active in Canada. We have a regional approach to our Canadian markets that I think we spend a lot of time thinking about where is the growth in immigration impacting some of the Canadian demand. So it's really about getting to the data for us in terms of what we think are emerging opportunities.

Stewart (25:27): That's great. And I've got a tremendous education on real estate today. I really appreciate you taking the time to come by.

Maggie (25:34): That's fun. Yeah.

Stewart (25:35): I got a couple of fun ones for you on the way out the door. And I typically ask this question a little differently, but the way that this question comes out is, what is your top tip for paying it forward and supporting the next generation of investment leaders? And I mean, one of the things that we're, and it's not really formally announced or whatever, but I guess when I say it, it will be. We're working on chartered insurance asset manager designation. And because in spite of being 30% of the world's invested assets, there's nowhere to learn how to run that money. And so, we have a partner and we're working on building curriculum right now.

And I think that part of the challenge around diversity, equity and inclusion, is it's less about different programs for folks, but it's about letting people know what the opportunity set is. I grew up, I didn't know any of this existed. I didn't know that there was institutional investors in real estate. I had no idea that insurance asset management existed. Right? And somehow or the other, I figured it out. But it seems like it's a matter of just making folks aware of what opportunities there are out there. But how do you think about the next generation?

Maggie (26:59): I a 100% agree with your comments and it's funny, I did not realize what this business was and didn't know anything about commercial real estate when I started. And I kind of joke, if you ask my parents what I do, they have no idea. It was just not a part of any of our family. No one was investment managers, no one was putting money to work. My mother was a high school principal, my father was an attorney. So everyone was kind of along those lines. You would go get a terminal degree and you become a teacher or something.

Stewart (27:31): It's the same for me. I mean, my grandmother is the only person that got out of high school and I was the next one. So my granddad went to eighth grade and was a carpenter. And it's like I went of to, he goes, they're like, "Go off to college." And I'm like, "Okay." And I major in finance and then he doesn't understand why we're not working together anymore.

Maggie (27:57): Right, right, right. Yeah, it's really fun. So no one really, there was no roadmap for me moving into this space. And I think it was a lot of just, again, I try to make sure when I talk to young people, it's about finding what makes you excited about getting up in the morning and understanding what do you like to do and how do you like to spend your days? And I think I had a mentor once who told me that, was like, "How do you like to spend your days? Don't worry about what the title is or don't worry about what the industry is, but how do you like to show up every day and what do you like to do? Do you like to be by yourself?" And I am a very extroverted person, but I'm also quantitative. And so, I found my way through this kind of broad industry and taking on new roles to really get to what gets me excited.

And it happens to be investing, and it happens to be working with LPs and thinking about these big picture questions on portfolio construction, but also going deep onto an asset that you can touch and feel and underwrite and say that's a good real estate deal at the end of the day. So I've been really fortunate and blessed to be able to combine all of that. I think paying it forward, one, just making myself available to talk to people who are figuring it out for themselves. Also, making sure that when we're recruiting, that we're recruiting from institutions that may not have a real estate or have a real estate department. And for a long time, a lot of business schools haven't had a real estate. Maybe they had a couple of real estate classes, but it wasn't a real focus. But mentoring obviously is a big one, making yourself available, but also really I think challenging the next generation of individuals to stretch for roles that they may not understand, know about, and really stretch themselves.

Because I think that's really where the magic happens and where you can find yourself in these really interesting and new places and really think outside of what might be your comfort zone. And that's probably true for real estate investment management and many sectors. But I think really challenging that notion of you have to wait to be asked, but really stretch for what you want and ask for more and ask for what you want to be in two years now, and have people help you get there. So nothing probably mind-blowing to you. It's all blocking and tackling in working with the next generation as well as trying to be present and be visible. But yeah, it's an exciting time and I think it's really a great, like I said, vintage to be investing. So if you are in the business, pay attention to this next phase of the cycle.

Stewart (30:37): That's good stuff. I think it's inspirational. I think that whole thing is inspirational, so thank you for that. So the last fun one is, you get to have lunch or dinner with you and up to three guests. Your guests can be alive or dead. And the question is, who would you most like to have lunch with?

Maggie (30:56): Oh, that is a good question. Who would I most like to have lunch with? The two that immediately came to my mind, would be my maternal great-grandfather, who was from Elkton, Tennessee and grew up the son of a slave and a slave owner. And he had 12 kids and that was part of this kind of family tree that started. But I love to hear just what his experience was in raising this huge family that ultimately yielded my grandmother and just understand what the perspective was back then. And so, having access to that kind of family history would be really fascinating. And then my second one would probably be Muhammad Ali.

Stewart (31:41): Wow, there you go.

Maggie (31:42): As just a force of nature and relentless pursuit of excellence. Those were the two that came to my mind. Then I was like, I need to think of a third one that's really compelling. But I can't think of anyone other than those two.

Stewart (31:55): That's a great answer. All right, I just wanted to say thank you so much. I really enjoyed getting to know you and everything. It's really nice. I mean, one of the things that podcasts do is, it's so much more than a white paper. You're not reading a script, you're just talking about your market. But at the end of the day, it's really nice to get to know there are such nice people in this industry and so knowledgeable and so accomplished, and our guests have gotten better and better and better over time. And you've been an outstanding guest and given us a great education on real estate. So thank you so much for being on. I really enjoyed it.

Maggie (32:39): Well, thank you. It was a pleasure. And happy Thanksgiving.

Stewart (32:43): Oh, thank you. Yeah, happy Thanksgiving to you. It's tomorrow. So yeah, good. Happy Thanksgiving to you and everyone that listens. We've been joined today by Maggie Coleman, chief Investment Officer in North America Real Estate Equity at Manulife Investment Management. Thanks for listening. If you have ideas for podcasts, please shoot me a note at Stewart at InsuranceAUM.com. Please rate us, like us, and review us on Apple Podcast, Spotify, Amazon, or wherever you're listening to your favorite shows. My name's Stewart Foley. We'll see you next time on the InsuranceAUM.com podcast.

Disclaimers: The views and opinions expressed in this podcast those of the speakers at the time of recording and are subject to change as market and other conditions warrant. This podcast is for informational purposes only and is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise, regarding any specific product or security.