“What we’ve seen recently in the past ten years is a change in the way we work, a change in commerce and a change in demographics,” says Dwight Angelini, founding and managing partner of Longpoint Realty Partners. “Each of those has an impact on real estate.”
Over lunch in New York, Angelini and Reid Parker, founding partner with Boston-based Longpoint, outline their plans to profit from reurbanization, a growing trend in property investment. “Real estate has to change and become more culturally relevant, and that’s driving a lot of the way we think about reurbanization and redevelopment,” Angelini says.
Launched last December, Longpoint comprises four former executives from Boston-headquartered TA Associates Realty. Angelini is building on the strategy he used at his previous employer: buying secondary assets and repositioning them. At a big firm like TA, whose assets total roughly $12 billion, it can be tough to capture smaller but more dynamic secondary opportunities. So Angelini, Parker and founding partners Nilesh Bubna and Robert Provost decided to launch a firm dedicated to such properties.
Demographic shifts have breathed life back into the cores of U.S. cities, forcing local governments to update zoning rules and improve public transportation. In the wake of the 2008–’09 financial crisis, younger workers sought city centers with higher job growth, and empty nesters left the suburbs to rejoin the action downtown. This migration has created an opening for real estate investments that find new uses for old buildings.
Longpoint aims to turn the dusty remnants of the old economy into something that Millennials want. That could mean repositioning a large mall — the emblem of 1990s retail — as a mix of stores, restaurants and apartments.
On the firm’s radar: any midsize industrial, retail, office or apartment building in a rapidly growing neighborhood. “Industrial assets are a key focus area for us,” Parker says, adding that Longpoint seeks links in the supply chain that directly serve the local community, typically distribution centers or small-parts manufacturers. “We’re looking at the last mile of distribution and finding interesting ways to reposition other industrial assets to make them more desirable.”
Targeting the right geographies is critical. “We’re focused on areas with positive net migration, so we’re looking at cities in the Northeast, or Florida, or places like Nashville that are attracting younger demographics and seeing strong job growth,” Parker explains. He and Angelini shy away from areas like Kansas City, Missouri, and other parts of the Great Plains, which they cite as not yet resilient enough to roll with the ups and downs of the global economy.
From January to late November 2015, private equity firms raised a record $96 billion for real estate, versus $85 billion for the same period in 2014, according to London-based research firm Preqin. Some $61 billion of the 2015 total is focused on U.S. investments. Repositioned properties typically yield better returns than new ones, in part because they are already built and have zoning and critical infrastructure like water lines in place. Investors can also buy these buildings at a discount if the current owner is selling short or has foreclosed.
Middle-market players like Longpoint face competition for deals in reurbanizing hot spots. New York, Philadelphia and other cities with mature centers probably have a history with firms like $225 billion megadeveloper Brookfield Asset Management. Toronto-based Brookfield is the global leader in ownership of office buildings and one of the largest holders of retail space in the U.S.; it also runs expansive industrial and multifamily real estate groups. Few U.S. assets come to market without getting at least a passing glance from the firm.
Brookfield is constantly looking to add value, whether that means converting office space it already owns into mixed-use buildings, picking up new assets or allocating to new geographies. “We had avoided investing in downtown LA for 20 years, for example, until 2006, when we recognized the urbanization trend and downtown LA’s potential and began to make significant investments there,” says Richard Clark, senior managing partner and global head of real estate.
Longpoint’s Angelini thinks there’s room for everyone. Many closed-end real estate funds launched a decade ago are nearing the end of their life cycles with properties they need to sell, he notes. With that in mind, Longpoint will be seeking distressed assets that can provide investors with smaller, niche opportunities likely to get passed over by the big firms. In a portfolio, such investments can complement exposure to large players like Brookfield.
Angelini and Clark also observe that reurbanization tends to ripple out from a city’s core, creating opportunity in areas that aren’t quite the suburbs but not quite downtown, either; think of the Bronx in relation to Manhattan. A recent study from the Federal Reserve Bank of Philadelphia shows how this ripple effect works. Over time, as people move back into urban centers, it’s possible to break up a city into areas that are gentrifying and gentrifiable, based on factors such as median income or the presence of a university or a job center. Redevelopers and investors can use these segments like a playbook to find their next move.
These patterns are familiar to Darell Schmidt, managing partner and co-founder of Denver-based Allante Properties, which has been developing real estate in its hometown for more than two decades. “Twenty years ago you didn’t really have much downtown,” Schmidt recalls. “It was mostly office space and a lot of breakfast places.”
Then Denver built a convention center and put more backing behind local professional sports teams like the Colorado Rockies, which have a stadium downtown. Those projects brought a lot of people into the city, despite its distance from the outer suburbs. “People started saying, ‘We’re spending a lot of time down here and then driving an hour or more home,’” Schmidt says. “That’s when the movement started.”
As demand grew, Denver had to adapt. Once the city voted to rezone for mixed-use spaces in 2010, reurbanization took off, Schmidt recalls. “We’re now starting to see people move here without a job because they think they can find one easily,” he says. “That’s a big indicator.”
Once reurbanization gains steam, it can have a significant upside, Brookfield’s Clark asserts: “Investors who go into reurbanization and redevelopment are doing it because they expect the yields to be greater than ground-up development or investing in other types of real estate.” It’s important to partner with a firm that understands the building stock and how to maximize it, he stresses.
Allante’s Schmidt agrees. “The key is forecasting possible dips into our models so that we have great cash flow while the market is high and still maintain acceptable levels if there’s a dip,” he says. “But those dips are temporary. The local economy is very resilient; sometimes you might just have to be patient.”
