Walker & Dunlop Examines Shifting Dynamics in the Global Commercial Real Estate Market

Well, Willie, it's always great to be with you and thanks for having me back. I think the last time we did this was three and a half years ago. Not much has changed, right?

Yeah. I mean, the way we describe it here at KKR, and I'll quote my partner Henry McVey, is we think about it as a regime change. And if you think about what has happened over the past kind of the post-GFC world, we all lived in a world where everyone was worried about deflation after the GFC. Most of the central banks had a mandate of only focus on growth and re-employing the economy, and you had central banks that were just doing incredible amounts of monetary stimulus, and you had that coming with fiscal stimulus at the same time. So for about a 10-year period up to the pandemic, you had these unusually low rates. You had these developed economies around the world healing, and you also had this very benign kind of globalization framework where you had kind of free flowing of capital, labor. You didn't have any of these, you kind of geopolitical, some of the same geopolitical issues. Fast forward to today, you've got government balance sheets that feel very fully levered. You've got central banks that are much more worried about inflation as part of their dual mandate than they are on employment. And then you have really complicated geopolitical backdrop, and then you have an economy that's really driven by AI capital spending around digitization, and it's just a very different environment that impacts real estate in a bunch of different ways. So I think we're in a very different environment today than we were three and a half years ago when we spoke, but it almost feels like a completely different world than where we were maybe seven or eight years ago.

I would say we're taking a pretty balanced approach right now. We're deploying in both. And we are very active, maybe I'll start on the credit side. We're very active as a lender. We're very active buying securities through our insurance company. And across everything we're doing in lending, it's across all of our different pools of capital. We have bank capital. We have insurance capital, fixed and floating. And then we have more opportunistic lending capital. We're very active in all of those markets and we're in all those asset classes, but we're also active across the US and Europe where we're seeing a lot of opportunities. It's more competitive than it was a few years ago. So, you know, we have to pick our spots, but there are just a tremendous amount of opportunity to lend given you have really a maturity wall that we're hitting. A lot of the 5-year loans from 2021 and 22, they're hitting their 5-year maturity. So there's a lot of need for capital on the refinancing side, and then on the growth side, we're seeing a lot of demand for data center or development capital. We're participating there also, picking our spots. So maybe starting there on the credit side, we're very active. I see on the equity side where we're taking the last dollar of risk, we're deploying, but we're very selective. And when we think about our investment strategy, we are looking for demand trends that we think are attractive long term. And so we start with what are the consumer trends, what are the corporate strategy trends, what are the demographic trends that we feel very comfortable from a demand perspective. And then we of course overlay that with more of the micro around replacement cost and locations, and then bring in, you know, where do we have dedicated operating capability to really pick where we want to deploy capital. But I'd say we're deploying on the equity side, but it's more selective and we're more opportunistic in terms of how we think about deploying there. It's not a back up the truck type of market given where I started the conversation.

Yeah, we think it creates a tremendous amount of opportunity for us. I'd say on the lending side, there are a lot of capital structures that need to be recapitalized. They were set in an environment, and the journal article you referenced talked about just these assets weren't necessarily overlevered at the time of origination 5 years ago, but they feel overlevered today because of the cost of debt service having gone up so much over that period of time and you...

Yeah. Yeah. And then the values dropping as well. So you have capital that needs to come in. The asset either needs to get sold, that creates a lending opportunity and a buying opportunity for us. So the asset needs to be refinanced and recapitalized, which creates a lending opportunity for us as well. So our pipeline on the lending side has never been, you know, this robust, and we're seeing a lot of multifamily lending opportunities. The nice thing is where asset prices are today, and then we're lending at a discount to, you know, the appraised value or the new value where someone's coming in resetting. We feel like the basis that we're lending at is very attractive. If we think about it on a yield basis, debt yield, or we think about it relative to replacement costs, it does feel like a good entry point as a lender when we're looking at these opportunities.

Yeah, I mean, we feel good about our existing book, especially as it relates to multifamily. We were never a, you know, what I'd call a high octane lender lending at, you know, 75, 80%. So even in a world where we've seen, you know, prices come down, we feel pretty well margined versus, you know, today's prices. And in some of these markets, even the ones we've seen supply, you have seen, you know, some growth, but it's been offset by movements in cap rates. I say the other thing is we are very sponsor driven in our lending business. So a lot of what we do is we always say we're not lending to collateral, we're lending to sponsors, we're lending to human beings who have wherewithal, etc. And I think that's been an important north star for us because, you know, in our multifamily book, we've lent to very high quality sponsors that have strong, you know, businesses, have reputations that they care about, and it's actually led to, you know, very few credit situations from a lending perspective in our existing multifamily book. It's a market where there's definitely capital that needs to come in. And I think the areas that we've seen the most issues have unfortunately been in the, you know, what we call more like B properties and where you're seeing more stress in the overall economy in that kind of middle income consumer that's more stretched by what's happening with gas prices, etc., and is more susceptible to the issues related to inflation. And so we've had less of those issues in our book.

Well, yeah, that was very good. You know, everything we've done, maybe better than most of the people on our team. So I would say it's been kind of different things that have driven those different deal profiles. When we bought the assets, you know, coming out of the liquidation of that fund that was in 2024, and we were able to step in and buy those assets at a very deep discount to what we thought replacement cost was at the time, and these were newly developed assets, and so we thought that we bought those very well. We have, you know, kind of watched those assets perform nicely since we acquired them, but that was in a strategy that we could hold those assets longer, and we had the right cost of capital when that transaction was available to us in our opportunistic strategy. The other assets you mentioned in Seattle, in the Bay Area, in Dallas are in our most recent opportunistic fund. A lot of that is being driven by where we're seeing strong job growth. And so ultimately, we think of multifamily, really shelter in general, is a resilient asset class. You think about why real estate exists. You need shelter, you know, ways for people to interact with goods and services, gathering, and then of course, you know, data. That's most of what real estate exists for. But on the shelter side, we've seen construction starts drop pretty dramatically. And the markets you just mentioned are markets that we think are benefiting in this new economy that we're living in. Of course, the Bay Area is benefiting from AI and that, you know, job creation, and that, you know, kind of wealth creation is also a very expensive place to, you know, to buy single family homes. So the rent to own math is very attractive there. And then the Puget Sound, that's also an area that's also benefiting from a lot of the technology, you know, GDP activity that we're seeing in the country. And then Dallas has been a market that's just, you know, really, you've seen a tremendous amount of job growth over the last 20 years, but even over the last five or six post-pandemic, Dallas has been one of the top places where large companies are bringing talent. So it always starts with where are those demand trends, and then of course we do our work on the individual asset to make sure that it's the right asset in the right corner, right tenant mix, but we really start at the 30,000 foot view on the demand side.

Yeah, I think the one thing you're leaving out is senior housing. Actually, our highest conviction area over the past three years has been in senior housing. It's the area that we have deployed over a billion dollars of equity across our strategies into senior housing, and that has been an area that we think has very strong long-term demand trends. It's been across independent living and full continuum. And starting in 2023, we started deploying heavily coming out of the pandemic. And so that's actually been a great, that's played out very well for us in our funds. And we're seeing very strong growth, very strong demand. And we're really just at the beginning of some of those demographic tailwinds when you think about that 80-year-old plus cohort that is reaching that point in their life cycle where they're a consumer of senior housing. So I would say senior housing has been our largest area across the entire business. But specifically in shelter, we've done some student housing as well during the last, over the last few years. You mentioned multifamily, you mentioned industrial, and then we've lent on office. We haven't bought anything on the office side, but we think of office as an investable asset class for sure, but you just have to realize it's a bifurcated market now. There's certain types of high-quality office assets that attract premium rent-paying tenants, and then there's more commoditized office in a lot of markets that has really struggled to differentiate and has very different cash flow, valuation characteristics and liquidity profiles as well. So we think about that as two different, basically two different asset classes within the office space.

No, it's 100% fair, and we actually think of that as our biggest differentiator as a real estate investor is the access we have to tenants. I mean, a lot of us in real estate, we spend a lot of time talking to each other, talking to other landlords, talking to other liquidity providers to landlords. If you think about what we have at KKR, we have an unbelievable access to the tenant, especially on the corporate side. We own a couple hundred companies in the US, employs hundreds of thousands of people that touch tens of millions of consumers. And so when we talk about consumer trends, we talk about corporate strategy trends. Those are, we're watching those every day. Those 200 companies I mentioned, that's 200 boardrooms that are making logistics decisions. They're making hiring decisions. They're making office decisions. They're making retailing decisions. And that information flows, and we can develop themes around what we're seeing and what are the trends that are impacting the overall economy. And then how does that impact the built environment? And then to your point on something like senior housing, we're comfortable investing in asset classes that have a little bit more operational complexity. That's a little bit more of our private equity DNA. And so we think of senior housing as a hybrid. It's a real estate asset class. It's housing, but it's also you're delivering care, you're running an operating business, you're responsible for people's loved ones. We're more comfortable in those types of environments. And we spend a lot of time across our business, our public affairs team, and other parts of the firm making sure that we're delivering that service, which is what it is, in the best way possible.

Yeah, we dabble in hospitality, but the same thing that you mentioned on the revenue side, it happens on the cost side. And so a lot of, you know, you can ask people who operate in New York, RevPAR is at all-time highs, but I'm not sure, you know, NOI is at all-time highs in this market. And so it's a more nuanced asset class. And then there's also, we think about downside profile, upside profile, we think of a dispersion of returns. We have traditionally not been as aggressive a hospitality investor because at the end of the day, where the marginal buyer prices that, it's, you know, the return profile is inside of where we think it should be generally risk-adjusted for that type of risk. Then you also, you know, you're talking about hotels have a lot of capex associated with them. You have to keep them refreshed. There's always capex above and beyond your FF&E reserve. So it's not an area that we have played as much. There's some people who are, you know, great at it and have, you know, made a living out of it, but we think these other asset classes tend to play to our strengths as a firm much more, where we can get these themes right. We can operate them well and have a liquidity profile and ability to ride through cycles that we tend to like when we're making equity investments.