Navigating the Real Estate Landscape: Perspectives from TPG Real Estate Co-Heads, Kelvin Davis and Avi Banyasz

In our latest edition of The TPG Take, we sit down with Kelvin Davis and Avi Banyasz, Co-Heads of TPG Real Estate, who discuss the themes, trends, and dislocations driving real estate markets today.

They also discuss the role of private credit in real estate investing, and how TPG’s thematic focus and investment in its people are critical to their team’s approach. ?

On Sector Trends Driving the Real Estate Market:

Kelvin Davis: “I've been investing around real estate for 35 years. I think one of the distinctive things we see today is a higher level of differentiation between individual real estate sectors and specific geographies than we've perhaps ever seen before. I remember early in my career in the 1990s and 2000s, real estate seemed to follow a fairly consistent pattern among the different property sectors. But today, as a result of some of these population and demographic trends, both in the United States and Europe, and certain societal or behavioral changes, we're seeing real differentiation in both the demand and supply of certain real estate sectors.”

Avi Banyasz: “It's quite an interesting investing environment. You have several sectors in real estate where I think you can rely on NOI growth over the next few years. One is probably in its first derivative of growth, and that's in the data center space, which has really nothing to do with the pandemic. It has to do with artificial intelligence. And we see data center rents escalating dramatically. We see positive growth in a few other sectors, including student housing, build-to-rent, and certain types of infill light industrial assets. Now, they're not growing as fast as they did during that period of time right after the pandemic, but they're still growing.”

Kelvin Davis: “Trends towards e-commerce accelerated in the height of COVID. These trends are profound, they're fundamental, and they're ongoing. This has dramatically changed the demand for industrial space in this country and in other countries compared to what it had been just 20 years ago. And that increased demand for industrial, candidly, has been at the expense of demand for retail.”

Dislocations Driving the Market:

Kelvin Davis: “We are in a period of dislocation where values have been under pressure, and very likely will continue to be under pressure, depending on the direction of interest rates and the overall economy over the next 12 to 18 months. It's a time to be cautious and extremely deliberate, in our view, as to where we deploy the capital entrusted to us by our investors.”

Avi Banyasz: “Real estate is a part bond and a part equity. You have a hard asset – people are paying you an income stream that you should be able to rely on – but you have the equity upside associated with rising rents and growing NOI. But that bond element of real estate, the values of that have come down because interest rates have risen. There are other impacts too. For example, in the self-storage space, people moved when they worked from home, and moved a lot of their extra things into self-storage. That has reversed. High interest rates have caused very few people to sell their houses, so we see very few home sales in America, and that also hurts the self-storage business, which benefits from people needing to move a lot. So, we've had these very interesting second derivative impacts from the pandemic, not just associated with office, but in other asset classes as well.” ?

Kelvin Davis: “It's gotten more complex, but I think it's actually gotten more interesting. The environment is certainly one where I think investors have the opportunity to differentiate themselves to a greater extent, because it's not so easy. It's about using all of the tools that we have from a data standpoint, the collective experience of our talented team to figure out where we can find those opportunities – even in a time of economic uncertainty – that we think are likely to outperform as an investment.”

The Role of Private Credit in Real Estate Investing:

Kelvin Davis: “Real estate fundamentally is an income-producing asset that is generally invested or acquired on a leveraged basis. It is an asset class for which leverage is critical.

The financing markets – the capital markets and their appetite for real estate – are fundamental to our ability to do what we do, and do it well. As a result, an environment of significantly rising interest rates has a profound effect on real estate across the board. Consequently, in today's environment, we are confronting an environment of lower levels of financing liquidity than we have seen in the past.”

Avi Banyasz: “As an equity investor, credit is very expensive today. It's very hard to find deals where you can buy them at cap rates higher than your total cost of leverage, which makes this environment especially challenging. So credit is expensive for buyers, and that's certainly held down values and caused values to decline. A lot of the market is expecting interest rates to decline and for that ratio to equalize into a more normalized state. The second opportunity to talk about is investing in real estate credit.”

Kelvin Davis: “We do think the opportunities in credit are about as attractive as they've ever been because you're benefiting from an environment of significantly increased interest rates – so in effect, you're being paid more for your capital by the borrower than you were several years ago. Many of the traditional providers of that financing have retreated from the market, providing a more interesting opportunity for private credit providers.”

TPG’s Real Estate Approach:

Kelvin Davis: “For us, it's been about identifying the specific thematic areas of interest and then identifying ways in which we can invest behind those themes in scale. And that has typically taken us to operating platforms that own real estate of the particular type we're interested in, and backing management teams that are highly talented and aligned with us and our investors.”

Avi Banyasz: “We spend a lot of time focused on themes that we like investing in, and a lot of time focused on the macro, and that drives a lot of success. But that success wouldn't be full and complete if we didn't have this great culture and this phenomenal team. That really is critical to us – it’s transparent investment committees where we have open debate and teach our youngest folks on what makes interesting investments. We do a lot on mentorship and recruiting the best and most talented folks, and creating this great combination of work-life balance and investing in our people. That combination of culture and real estate investing is really what drives our performance and differentiates us.”

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