The Energy of a Balanced Portfolio: Questions and Solutions
As house owners and tenants modify to a brand new workplace surroundings reconfigured by the pandemic, KBS, one of many greatest workplace house owners properties in america, applies long-standing ideas which have been examined by means of quite a few cycles.
“The corporate takes a long-term funding strategy,” mentioned Robert Durand, govt vp of finance at KBS. Director of Industrial Property.
Within the dialogue under, Durand highlights the significance of leveraging the precise stack of capital to construct a balanced portfolio, and he shares his outlook for the workplace funding market in 2021 and past.
What are the primary components for KBS when evaluating an funding alternative at the moment?
Durand: KBS has gone by means of many market cycles and the corporate takes a long-term funding strategy. We perceive that unexpected occasions can and are prone to happen, which is why we incorporate these dangers into our investments and underwriting. Whereas nobody might have predicted the COVID-19 pandemic, our objective is to construction portfolios to restrict draw back publicity in occasions of uncertainty and this technique serves us properly at the moment. KBS’s portfolio has reached rental collections of over 95% all through the pandemic and rental exercise stays wholesome throughout the portfolio.
With this in thoughts, we proceed to judge investments with the identical standards that we use in all financial climates. We’re on the lookout for markets and properties that intently match our funding technique. This contains markets with various economies, sturdy inhabitants and employment progress, and revered academic establishments, in addition to properties that supply nice facilities, ease of strolling, and entry to public transportation. and highways.
What’s a typical KBS asset?
We deal with main Class A workplace property with a variety of creditworthy tenants. We’ve got discovered that the costs of those property have remained comparatively steady all through the pandemic. We’ve got additionally efficiently leased and renewed over 2 million sq. ft all through the pandemic, demonstrating the continued demand for top of the range workplace house in main areas.
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What’s KBS’s technique for constructing a balanced portfolio?
Durand: KBS understands the significance of getting diversification inside its portfolio. This contains geographic diversification, tenants and tenants. Most of our property are positioned in key enterprise districts or main city facilities in the perfect performing markets in america. We additionally work strategically to make sure that the tenant combine of every asset is various throughout a wide range of industries. This fashion, no asset is considerably affected by adjustments in a single tenant or inside a single business. Every of the revenue sources in our portfolio can also be diversified in that nobody property contributes greater than roughly 13% of the rental revenue of the portfolio.
Past that, now we have an asset administration staff that approaches markets and properties on a granular stage. Actual property requires a neighborhood strategy and we combine this into our funding technique. This enables us to intently research market information and have a strong understanding of market tendencies each on the prime and native stage. It additionally permits us to make necessary selections about our investments, together with acquisitions, tendencies, financings and growth and renovation alternatives, the place it contributes to our funding technique, in each property of each fund.
On the finish of 2020, KBS concluded three main refinancing operations totaling $ 527 million. What was the technique behind such an elaborate deal?
Durand: The highest three refinancing transactions we accomplished within the fourth quarter of 2020 included a $ 375 million mortgage for Accenture Tower in Chicago; a mortgage of $ 123 million for The Almaden in San Jose, Calif., and a mortgage of $ 28.7 million for the Crossroads distribution heart in Charlotte, NC For every of those transactions, KBS has drawn leveraged the industrial experience of our inner finance staff to know a fancy capital market surroundings and establish refinancing alternatives that might be advantageous for our investor shoppers. We consider these offers and their dimension present that lenders nonetheless trust in prime quality, well-located property in sturdy markets throughout the nation, even within the face of a worldwide pandemic.
The US Financial institution and Financial institution of America collectively led the refinancing of the Accenture Tower. The US financial institution served as administrative agent, with Deutsche Pfandbriefbank becoming a member of the lender group at shut and the Nationwide Financial institution of Kuwait within the first quarter of 2021. The mortgage floats above LIBOR and is structured with an preliminary time period of three years and two one-year extension choices. Twenty-five % of the mortgage dedication is revolving, giving KBS REIT III the flexibleness to lift capital as wanted and to repay the mortgage to higher handle liquidity wants.
The refinancing of Almaden with Equitable Monetary Life Insurance coverage Co. allowed KBS REIT III to extend the mortgage dimension and improve its liquidity reserves whereas profiting from the traditionally low rate of interest surroundings. This mortgage consists of an preliminary three-year fastened charge time period with two one-year variable charge extension choices.
Residents have been in a position to present a brand new mortgage to refinance the Crossroads distribution heart. The mortgage had an preliminary three-year time period with two one-year extension choices, all floating above LIBOR. This financing has been tailored to match the rental exercise of the constructing and supplies further liquidity to one in all our sovereign funds.
How does KBS strategy potential financing offers at this level within the enterprise cycle?
Durand: Whereas the workplace market fared higher than the retail and hospitality sectors final 12 months, lenders stay cautious and are very selective in granting new workplace loans. KBS firmly believes that the demand for workplace house shouldn’t be going to go away. Many information sources have reported that workplace employees are more and more bored with working from house full time and plenty of are wanting to go to an workplace the place they’ll collaborate with their staff members, be extra productive. and benefit from the assets and facilities provided within the trendy world. workplace property.
You merely can not replicate the social experiences of the workplace surroundings in a distant surroundings. It’s unimaginable to correctly prepare, mentor and nurture staff and construct a real company tradition when working from house.
General, our outlook for the workplace sector stays optimistic. We consider the sector will rebound as soon as we emerge from the pandemic and the economic system recovers. Because the variety of COVID-19 instances declines and vaccinations improve throughout the nation, we consider the workplace market is properly positioned for a strong restoration.
What steps can you are taking at the moment to cut back future dangers?
Durand: Growing diversified actual property portfolios in geographic markets and having asset managers who ceaselessly journey to those markets to stroll the streets and meet with tenants and customers supplies our groups with a singular perception into rising tendencies in every space. Whilst you could not have the ability to put together for each state of affairs, sustaining this technique helps scale back and put together for future dangers. Native information and preparedness are among the many causes our properties have carried out long run, even through the pandemic.
From a worldwide perspective, what adjustments do you count on to be non permanent for the workplace business and what is going to final?
Durand: We’re witnessing a reconfiguration of workplace house to permit social distancing, mask-wearing and sanitation protocols. Floor signage and orientation to assist keep social distancing have additionally change into widespread. We’ll possible see contactless and more and more automated techniques taking maintain in workplaces to assist stop viral transmission. The elevated deal with higher air filtration and a wholesome work surroundings is prone to survive the pandemic and sure be calls for of tenants sooner or later.
In 2020, KBS started working with Maptician, a cloud-based office administration platform that makes use of expertise and information to reconfigure workplace and neighborhood areas, to facilitate a life-conscious return to the workplace. tenant security. Applied sciences like this may assist companies make the change from distant work to work in an workplace once more and assist staff really feel secure and comfy doing so.
We’ve not seen a serious change in the way in which workplace buildings are designed or developed within the wake of COVID-19. Whereas some builders and tenants are establishing extra personal workplaces, altering the structure of their furnishings, and creating extra space between staff, we’ve not seen anybody utterly change their long-term flooring plans.
Sooner or later, how do you count on the workplace actual property funding market to carry out?
Durand: We see nice promise within the workplace actual property funding market. The present low rate of interest surroundings can also be a optimistic wind for actual property buyers who’ve the chance to refinance and benefit from these traditionally low charges. KBS was inspired by the sturdy leasing exercise we skilled from March to December 2020.
As talked about, we signed simply over 2 million sq. ft of rental transactions through the COVID-19 pandemic in new leases, renewals and expansions spanning our $ 8 billion portfolio. This demonstrates how corporations yearn to return to a bodily workplace and their dedication to that return, even within the face of a extreme international disaster. We count on this dedication to drive funding in workplaces for the rest of 2021, by means of 2022 and past.