09 Jun 2022
Login to access your documents and resources.
Expanding borrowing relationships into a greener world
Jack Gay, senior managing director and global head of debt at Nuveen, discusses how the New York-based investment management company blends its global and local expertise to strengthen borrower relationships and offerings
Nuveen Real Estate is finding that in an uncertain and rapidly changing world, two things stand out: the firm’s global research expertise and dedicated local investment teams. Their combined expertise signifies a greater ability to conduct real-time analysis as it makes equity and debt investments. And as more institutional and private investors express the need for more ESG-compliant investments, the firm has been able to tap into this same expertise – as well as a global network of professionals who are working to help write the standards in this area.
New York-based Nuveen has over $156 billion in assets under management globally, with debt comprising about $44 billion of the total. The firm is active across Europe, the US and Australia. “Over the past four or five years we have completed about $7.5 billion to $8 billion of global originations each year,” Gay tells Real Estate Capital USA. “Of course, that was down in 2020 as the pandemic hit, with about $4.5 billion of originations due to lower transaction and financing activity. But we were back up to our normal range in 2021.”
Within Nuveen’s debt business, about $6 billion of its AUM is focused on Europe, and the firm recently launched its fourth dedicated debt strategy in the region. The European launch follows the success of three Nuveen-sponsored UK-focused commingled debt strategies. In the US, the firm invests via a series of dedicated strategies and separate accounts, with Gay noting some of Nuveen’s equity strategies also have a debt component. One area that is of growing importance across its geographies, however, is green lending.
As part of this, the firm last year closed on its acquisition of Greenworks Lending, a Darien, Connecticut-based C-PACE Capital provider, as part of a longer-term strategy to bolster the environmental impact of its commercial real estate portfolio. C-PACE, or Commercial Property Assessed Clean Energy, is a state-enabled financing tool that allows commercial property owners to make sustainable upgrades to their properties.
The Nuveen Green Capital platform has closed several milestone transactions over the past year, including the first C-PACE transactions in cities like Boston and New York, and this part of the business is helping the firm to better identify and execute sustainable improvements in properties.
“We are working with Nuveen Green Capital to find ways to work collaboratively on loans and help define what is a green loan in the US,” Gay says. “That is something that has helped us in the US in terms of advancing our knowledge and work in that space.”
How important is green lending to the business, both within Nuveen and for your borrowers?
Green lending is certainly of big importance to TIAA and Nuveen. We have originated loans in Europe where we have created an internal standard for what a green loan should be. This is important because we don’t want to whitewash it and label something a green loan if it hasn’t hit a defined standard. The trickiest part, however, is that the market hasn’t yet defined a standard.
The team has executed on a number of these green loans in Europe, often situations where the money goes out to improve the ESG characteristics of a particular property. We are hoping to have a standard established in the US shortly on what we will call a green loan.
If you just take the ‘E’ piece in terms of the environmental risk you might have in a transaction, it is something we consider across the entire globe in equity, debt, or other investment sectors. We have developed models and mechanisms to evaluate environmental risk, and it is part of every investment decision. Our teams have also been trained to screen deals for potential environmental risks, including flooding, water availability and heat-related issues. If our screens reveal a risk, we work to understand it and mitigate the risk.
How are the debt markets adjusting to the current volatility?
The debt space has adjusted pricing more quickly than the equity space. That change is being driven by the rise in rates and volatility we have seen in the debt or equity markets. Pricing on certain loan types could easily be out well over 100 basis from where it was six or nine months ago. We have found that part of the increased cost of capital is driven by an interest rate increase and part of the added cost is due to an expansion of spreads.
There has been perhaps better relative value in debt, and we think now is a reasonably good time to invest in the sector. Debt returns are up substantially while underwriting standards are getting more conservative. We do have concerns about the impact of higher rates on property values – there are uncertainties out there that need to be addressed in our loan underwriting.
But with all of that said, the real estate markets are pretty well-balanced right now. You have an economy that is running very hot, and fears are over whether we can slow it down without a hard landing or deep recession. However, the good news is that most primary property sectors are well balanced in terms of their fundamentals.
What sectors and markets are performing best?
The two more talked about sectors are industrial and multifamily in terms of how strong the fundamentals have been and continue to look favorable. Rents have been increasing in both sectors at record paces and both sectors are seeing historically low vacancy rates.
I also think that as the world becomes more uncertain, certainty of execution becomes more important
Low vacancy rates exist for some types of retail as well. If you look at historical long-term averages and vacancy rates for need-based retail, shopping center retail, industrial and multifamily, they are below historical norms. We still have a pretty hot economy driving the demand side and those property sectors are well balanced overall.
Office would be the outlier of the four major food groups. It’s a sector where vacancies tend to be above their long-term average, but it is a different story if you peel it back and go a little more market by market. Certainly, some markets like Nashville or Austin have seen a tremendous amount of job growth positively affecting the office sector.
The flip side is that other traditional office markets like New York City are facing a tougher set of fundamentals, where vacancies are elevated above historical levels. Generally, the office sector is trickier than multifamily, industrial and some retail.
Are you able to use your equity portfolio to help inform your lending activity, ie, provide more of a real-time analysis on what is going on as you’re underwriting and sourcing your loans?
The scale of Nuveen Real Estate gives us the ability to have an extensive research team and expertise within each of the sectors; we have specialists on the investing side and the research side, which helps to inform decisions.
When we go through the evaluation of a credit, we get research’s opinion on the market and the equity team’s opinion to help validate what we are seeing in our underwriting versus what they are seeing in the assets we own. If we are looking at a loan on a multifamily property in, say, Miami, where we own dozens of properties, we can validate our underwriting assumptions against what we are seeing on our owned assets, which provides more real-time information.
There are some other data sources that we might use that were not available five or 10 years ago. For example, if we are looking at storage facilities, we can see where moving trucks are picking up or dropping off or look at cell phone traffic around retail nodes. Those things were not easy to track in the past. We subscribe to some of these sources that are not specific to real estate but help inform us of trends, and we put that data on top of what we are seeing in our own portfolios. The traditional research reports are also part of the picture.
What are borrowers asking for right now?
The added market uncertainty and higher cost of debt have impacted our borrowers. As debt pricing has increased, the amount of debt available to finance a project has, in some cases, dropped. However, pricing on the equity side has not necessarily adjusted quite as quickly.
We are now looking at several transactions where debt service coverage is becoming more of a constraint than in the past. One of the things borrowers are asking for is loan proceeds. As we underwrite transitional bridge loans, we can work with borrowers to see where income growth may come from to fi nd ways for the borrower to earn additional proceeds.
Looking ahead, what will the rest of the year bring?
The uncertainty of what we see in the world in terms of inflation and how the Federal Reserve will respond makes it a very opportune time to be in the debt space. A lot of the capital we deploy is floating rate, which means it has a built-in inflation hedge. So, as rates go up, our pricing goes up with rate increases and that is a really good hedge for inflation.
I also think that, as the world becomes more uncertain, the certainty of execution becomes more important to borrowers. Nuveen has been in the debt business for a long time and we have long-established relationships with borrowers and mortgage bankers who know we will be there and be able to execute on the terms we agree on. That is a bit of comfort in uncertain times.