When times get tough for real estate, Eric Adler keeps his confidence that the rewards will be worth the risks. “Some of my bigger, long-term convictions go through a rough short and medium term,” says the chief executive of PGIM Real Estate, part of the $1.4tn (£1.1tn) asset management arm of Prudential Financial.
Adler is talking about London, the city he has called home for more than a decade now, and the challenges it faces to remain a leading real estate investment destination. But he could equally be talking about the office market as companies realise that working from home, well, works. Or the many other areas of real estate investment being buffeted by the headwinds of the Covid-19 pandemic.
Over the course of a near-25-year career in real estate investment, US-born Adler has seen enough ups and downs to take current market conditions in his stride. Relaxed and personable in conversation, he talks frequently of long-term views of the market, of making it through crises and out the other side.
But there is realism in the rhetoric too, and Adler knows that real estate markets face difficulties as the pandemic plays out. His goal is to make sure that PGIM Real Estate can put its money to work even as those challenges arise.
Slow bleed
Every crisis is different, but the results of one can influence reactions to the next. Adler arrived at PGIM Real Estate in 2010 from Tishman Speyer, where he had been co-head for Europe. Like many of its peers, the company was emerging from the great financial crisis that had engulfed markets for the previous years.
Since that time, PGIM Real Estate has tried to learn the lessons of that crisis and to prepare for the next. That included putting in place what Adler calls an “enhanced delegation of authority” process that would centralise decision-making in the company’s global management committee “for periods that were similar to the GFC”.
“We activated that pretty quickly when it looked like Italy was going to be tough,” Adler says of the company’s reaction to the spread of Covid-19. “We were thinking very much in terms of a GFC-type challenge, where you start having a lot of liquidity problems. The ability to start managing cash in our different strategies early was a lesson learned from the GFC.”
Like many people, we’ve got quite a bit of dry powder. A lot of money had been coming into real estate pre-Covid, and a lot of it hasn’t been spent
As the pandemic spread further and governments in countries including the UK imposed lockdowns, market malaise seemed unavoidable.
“When you thought about lockdowns and business really shutting down, it felt like that was going to lead to a tremendous amount of difficulty with tenants paying rents, knock-on effects for banks and a similar outcome [to the GFC] in terms of a dramatic shift in values and some distress in the real estate market,” Adler says.
But although you can almost hear him knock on wood when he says this, the chief executive adds that this crisis has been nowhere near as dramatic as the GFC – yet.
“With hindsight, the amount of money that central banks around the world and governments have put into the economy, coupled with the health of the banks and financial system going into this, means it’s been a much smoother ride,” he adds.
“This is obviously going to have an impact on the real estate market, but it seems to be a slow bleed.”
Dry powder
Adler and his colleagues at PGIM Real Estate, which has $182bn in assets under management, are eager to spend. The chief executive shies from putting a number more precise than “billions” on the company’s cash pile. But what he will commit to is his willingness to put it to work. For now, that is proving easier said than done.
“Like many people, we’ve got quite a bit of dry powder,” he says. “A lot of money had been coming into real estate pre-Covid, and a lot of it hasn’t been spent. So there’s a lot of people who would be buyers of a lot of things, but we’re waiting for the right price points. And because there’s been less distress – there’s a lot of liquidity and the banks are healthy – pricing hasn’t moved much.”
The company’s 650-plus institutional investors are facing the same issue, Adler adds. “We’ve been raising quite a bit of money for what we call more alpha strategies, the kind of strategies that could take advantage of more distress, what we would have expected to already be happening in the markets. We’ve got a lot of money sitting on the sidelines waiting for some of these values to come down.”
Since 2018, PGIM Real Estate has been running its equity investment division and its debt financing unit, previously known as PGIM Real Estate Finance, as one business with one brand. That structural shift should prove its worth as Covid bites, Adler says.
“At some point, banks will be wanting to restructure certain deals more long term, versus ‘let’s just add a year to the maturity and see how it goes’,” he adds. “One of the bigger opportunities will be to have debt money available to be part of that capitalisation. So in many ways, the combination of the businesses has gone smoothly, and I feel that much more positioned to take advantage of the opportunities that will surely arise.”
At today’s pricing in the UK, Adler says, industrial and residential are both in favour for the company as a lender and buyer, and the chief executive expects the company to make a mark on the UK’s PRS market.
“Residential, if you’re picking the right spot, looks like it’s going to be very resilient,” he adds. “And prospects for industrial look like they’re as good as – and in some parts of logistics even better than – before Covid.”
Office optimism
And then there are offices, where Adler hopes PGIM Real Estate will make a return to buying central London assets. He speaks with EG from home – he has yet to return full-time to the company’s offices on Trafalgar Square. But don’t think that means he thinks the office is dead, as a workplace or an investment.
“Working from home is incredibly effective from a technical standpoint,” he says. “But as you hire new people, the ability to meet on a recurring basis is important, not just for the culture of the company, but as a form of apprenticeship for people. In the business we’re in, we’ve all learned a lot by watching what others do. And that’s much harder to replicate online.”
That might not chime with the statements from some big corporate bosses, who have suggested that Covid-enforced home-working means they are likely to reduce their real estate needs. Adler thinks many such proclamations are “going to be walked back” but acknowledges that the office market will be “challenged in the near and medium term”.
“I do think there is going to be an exercise by a lot of corporates to examine where they have offices,” he says. “My guess is in the near term there’s going to be a reduction.”
None of that need be a concern for office owners that have focused on developing up-to-date buildings that can weather the storm, Adler adds. After all, he argues, it isn’t as though the market hasn’t had to ride out a downturn before.
There’s a reason people congregate around big cities and that reason will remain intact, once we’ve gone through this
“Of the four main asset classes, historically, office always has been the most volatile,” Adler says. “There’s always some reason at the end of the cycle for office to have challenges, whether it was a huge supply overhang in the early 1990s or hits to the economy when there’s less need for office space. I think, by and large, companies will come back to the office as necessary.”
Where will those offices be? Adler is sceptical of predictions that workers – and their employers – will move away from city centres over the longer term.
“At some point we will get to a new normal, and the young will want to be with other young people, where there’s action, there’s life,” he says. “And there’s no better construct we’ve come up with than some of these major cities. There’s a reason people congregate around big cities and that reason will remain intact, once we’ve gone through this.”
Little wonder, then, that Adler is sticking with his long-term bet on the capital.
“I’m a big believer in London,” he says. “Right now, Brexit concerns are heightened – we’ll see where it all lands, but I think that will create some difficulties for London. The UK is grappling with Covid like a lot of other countries, and that’s having an impact on a city like London. But London still keeps a lot of attractions that I think will keep it a global hub.”
Lessons of a lifetime
Part of Adler’s optimism surely comes from experience – an understanding that cycles start, end and start again, and that a crisis isn’t insurmountable, even if it might feel that way while in the middle of it. But he also knows that younger industry professionals have not yet had the experiences that lead to that understanding. The junior members of the PGIM Real Estate team that he hopes will want to return to the office, to learn from their industry elders, will never have been through anything like this. Should they see this crisis as daunting? Yes. But they should also be excited about the opportunity it presents, he says.
“This will be a real accelerator for your career experience,” Adler says when asked what advice he has for younger team members. “When I think of the lessons that marked me most, that I carry with me to this day, they weren’t in buying a building and watching the cap rate compress or rents go up. They were always when something went wrong.
“This is a time when [junior professionals] are learning more than they realise because they’re seeing how to handle this uncertainty. They’re seeing how to contingency plan for the fact that certain asset classes, certain tenant bases are really going through distress. They’re also seeing the need for increased transparency of information to our client base.”
Those kinds of lessons can only be learned from making it through crisis, Adler says; from surviving that “rough short and medium term” that is battering so many parts of the market. And people learning those lessons as Covid rocks real estate will hold onto them.
“If they don’t have another crisis for 10 years, they will remember some of the things they went through in the early part of their career,” Adler says. “Some of the reflexes that they’re picking up now, they’ll carry with them for the rest of their lives.”
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