Jerry Claeys III, Non-executive Chairman of Heitman, visited Kellogg’s Allen Center for the November installment of the Executive Speaker Series.
On November 14th, Jerry Claeys III discussed his career in real estate and shared his perspective on the current market at the Allen Center. Mr. Claeys worked in commercial banking after receiving his Bachelors education. Despite his interest in finance, he did not find commercial banking particularly exciting and decided to pursue an MBA. A professor recommended he might find the excitement he was looking for in investment banking, and so Mr. Claeys joined White Weld & Company upon receiving his degree. It was at White Weld that Mr. Claeys got his first exposure to real estate when a senior banker asked him to write a prospectus for an equity REIT. At that time, all REITS were mortgage REITS and this was to be the first equity version of the fledgling security type.
After moving to Chicago with White Weld, Mr. Claeys pitched Neil Bluhm at JMB Realty on an investment for a project the firm was raising capital for on Nuns’ Island, a property in Montreal, Canada When Mr. Bluhm returned his call, it was not to invest in the development as Mr. Claeys had initially hoped, but to offer him a job at JMB. Thus, Mr. Claeys spent much of the 70s and 80s raising capital and investing in real estate on behalf of individual investors and for JMB’s funds. With Tax Reform looming in the 1980s, JMB turned its attention to soliciting institutional capital for pension funds, university endowments, and foundations and gradually in the 1980s real estate became an accepted asset class.
The 1990s brought much organizational change for JMB and Mr. Claeys. In 1994, JMB sold its institutional business called JMB Institutional to United Asset Management, merging the company with Heitman, which was already owned by UAM. In 1999, Heitman was restructured by management and a group of senior individuals of the firm took over management and gained 50% interest in the company. At that time, Mr. Claeys was named Chairman.
Fielding questions in a roundtable setting, Mr. Claeys touched on his concerns about interest rates and Federal Reserve action. The major concern he expressed is whether the risk free rate is accurate or if the Federal Reserve has pushed the rate too low. He offered his estimate that the real rate is at least 100 basis points higher. Thus, investors must be very careful about the yields at which they are buying property today as prices for major market commercial real estate is very expensive. Mr. Claeys went on to provide his prediction that the infamous “debt wall” would need to be refinanced with equity. In his opinion, CMBS is either small or not-material in the current lending environment. Many real estate assets are still overlevered at 70-100 percent of value.
Mr. Claeys was asked his thoughts on multifamily pricing in the current environment. He offered his view that the wind is still at our backs due to a modest supply pipeline that is unlikely to keep up with demand. This is partially true due to the fact that banks are still reluctant to provide construction financing, often only to a 50 to 60% level, thus requiring significant equity on behalf of the developer. This is true not only for multifamily properties but also for other types of income producing real estate. He believes that as long as supply is low, income producing assets should remain occupied and landlords should be able to slowly increase rents.
Continuing his thoughts on current opportunities, Mr. Claeys said that he likes “specialty properties” such as self-storage, student housing, and medical office. With less capital chasing these types of assets, he likes the opportunity provided. Mr. Claeys provided office properties as a strong contrast. While office comprises approximately one third of Heitman’s portfolio, Heitman has not been compelled to make an office investment in the past five years.
Mr. Claeys closed by offering advice to current students and recounting experience from early in his career. He was still new to the industry when he went to Atlanta to visit a development site he had helped fund. It was in the then-sprouting neighborhood of Buckhead. He saw steel rising from the ground and a project coming to fruition because of his work. It was then that he knew he had found his calling.