KKR’s Head Of Real Estate For The Americas On What CRE Needs To Be Watching Right Now

While many companies are taking a wait-and-see approach to the commercial real estate market amid so much tension and change, some firms are embracing a more active approach. 

Chris Lee is the head of real estate in the Americas for global investment firm KKR, and on this week’s Walker Webcast, he told Walker & Dunlop CEO Willy Walker about the strategies the firm is using to forge ahead in the face of uncertainty. 

“We’re out looking at acquiring properties, we’re getting much more serious about putting bids in the market, and we're very active on the securities and lending side as well,” he said. “We’re putting capital to work, and we feel like it's a pretty attractive risk-reward environment we’re sitting in right now.” 

Lee said KKR isn't waiting on any particular set of investors to come back to the market. In the firm’s view, if it is pacing appropriately, there are a lot of positives to gain from buying now. He said KKR is looking at yields, which are at much higher levels than they have been, along with replacement costs, development pipelines and other factors that will present more of a green light than a red one in today’s market. 

When it comes to commercial real estate values, there are three broad things that drive valuations: fundamentals, capital flows and the macro, Lee said. KKR is also looking at who is making real estate decisions, including consumers and corporations, and what is driving them. 

He said KKR has a huge corporate credit business, and the high-yield market has come in 70 basis points to start the year. 

“When you think about what can move money out of real estate, it's because you can go get a lot of yield somewhere else, and if that kind of alternative becomes less yieldy because spreads are coming in, then you can see the capital markets on the real estate side get more constructive,” Lee said. 

Lee said he believes it is still a lender’s market where there remains a scarcity of capital since the banks have pulled back. Because of this, KKR is seeing the relative value in credit, whether it be securities or direct lending. On the equity side, the firm is seeing assets that are pricing at levels it is starting to get excited about, but the better relative value is still in credit, he said. 

Walker asked Lee his thoughts on credit in the real estate market broadly but also specifically when it comes to office assets.

This cycle is all about interest rates, Lee said. 

When rates were very low and a tremendous amount of fiscal stimulus went into the market during the pandemic, the real estate industry performed well, but it wasn’t facing oversupply, overbuilding or overleverage. In today’s more normalized or even restrictive rate environment, however, a lot of asset classes are still performing well on the fundamental side, primarily housing assets and industrial, but office is a different story, Lee said. 

“You almost have to take office as a separate sub-asset class within the broader real estate market because it's going through a secular change, as retail did over the last 15 years,” Lee said. 

The labor market has tightened significantly over the last few years, which has pushed companies to figure out how to get efficient and to give prospective employees what they want.

That has led many companies to offer hybrid models where people no longer come into the office every day. As a result, companies are examining their real estate footprints as well as their headcounts and are trying to figure out how to optimize that in an environment where they are much more focused on margins and more traditional metrics versus just growth. 

Even before the pandemic, KKR wasn't investing much in office, and the firm has invested even less since, he said. Instead, the company made a big play in logistics and owns over 45M SF in the U.S., even after selling a large portfolio for $2.2B in 2021. Lee said that the fundamentals in this asset class are still very strong, not just thanks to e-commerce but also onshoring efforts to improve supply chain resiliency and the move from getting materials to ports “just in time” to companies buying in bulk “just in case.” 

As for other asset classes, KKR makes its decisions based on the quality of cities — population growth, business activity and what makes a city attractive to residents and companies — since that is what drives real estate demand. Cultural infrastructure is key because you can’t just build sports teams, film festivals and music scenes, and those are the things that are core to cities and make them attractive to residents, Lee said. He added that for multifamily, KKR is focused on major markets and urban centers that are growing instead of secondary markets.

Walker and Lee closed their discussion by talking about women and minorities in real estate, since Lee has taken a significant leadership role at KKR in recruiting more diverse hires to the industry.

Lee said real estate was historically a family business, and as a result, many firms were passed from father to son and it left little room for others to join or even consider real estate as a career. This is why Lee has been focused on spreading awareness about the industry and the opportunities it has to offer people of all backgrounds. 

“We can broaden that funnel of people that know it exists and bring people into the industry through internships to get them exposed to it like I was,” Lee said. “I wasn't exposed [to real estate] through a family business; I was exposed through an internship at an investment bank. [If we can do more of that], then we're going to have more people that come in at the entry level and then have opportunities to grow.”

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This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.

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