Industries: Real Estate

Recently, we had a chance to speak with Lou Jug, Managing Director, Head of North America for the Global Investors Group of USAA Real Estate. USAA Real Estate (USAARE) was formed in 1982 as the real estate arm of USAA, a leading financial services company serving the military and their families. While Lou resides in the East Bay, his office is at corporate headquarters in San Antonio.

Can you provide an overview of USAARE’s real estate activity in the US?

USAARE has over $20 billion of assets under management and invests in virtually all major property types. The company co-invests with US pension funds as well as foreign and domestic institutional investors. It also provides capital to development partners. Geographically, USAARE invests in North America and Europe. In Europe, investment focus is currently in logistics.

USAARE has a multi-faceted platform, including core, core-plus, value-add and opportunistic funds – but at its core, USAA is a value investor. USAA and its affiliates also offer a variety of lending programs. So, the company is truly multi-faceted with diversified property types.

How active is USAARE? Are you a current net buyer or net seller? What do you see as opportunities in the next 12 months? 

USAA remains quite active, but for the last several years the company has taken a more defensive posture as values reached peak levels. In our acquisition due diligence, we focus on replacement cost and how the asset competes in the sub-market. While our primary focus right now is on multifamily and industrial, we will, however, still consider office and retail. As a side note on retail, many investors shy away from retail today. We are open to retail, if we see the opportunity to densify and repurpose underutilized parcels into experiential retail and non-retail mixed use elements, making it more of a community.

We will also look at drug store / grocery-anchored retail, especially if there is adjacent land or excess land on which we can develop to create additional income. The same is true for office product. We are active in the area of corporate build-to-suites and seek other office opportunities in strong urban markets or in dynamic mixed-use environments. 

Notwithstanding our investment activity, we remain an active seller of assets that we believe have maximized returns for our investors and have sold more than $10 billion over the past five years. 

Where do you see the best opportunities in the next 24 months – by area of the country or property type?

We are bullish on all rental housing as a long-term investment theme, including multifamily, work force housing, single family rentals and senior housing. Demographics and economic trends are driving demand in all of these product types and USAA is increasingly focused on creating viable solutions to create quality workforce housing. 

What are the biggest risks to real estate in the next 12–24 months?

Obviously, there is the overarching concern of whether there will be a recession and, if so, how significant will it be. Generally, our view is that a mild recession remains likely over the next two years. We are also increasingly focused on rising construction costs driven by rising labor costs and the impact of tariffs. 

USAARE does commercial real estate lending. What is the profile of your “ideal” borrower?

Our ideal lending opportunity for senior financing is to a mid-size operator with a portfolio worth $30-$50 million, looking for a fixed rate loan with a term of 5 to 10 years. We generally will look at any property type in any major US market.

We also offer construction lending, stretch-first mortgage lending on value-add properties and mezzanine lending through our Square Mile affiliate. 

Do you currently own any property in the San Francisco Bay Area? What is your view of the expensive bubble we are in?

We are pleased to own office, multifamily and industrial assets in the Bay Area. We are concerned by today’s high valuations and the challenges of affordability in residential, particularly in San Francisco, but we enjoy attractive basis in our portfolio as compared to today’s replacement cost. As a result of our concerns over current values and to reduce our last dollar exposure, we have recently been far more active in our debt strategies.

Any final thoughts?

It is now our view that interest rates will remain low for the short and medium term. The industry has exercised a greater level of caution and discipline than in previous cycles. As a result, supply and demand remain generally in balance and leverage has been constrained. So, we do not anticipate another series of events similar to 2007-2008. 

Finally, the diversity of our strategies enables us to remain nimble and, since we invest a significant amount of our capital in all strategies, we approach every investment from the perspective of an investor.

Greg Dresdow is a Senior Tax Advisor in the Real Estate Industry Group at BPM. Contact Greg at [email protected] or call 925-296-1088. 

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