LaSalle’s Jason Kern Talks Investor Appetite and Why ‘Suburban’ Is Still a Dirty Word
Jason Kern is CEO of the Americas for LaSalle Investment Management, overseeing all investment activity in the Americas and a whopping $18 billion in assets under management. Prior to LaSalle, he founded and led HSBC Asia-Pac RE where he oversaw private equity raises and asset acquisitions and dispositions with more than $50 billion in transaction volume. An international jet-setter, Kern has spent more than half of his professional career overseas. He spoke with CO from LaSalle’s headquarters in Downtown Chicago and described what’s keeping him busy and what’s attracting foreign investors to the U.S. as we head into 2018.
Where did you grow up?
That’s a complicated question. When you hear all the places that I’ve lived my joke is often that I was in the witness protection program as a child. Many people assume I was in a military family but I wasn’t. My folks met at Vanderbilt University, got married after their junior year and had me right after graduation.
So, I was born in Bethlehem, Pennsylvania, moved to St. Louis for a couple of years, then Charlottesville, Virginia. My formative years were spent in Alabama before my dad was transferred to Connecticut: I started my freshman year in a public high school with a deep Southern drawl but lost it by my second week—I didn’t want to get beat up by the kids.
I went to school in upstate New York then got my first job in New York City and spent ten years on and off there. In the middle of it I spent three years in Europe and eventually was sent to Asia, where I spent seven years. I’ve spent roughly half of my professional career abroad as an expat, but now I love Chicago—I’ve been here for four years and have no intentions of leaving.
How did you get your taste for real estate?
There are two classes [of people] in our industry. Some have a proclivity for real estate because their family was in the business and others fall into it: I fell into it. I was a liberal arts major undergrad and was recruited into a program at J.P. Morgan that was specifically targeted toward liberal arts majors like me who didn’t know what they wanted to do with their lives. The idea was that we didn’t have a lot of formal business training, so they put us through a two-year program where we rotated around the [bank’s various groups] but also took business classes at night at NYU Stern School of Business.
I always thought I wanted to do M&A work but I also had a love of Europe and, lo and behold, they found a ‘special project’ for me—a phrase everyone should fear and run from in their career—and I went to Europe for a three-year assignment. I came back to New York and into the real estate investment banking group at J.P. Morgan at the time because it was a very successful franchise and I loved the people in the group. I learned very quickly to love real estate and have ever since.
What was your first big transaction?
We got hired to advise on what was at the time the largest REIT M&A deal in history. Equity Office Properties [EOP]—Sam Zell’s company, bought Cornerstone Properties [in 2000]. At a little over $3 billion in enterprise value, it was a big deal at the time. EOP at the time was cutting edge in terms of institutional, publicly-traded real estate investment trusts. That was a fun and high profile deal. I also got the chance to work with Jon Zehner, who is the reason I joined LaSalle. He was J.P. Morgan’s global head of real estate global banking at the time, out of London.
How did your time in Asia come about, and the move to HSBC?
I spent 17 years at one firm. No millennial would be able to stomach such loyalty and longevity! In 2006, around 14 years into my stint, the Asia investment banking business for J.P. Morgan was growing like gangbusters. There was a lot of emerging capital markets activity with REITS going public, and big state-owned enterprises in mainland China doing big high yield bond deals, and so they needed more Western capital markets expertise to help run that business. I’d never been to Asia in my life when I got the call asking if I’d like to move my wife and my two-year-old daughter to Hong Kong. Both my wife and I said ‘there’s no way that’s ever happening,’ but we went there for a week to try it and and my wife went from being a hurdle to the move to encouraging me to cut a deal.
It was the time that the global financial crisis hit and Asia was the best place to be geographically, because it was still active. We had layoffs like everyone else but it wasn’t nearly as moribund as the U.S. market.
As loyal as I was to J.P. Morgan, in the Asia context HSBC is really the gold standard in terms of long-term relationships with all the big institutions. I’d looked at HSBC as being a bit of a sleeping giant—specifically in the real estate space—but they didn’t have a team to advise on capital markets or M&A so I convinced them to hire me as employee number one to found that business. Within a year or two we were the busiest real estate investment banking franchise in all of Asia Pacific.
What were the biggest challenges in growing that business from scratch?
Asia is challenging from both the language and cultural barrier perspectives. It was difficult for me to simply rock up and have a one-on-one dialogue with a mainland Chinese [state-owned enterprise] chairman. That requires a team of interpreters and relationship bankers. At the time there was less sophistication in terms of capital markets which made it fun as you really could bring a lot to the table—in terms of how things were done in mature western markets.
Why did the LaSalle role appeal to you?
I had daydreamed, as many do on the investment banking side, about finding a way over to the private equity side of things. I’d never found the perfect fit. But Jon Zehner had been newly hired as the global head of capital raising at LaSalle and he was able to give me the inside scoop that there was a position opening up as CEO of the Americas. I certainly wasn’t an obvious choice—given that I had been out of the U.S. market for a number of years and had never been on the private equity side— but he saw an international perspective and that’s almost essential in our business these days seeing as we’re raising the majority of our capital across borders.
What are you most proud of?
I think I’ve been a change agent—not in the sense of changing the culture because that’s the fundamental strength of our business, but giving the next generation of talent here platforms to be able to influence the direction of the business.
In my four years here we’ve gone from a little under $12 billion of assets under management to over $18 billion today. That’s really from upping our stroke-rate in terms of acquisitions—and we’ve done that without increasing our headcount.
Has foreign investment in the U.S reached its peak?
No, not at all. If you look at the growth trajectory for domestic pension funds, they’ve been doing direct private real estate investing for many years and many of them are at 8 to 10 percent allocation. Many of the foreign capital we talk to are coming to the U.S. for the very first time or are significantly underweight here, so there’s a ton of growth potential. If you think of some of the largest sovereign wealth funds around the world, some of which have never invested in the U.S. and you run the math on a 5 to 10 percent allocation you’re talking tens of billions if not hundreds of billions of dollars that could come into our market. That could be a long-term secular impact.
How about the foreign interest in debt on U.S. properties?
Debt has been the golden child of the real estate space over the last couple of years. The allocation to nonbank debt and private equity real estate funds has grown leaps and bounds and I think it’s partly due to the paucity of bank lending, given the capital controls and regulations. CMBS is not as big as it once was so there has been a bit of a void that has been filled by the nonbank lenders. It’s a huge market with what has been a strong level of acquisition activity, and a large portion of that needs debt financing and refinancing of existing debt. I think there are a lot of foreign investors seeing that we are relatively long in the tooth in terms of the bull market—we passed 100 months now—and I think investors are seeing the U.S. debt market as a good place to be.
What’s LaSalle’s largest exposure in terms of property types?
Office has always been our largest exposure. Foreign investors tend to enter the U.S. market via office type assets in gateway cities and we’ve helped them do that. The reality is, frankly, that office has had undeniably the worst risk return of performance of the four major property types because it’s so capital-intensive. So we invest in office very heavily but we do it carefully and hopefully try to be smart about it. Retail is second to office. We have been perpetually underweight to retail—not strategically, but a large portion of retail investing is in the regional and super-regional malls and those have been very closely controlled by the public REITS and some of the largest open-end core funds. So, it’s been very difficult to get your hands on a mall and we don’t own any regional malls at the moment.
Is that a good thing, given all the scary retail headlines?
I think we’re feeling good about not being exposed to malls at the moment. As everyone will tell you, the top quartile of regional malls will continue to perform— it’s the lowest three quarters that everyone is wringing their hands about.
Are there any property types that you’re actively avoiding?
The dirtiest word in commercial real estate for years has been ‘suburban’. As someone who lives in the suburbs, I take offense to that [laughs]. But we, to a certain extent, are in line with that sentiment. Chicago is a great example of a market where overall population growth is negligible however you’d never know it here in the Downtown Chicago area. The urbanization that has been happening over the past few years, with of major corporations decamping from suburban office parks and coming Downtown, makes it a very vibrant Downtown scene. That’s driving huge demand for apartments and office and retail and it doesn’t bode well for owning suburban office properties. Of course, there are some opportunities for buying suburban office because it is such a red-headed stepchild in our business these days. We’ve done a few deals where we’ve found a unique opportunity where the risk return was compelling, but for the most part we’re avoiding suburban office.
Have you completed more dispositions or acquisitions this year?
I’m happy to say that we have kept acquisitions ahead of dispositions, certainly in my time here. There is some volatility from year to year but I’d say in the Americas we’ve been averaging $3 billion of acquisitions on a year to year basis and averaging $2 billion in dispositions. The dispositions take place because we have closed-end funds that come to a natural end of their term and we have to liquidate assets. This year we’ve probably done the lowest volume of dispositions that we’ve done in past years and it’s partly because there is a bit of additional turbulence out there in the market and that’s caused a bit more of a bid-ask spread.
What’s on the agenda for 2018?
Boring answer, but i’d say more of the same. I think we still have a lot of low hanging fruit in our business—in terms of getting on planes and meeting with international investors and helping them access this market.
Any personal resolutions?
I wasn’t able to run the Chicago marathon this year due to a stress fracture so I hope to do it next year instead. My other is to cook more. Nobody cooks at home any more, and my daughter  and I like to cook.