Sales’ Force: Nuveen’s Mike Sales on Int’l Investment and Slowing Global Growth

“I’m 800 yards from where I was born—opposite St. Paul’s Cathedral—and I can see the window [of the delivery room],” Sales told Commercial Observer from Nuveen’s London outpost. “I think in English that makes me a Cockney because I was born under the sound of Bow Bells.” (It’s a British thing.)

His taste for international competition spills over into his role as the head of Nuveen Real Estate, the London-based global real estate investment arm of TIAA that carries a massive $125 billion in assets under management across all products and sectors, except hospitality.

Nuveen stands with the likes of shops such as Brookfield Asset Management, Blackstone, PGIM, Hines and UBS as one of the largest real estate investment managers in the world, according to a 2018 ranking by Institutional Real Estate. The firm underwent a rebranding effort at the beginning of this year, changing its name from the original TH Real Estate, with Sales maintaining his title as chief executive. (TH Real Estate started around five years ago as a joint venture between Henderson Global Investors, where Sales had been for 18 years, and TIAA, before TIAA acquired Henderson’s minority stake in 2015 and the shop was rebranded as Nuveen Real Estate at the beginning of this year—TIAA acquired Nuveen in 2014.)

In February, the firm launched its most recent offering, closing on the first round of investment for its $550 million U.S. cities multifamily fund that will target millennials and middle-income households that are renters “by necessity rather than choice.”

Last September, the firm teamed with an Australian pension fund to provide a $372 million development facility for the planned 370,500-square-foot mixed-use One Crown Place in London. Just a few months prior, the firm bought the 1-million-square-foot Whirlpool distribution center in Joliet, Ill. for $72 million from J.P. Morgan Chase, which marked the largest deal in three years for a non-refrigerated industrial property in Chicago.

Sales chatted with CO last week to discuss his business, the state of global real estate markets, challenges facing the industry and which team should be considered the most respected football club in Britain.

Commercial Observer: You and your kids are rabid Crystal Palace supporters?

Mike Sales: Oh yes. I went to Liverpool for their recent match against Crystal Palace and going to Liverpool’s home ground is really an experience. It was the first time I had been there, living down south. If you’re ever in the U.K., we’ll have to get tickets to a Premier League match at Crystal Palace. That’s a proper football club, not this Liverpool and Manchester United rubbish.

How did you find your way into the sphere of commercial real estate?

Early on in my career in business, I realized that I wanted to specialize in something. The then-chief executive of Hammerson, which is a U.K.-listed real estate investment trust, was a patient of my father’s. So, continuing that link, I went to visit him and became immediately interested in real estate, so I did a master’s in real estate [land management] at Reading University. My first job was at Morgan, Grenfell & Co., a famous U.K. investment bank that was acquired by Deutsche Bank [in 1989], and then I made the move to Henderson [Global Investors] [in 1994] to become a fund manager.

When I joined the Henderson business as it was then, it had around $400 million of assets under management, running pension funds, corporate pension funds, and over the next six years we expanded that business in Europe. At the turn of the millennium, Henderson was acquired by AMP, a big Australian insurer—that suddenly resulted in us looking after an additional $4 billion of real estate assets, which, combined with what we had, led us to become a major player in the U.K. And then in the early 2000s the life funds we were looking after were effectively in a runoff, and what we were able to do was to launch a whole series of products with some of those life fund assets on the basis that they didn’t want to sell out of those assets immediately but wanted to sell down over time. We were able to launch a sector series in the U.K., in the retail, office and industrial markets, which we attracted third-party capital to [and] we were able to redeem the life funds over time. So, it was a huge platform for us to [use to] grow the business up until the [financial crisis].

And what happened from the crisis onward?

From [the crisis] perspective, we weathered that storm pretty well in terms of our assets under management [AUM] not going down because we continued to grow. But after, it left us thinking about what the future held for a medium-sized investment real estate manager. We made the decision to go and look for a capital partner, which took us to the U.S. We scoured the globe but found someone who we were very culturally aligned with in TIAA and we brought those businesses together five years ago. They have a very big U.S. business and we have a pure third-party Europe and Asia Pacific business, so it was really a match made in heaven. The most important thing is TIAA runs a sizable amount of money for their own general account, so we were able to align ourselves with our third-party investors by investing right alongside them. It was a trend that we saw continuing back in 2011 to 2012.

How have the last several years been since the merger?

We’ve grown the AUM from $67 billion to over $120 billion and now on the direct real estate side, we have just under $7 billion in real estate securities as well that’s run separate to the direct real estate assets. So, we’ve had great growth, and it’s been epitomized really by our mission. It is to set the benchmark for, obviously, investment excellence and client experience, but the last two things are the two most important things we’ve been focusing on and that’s geographical reach and sector expertise, setting our business up along organizational lines to where we have really deep-rooted experience across all commercial real estate sectors.

What drove the recent name change from the original TH Real Estate to Nuveen Real Estate?

As we became part of Nuveen, we definitely felt that there was some benefit to be had from having one brand and the simplicity and clarity of message, leveraging the scale of the Nuveen platform in the U.S. We’ve seen a huge step up in quality of marketing literature, access to a new distribution channels through the Nuveen retail sales force and cross-selling on the institutional side because Nuveen had a relatively large real assets business in the farmland, timber and infrastructure side, and in private debt.

You launched Nuveen’s first U.S. debt fund last year.

It’s the third and final strand of our product revolution [outside of our two sets of global cities funds we’ve established over the last few years]. We have a huge amount of debt we run within our business—over $30 billion. Our first U.S. debt fund is a core-plus fund. We’ve also got around $650 million in equity raised, and we’re also currently capital raising for our second U.K. fund with a similar type of philosophy. It’s not stretch senior [loans], so we’re talking about returns in the region of anywhere from 6 to 9 percent. Not aggressive, not really mezzanine, but designed to deliver income returns during a period where we think debt returns will probably, for the next two or three years, mirror equity returns. In the last 12 months, we’ve set up an Australia debt platform, we’ve made our first debt investment in the U.S. for one of our TIAA accounts and we’re looking to build on that in the third-party space as well. The majority [of our $33 billion in debt is] in the U.S. and we have over $3 billion in U.K. and just under $500 million in Asia Pacific.

What’s your thinking around the state of  global debt markets and the air of uncertainty with rates?

I think the Fed has given the message that economic growth is slowing and therefore the interest rate hikes expected by all the commentators are not going to materialize. I think what you’ve seen is spreads have come in and it’s become a very competitive market. The best example may be here in Europe, where the cost of debt, particularly in Germany, is so accretive to income return. It’s incredibly attractive even for those people who believe the market is late cycle. If you’re borrowing at just around 1 percent, in Germany, that’s an example of going out and buying well-leased real estate at 4 percent. It’s just incredibly cash flow positive.

Now, in the U.S., there’s a squeezing of rates because there’s such a lot of competition in the market for transactions. Will that slow down as result of equity markets slowing down? Possibly. But I think there’s a whole lot of refinancing that always needs to take place. I don’t see that competition deteriorating too much. On the whole, I look at the debt market as being a really good place to be for the next few years, but certainly not at the risky end—more on the stretch senior end, because it delivers an income return close to what we would expect to get from the equity markets over the next two to three years.

How would you best characterize Nuveen’s place in today’s commercial real estate market?

[We have] 25 offices globally. If you look at retail, we have $34 billion under management globally, office $25 billion, industrial close to $10 billion, housing close to $13 billion and debt over $33 billion. We’re big in all of these key sectors. Scale isn’t everything, but what it does bring is the expertise. We have over 370 existing clients and I think I’m right in saying 11 of the top 15 global investors invest with us. And eight of those invest in more than one strategy.

What’s different about our platform is that ability to tap the retail markets through the Nuveen retail sales force. I think another differentiator for us is we’re not frightened to team up with best-in-class operators where we think we can deliver for our clients. So, you look at some of the relationships that we have globally, with PCCP in the debt fund space; there’s Taconic in New York; McArthurGlen in the European outlet market; WeWork in London and Citizen housing on the multifamily side. There’s RDM on the China outlet mall side and then a whole raft of retail operators like Brookfield and Simon [Property Group] and Hammerson and Westfield. We own assets alongside, or with, all of these people.

With the firm’s heavy presence in retail, what’s the thinking there given the state of that space and where we are in the cycle?

Undoubtedly there’s a nervousness about what the future of retail looks like. We still like retail. We’ve been invested in the two types of retail that we think have a long-term future, i.e. the top-end high-quality dominant malls and the local grocery-anchored centers, for instance; that’s where the bulk of our portfolio is invested. And we’re trying to make them far more relevant for today’s consumer. We think those definitely have a future.

How about other asset classes?

The logistics market goes from strength to strength, but we’re probably getting to a point where yield compression is probably going to end at some point. But what’s positive about that sector is you can expect net operating income (NOI) growth, because the demand is still there, particularly on the last mile, [and] the effort to get the goods to the customers. We think there’s still plenty of growth on the rental side in the logistics sector. In multifamily we see it being robust; it’s an asset that we continue to like and invest in heavily. The office sector, I think, is all about making sure that what you’re providing tenants, and what you’re competing over with your peers in the market, is to provide the type of space that the tenants of the future want.

How has Brexit impacted the U.K.’s commercial real estate demand? You’d assume it’d be a positive for the market.

The U.K. has held up relatively well since the announcement of Brexit two and a half years ago. I think there’s still a big appetite for real estate. I think what’s happened is you’ve seen that yield pricing compression. So where can you add value? What are the sectors that are going to be with us when that yield compression ends? Where is rental growth to be found? We think that’s going be more demographic driven and therefore impacting things like multifamily, student housing, self storage, senior living and these kinds of investments where there’s a huge untapped demographic demand.

A Brexit vote was expected last week but was postponed. What are your thoughts on the process and the political jockeying?

There, that was a big delay, yeah. It’s a really interesting one, Brexit, because no one wants a no-deal; no one is planning for a no-deal. Undoubtedly the economy has begun to slow down, but if that means interest rates stay very low, then you look at property yields, and you compare the U.K. to places like Berlin and Paris, and you look at London versus Europe as a currency—it’s an interesting capital play. The big question post-Brexit is what happens to the occupied markets; that’s the bit that I think people are keeping an eye on. We’ve not really seen a fall out at all from Brexit in terms of Central London, other than uncertainty. Now what you’re seeing is that people are just sitting, waiting for the Brexit result. Because why would you do anything like that if you’re arguably six weeks away from knowing what’s actually going to happen.

How significant are the ripples that Brexit has created throughout the rest of Europe—other major cities and secondary markets?

That’s a hard one, because it’s hard to say what negative impact Brexit had other than looking forward. Is Brexit good for Europe? Is it good for the U.K.? Opinion is very divided on that. Everyone thinks the U.K. is going to suffer from Brexit, and then there’s a school of thought that Europe might suffer from it, in terms of the contagion that it might lead to with Italy and others potentially following suit. But I’m no politician. It’s forgotten sometimes that you’re divorcing yourself from 27 countries. I mean, that kind of withdrawal agreement is not an easy thing to negotiate. Our view is that we will reach a deal of some sort and the deadline may be extended for a period of time, but it can’t be extended really beyond May because then you’ve got the European elections and it would be quite ironic if we voted for European members of Parliament in May while at the same time opting to leave. I’m guessing something will have to happen by then.

What do you think may be one of the biggest things to come out of this global slowdown?

The biggest factor is technology. You look at the structural shift from retail to logistics as a classic example. And you look at the office market and the emergence of the coworking experience. So I think the biggest factor and the thing that keeps us all awake at night is how technology might change the way people use and access real estate. That’s what we’ve got to stay ahead of.