Madison International Realty’s Ron Dickerman On the Great Retail Pivot

One would be forgiven for associating Dickerman strictly with retail. Madison’s gargantuan global holdings include Forest City Realty Trust’s former 2.5 million-square-foot, 15-property retail portfolio that includes Atlantic Center and Atlantic Terminal Mall across from the Barclays Center in Brooklyn.

But it’s clearly not all that’s on Dickerman’s mind. Case in point: Madison International Realty recently pumped $275 million of equity into the data center space.

“All asset classes are not created equal,” said the 59-year-old founder and president. “COVID, as the great accelerator and differentiator, started to impact asset classes in different ways.”

As such, the pandemic brought about a de-emphasis on retail and commodity office for Madison, as well as the pursuit of investment opportunities in multifamily, logistics, single-family rentals, and “a whole series of specialty asset classes,” Dickerman said.

But retail is obviously not something Madison is turning its back on, either. In fact, there have been some categories that have even done well. Dickerman chatted with Commercial Observer recently about his new view on retail and office space, the state of his portfolio, how investors like himself are navigating myriad market hurdles, and why inflation may not be the worst thing in the world for real estate, despite the daily doom and gloom headlines.

This interview has been edited for clarity and length.

Commercial Observer: What’s your view on the retail sector right now?

Ronald Dickerman: I think retail is becoming an asset class that people are considering revisiting, based on how frothy other asset classes are. In the midst of COVID and what’s happening with the rising interest rates, potentially higher inflation and [a potential] recession,  there’s a little bit of cold water on retail, but we’ve been big owners of grocery-anchored retail, and [it has] been a bright spot for us. We believe that there continue to be opportunities there. I’d say that we like retail, and we own a lot of it, but right now we’re not seeing the risk-adjusted returns that make us feel comfortable.

So, retail continues to lag in attractiveness when compared with other asset types? 

Yes. I’m not sure that the growth that you can generate in retail is as attractive as other low-inflation-protected, growth-oriented asset classes — whether it’s multifamily, where you can reset the rents every year, or industrial where rents are going up really rapidly. We’ve been investing in single-family homes for rent. Single-family homes are getting very, very expensive as interest rates rise and prices increase, so the idea is to offer single-family homes on the rental market for a price that may be more approachable than buying, and you can reset the rents every year. We’ve also been [investing] in life science and cold storage, which are tech-enabled and growth-oriented. And, then, very recently we made a relatively large investment in a data center portfolio. So we think there are some interesting opportunities there.

Do you think this shift is any indicator for the future of malls or brick-and-mortar retail?

Malls are a different animal. We are not investing in malls, because we think they’re very capital-intensive and specific. We would invest in grocery-anchored retail, but we are cautious about other forms of retail.

Do you think there’s a time frame where retail might make a comeback?

It’s hard to say. It has to do with the Federal Reserve policy, rising interest rates and consumer spending patterns. You have tourism that comes into play in urban centers with Asian and Russian customers that are out of the market and will be for quite a long time. So, there are a lot of things to think about.

What are your views on the office sector right now?

There’s never been such a big differentiation between Class A and Class B office buildings. If you look at 1 Vanderbilt and what’s happening now with Hudson Yards, people thought Hudson Yards was a dinosaur and was dead in the water during COVID because “who wants to work in a big office building anymore?” But the fact of the matter is that Class A office is in demand. 1 Vanderbilt is 92 percent occupied now, and it’s directly next to Grand Central station, with very high-tech space. But, if you own a Class B office building that’s in the middle of the block, and commodity B space, you don’t have any pricing power at all to drive rents. The office market has become very differentiated.

You once said that inflation is not necessarily negative for real estate?

Yes, that was my comment. Everyone in the real estate business thinks of rates as the holy grail, and I would say that’s true. But we’re starting from such a low base, where rates have been subsidized for real estate for so long. The spreads between cap rates and interest rates still continue to be strong, even though there’s a lot of capital chasing transactions, and prices are getting thin. People are always concerned about the end of the business cycle, and I think obviously we’re in an inflationary environment now, made significantly worse by oil and what’s going on in Ukraine, which is pretty awful.

I think at this point, the Fed really needs to get in front of inflation. Some people think that they’re acting from behind and that they’ve waited too long. But the general view is that, if interest rates are rising, you have to ask for what reason, and in this case it’s because of inflation and the fact that the markets are overheated. So inflation is not necessarily bad for hard assets and commercial real estate. It means prices are rising. And real estate is one of those asset classes that has the ability to pass through price increases through CPI, leases, multifamily and hotels. You can reset the rent every day or every year. And that is a natural way to bleed through those price increases.

So, if you’re thinking about the long term, raising rates by half a point — or a point, or whatever the Fed is really contemplating doing — might have the impact of bleeding off some of the frothiness, and continue to extend the business cycle longer than going into a hard recession. If inflation continues to grow, the Federal Reserve would have no choice but to put the brakes on much harder and throw the economy into a recession, which is what happened in the late ’70s. When [Ronald] Reagan came into office, interest rates were 18 to 20 percent under Paul Volcker. So a little bit of pain now is definitely better than what could ultimately come.

So it may be counterintuitive, but you have to have the view that rising interest rates are not necessarily bad for the commercial real estate business.

Back in 2020, you called your firm’s strategy “counter cyclical.” Now, after two years, would you say the strategy has changed? What’s new with the platform?

I would say there’s a lot new with the platform.  We are an investment manager for investors around the world, and we steward their capital investment into commercial real estate. We own office buildings, retail assets, multifamily and industrial. So at the end of the day, when COVID occurred, we executed our business continuity plan just like everyone and we were Zoom-ing away from home. But it didn’t take us long to figure out it was not sustainable. The idea that we were going to have a company and we were going to be effective in doing everything I said before — working from home on a video screen was just not credible.

We came back to our office in September of 2020. It was very early on, and it was me plus my senior management team. We began testing and putting in plastic glass barriers and buying lunch for people, getting COVID tests every week. And then we invited all of our people back in March of 2021. This past summer, we moved to new office space at 300 Park Avenue; we doubled our office square-footage footprint; and we committed for 10 years. So we have been bucking the trend for sure. We’ve invested about a billion and a half dollars of equity over that period of time. And we’ve raised billions of dollars of equity from investors.

We also started realizing just before COVID, and this became an even bigger deal during COVID, that all asset classes are not created equal. COVID, as the great accelerator and differentiator, started to impact asset classes in different ways. So we hired a series of data scientists — this goes back before COVID — to look at markets, asset classes, and how they were performing. To our credit, we de-emphasized retail and what I’ll call commodity office buildings. And we began to emphasize multifamily, logistics, and then a whole series of specialty asset classes, things like single-family homes for rent, life science, cold storage, data centers. We actually even invested in a marina company, and the reason is that the boating business and leisure activity is booming, and boating is a COVID-friendly activity. So we made a $50 million investment in a marina business in Florida.

I think what’s newsworthy is that not only did we identify these trends, just about which asset classes were going to start growing more rapidly, but we actually have been finding investment opportunities to deploy capital. So we feel like we’ve refreshed our business, and our returns have never been better. And I would say that you would never wish a global pandemic on our world, but given the fact that it came, we feel like we put our time and attention to very good use.

What’s the biggest opportunity you are seeing now in the market?

I think that [general partners]-led recaps are a big one that’s fueling a lot of our growth. General partners are under a lot of pressure to retain assets, and the risk of reinvestment is high. If you own a garden-style apartment portfolio in the Sun Belt, you can go ahead and sell it and you can probably get a good price. But try putting that money back into the same asset class today. It’s very hard to do. Madison has been assisting and participating with existing sponsors in what they call GP-led recaps to retain their assets longer, to provide them with growth capital and some GP co-investments. Usually, the sponsors and the GPs have to put in more money if they want to retain their assets longer, and sometimes they need to raise money from outside sources. So we have been helping our sponsor partners in doing that.

The idea is that a lot of sponsors are under pressure to retain parts of their portfolios. They need to provide liquidity or exit strategies for existing investors, and they are looking for supportive partners. We like them because they are true secondary transactions. The properties are not for sale. The purpose is to recapitalize underlying investors, sometimes to provide growth capital. There are very few frictional costs because the assets themselves are not being transferred or traded. And you have continuity of management. You have a lot of continuity of the historical operations of the assets. So it’s a lower risk profile as we typically see it.

Madison International Realty invested in the U.K.’s largest net-zero office development in March. Is ESG a new direction for the firm?

We’re very big on ESG, diversity, equity and inclusion, and then green buildings. That was a scheme that was in a larger portfolio that we own in London. It’s called the West End of London Property Unit Trust. Europe has been a leader in ESG, and the U.S. has been a lagger. We need to raise the level of engagement and understanding of what ESG really means and how important it is to the world. I would say that the real estate business has been a little bit of a late adopter of ESG. At the end of the day, we think it’s real and we’ve been adopting it aggressively.

We hired a new ESG director. Her name is Katie Cappola, and she came from JLL and Empire State Realty Trust. We’ve always had two co-ESG officers. And we have a very aggressive ESG policy for all investments that have to adhere to our standards. We signed on to the U.N. principle of responsible investing. It’s called the UNPRI. I’ve taken the CEO pledge for diversity, equity and inclusion. So it isn’t just paying lip service. This is a real thing for us.

What’s your general takeaway on the real estate industry as a whole today, from an investment standpoint?

Real estate is going to have a second look in an inflationary environment, especially with asset classes with short duration or the ability to pass cost increases on to tenants; their hard and financial assets are getting really punished in the stock market. With what’s going on with the Dow [Jones Industrial Average] and Nasdaq right now, every day is worse than the next because a lot of these financial assets don’t have the ability to reprice and retain their value. So we think this is probably a very good time to be investing in real estate.