Eye on the Prize: Sixth Street’s Marcos Alvarado Shares His CRE Investment Strategy

This conversation has been edited for length and clarity. 

Commercial Observer: As the head of U.S. real estate at Sixth Street, what’s your assessment of the current capital markets landscape, and what is your strategy to take advantage of this dislocation?

Marcos Alvarado: I think it’s one of the most interesting times in my 20-plus year career to be a real estate investor. We’re still in the middle of this value reset transition, which creates a tremendous amount of opportunity. If  you read the headlines, it’s all about distress, distress, distress, and I certainly think that will come to bear. However, it’s been interesting when we think about what we’re focused on — which is super high-quality assets and super high-quality companies, where they might not have bad capital structures or distress but they can’t take advantage of growth opportunities — and can we be a capital solution to them? In the other instances, maybe they do have a bad capital structure, but they’re still a good business or asset class. 

So, it’s very much the haves and the have-nots. There are underlying businesses and asset classes that have tremendous amounts of growth, still, and so we’re focused on those business lines. Other end of the spectrum, it’s interesting to see this evolution and application. I’ll highlight office as an example: It’s a little bit like the emperor has no clothes. Everyone knew office was an interesting asset class in isolation, but COVID created this massive disruption which has highly bifurcated and segmented the asset class. And for that one, it’s a little less clear what will ultimately happen. So I think It’s a phenomenal time to have capital and it’s a phenomenal time to be a solutions provider within the real estate ecosystem. 

Tell us about Sixth Street’s history and how you differentiate yourself from the competition. 

I think we’re in a very fortunate position. We don’t have legacy book, so we can be entirely on the offensive. I call it a blessing and a curse. The blessing is we can be everything and anything to everyone , and the curse is we can be anything and everything to everyone. So my job, and the firm’s job, is to narrow that focus to be a capital solutions provider to operating businesses, operating partners, capital structures across the board.

As a company, we’re  over 600 employees and $75 billion in assets under management.  Historically, the firm was affiliated with TPG. We disaffiliated years ago and, as you can imagine, there were some constraints when we had that affiliation. As an example, growth was something we couldn’t do before, and is now a huge part of the franchise. Post-disaffiliation, real estate was a big objective for the firm, but going back in the time machine, 2021 and 2022 wasn’t the best time to put on commercial real estate risk, so the firm was extremely disciplined. We were selective in what we participated in, and as we sit here today, we think it’s a tremendous opportunity for all the reasons I alluded to before: the value reset, the way I think about capital flows and leverage are more on my side of the ledger, versus back in 2021 and 2021 when money was effectively free. It’s very hard to provide bespoke capital solutions. So it’s an extremely interesting time for us. 

And how do you differentiate yourself? 

The way we differentiate ourselves from the competitive landscape is that we take the DNA that made Sixth Street great, which is we’re partner focused, first and foremost, and solutions focused, first and foremost, to real estate owners, operators, managers, businesses across the board. The fact we don’t have legacy issues or [legacy] relationships creates a ton of white space — we can go to a cold-storage business, an industrial platform, a multifamily business, and effectively can say “We can be your one-stop capital solution for corporate capital, asset level capital, for financing capital,” so we try to think about the entire risk spectrum and where we can play.  

$75 billion is a lot of assets. 

We alluded to the $75 billion in AUM. Sixth Street Insurance has another $130 billion in AUM, which is another capital solution we can offer our partners. And so, we use the DNA and expertise of the firm, which if you go back in the time machine, we were very horizontally focused: build expertise in health care, build expertise in agriculture, build expertise in consumer. What we’re doing today is vertical growth in real estate and leveraging that core competency, which I think creates true edge both from a relationship standpoint and then from an investing standpoint. 

And do you take more of a credit or equity approach? 

It’s entirely situational. So we can own assets, own businesses, we can take true last-dollar common equity risk, and we have done that in the living space broadly. For example, we are looking at the structural shortage of housing that exists, and has existed for a while, and seems to continue to exist, and that affordability dynamic in every headline, and we ask, “How do we play that?” So what we’ve done is we acquire and title land, execute on the horizontal infrastructure and sell on lots for single family housing to homebuilders. In multifamily space, we found an interesting gap where high-quality assets and high-quality sponsors are short on capital in their capital structure, and we think the best risk adjustment is to come in with credit-like instruments — whether that’s preferred equity or mezzanine debt — so we created a platform there, and this week we’ll be closing our 14th investment in that that platform. So we think about it as just pricing risk. It’s all a blessing, there’s no curse here. It means we can do a lot of different things, where we think the risk is appropriate. 

We keep hearing credit is now getting equity-like returns. What is causing that and how much longer do you think that will last? 

It depends on where you are in the capital structure. There’s a couple things causing that, but it’s primarily a shortage of capital. When you think about credit providers, from a credit perspective, when you remove the regional banking system as a credit provider — they were the largest capital provider and took the most share pre-interest rate hike — they’re effectively out of the market, so there’s just a shortage of capital. It’s a supply-demand dynamic: If you’re a capital provided in the credit landscape it’s a great time today. 

Is there an asset class or sub-asset class you think is overvalued? What about undervalued? 

There are segments of certain markets and asset classes that feel slightly overvalued. I’ll use data centers as an example. Not all data centers and data center businesses are the same. We used to own a business called Air Trunk, which we recently sold. We think the data center space has some of the most interesting supply-demand dynamics and unit economics, especially on some of the hyper-scale developments, which is why you’ve seen a tremendous amount of capital flow into the space. What’s occurring, though, is there are a lot of transients in the space, who are not real experts or truly understand what is required to meet tenant specification, or can understand power shortage and the power dynamic. So there are a lot of people coming to the space given the capital flows into the space, and, ultimately, it will be a bad outcome (for them). But I think these truly globally scaled, differentiated businesses will ultimately take share and be the winners. Rising tides don’t raise all boats when it comes to data centers, is my point. 

So are they overvalued or undervalued? 

My point is this: It may be perceived there are segments that are overvalued, but I actually believe in the underlying growth of data centers. But there’s lots of visitors into the asset class that don’t have the scale, core competency, and who will have a tougher time executing on their strategy. 

Gotcha. And is there an asset class that is particularly overvalued right now from an investment standpoint? 

It’s just been wild to see the lack of coming to the table on office and multifamily valuations, just given the debt capital provided to that space in the last few years. I wouldn’t say it’s overvalued, because everyone knows what the value is, but the lack of a forcing function from regulators, some sort of liquidity, some sort of run that creates a mark, has been somewhat surprising to us. So I’ve been surprised to see lack of flow on the distress side, but my guess is that will come. 

In what ways do you protect yourself in a major commercial real estate investment? 

Do your work upfront. I think, first and foremost, where things have gone wrong is misunderstanding your asset class. This is Investing101, but I think it’s a good framework: understand the unit economics of the business, because ultimately commercial real estate is just mini businesses, these asset classes, that is. Understand what changes the cost curve, understand alignment and understand behavior. I know that sounds overly holistic, but that’s a great approach to any sort of investment to think about how behaviors will pan out over the future. 

Also, invest in businesses that have good economics, that have a moat. Create alignment, whether that’s with management teams through management incentive plans, or through structure with your operating partners, or through security with your credit instruments, just try and create alignment. Win-win is usually the best outcome. And when things go wrong, make sure you have the ability to have a say at the table. 

How do you see things shaking out for capital markets the rest of 2024 and into 2025?

I think you’ll see activity dramatically pick up. I feel it on the ground with the activity of our team, across the board. I can’t tell if its people starting to feel valuations have bottomed, but buyers and sellers are closer to ending that impasse, the bid-ask spread has narrowed and narrowed over the last 18 to 24 months, capital flows, redemptions have slowed down, and I’ve actually heard people are starting to get inflows on core funds. Fundraising is little easier the last 18 to 24 months, and you put all that in a mixing pot — well, if I had to be a predictor on the back half of this year, it’s that we’ll dramatically outperform the back half of last year, and 2025 will be a very active environment across the board and for Sixth Street. 

What’s the best investment advice you received in our career?

I’ve been in a very fortunate position to have worked with the smartest people over the course of my career. Create leverage for yourself, empower people, don’t try to do everything yourself. And this is a sports analogy, but don’t skate to where everyone is going. Figure out where the puck is going and get ahead of it. I’m not a hockey player, but I think that’s super important. Our sector has a herd mentality, where we sort of follow the leader, so figure out why you want to do something, get ahead of it, and have courage of your conviction.

Brian Pascus can be reached at bpascus@commercialobserver.com