Real Estate Investing Re-Imagined in a Post-Pandemic World

Max Swango headshot
Max Swango Invesco Header Image

Stewart:  Everybody's talking about real estate these days, and the impact of COVID-19 on the asset class. My name is Stewart Foley. I'm your host. This is the Insurance AUM Journal Podcast. And we are joined today by Max Swango of Invesco, who is one of the founding partners of Invesco's global real estate team. Max, welcome. We're very happy to have you on.

Max: Stewart, it's great to be here. Thank you for having me. 

Stewart: We are in a weird spot with regard to real estate. Now we're going to talk about two components, real estate equity first, then real estate debt. But I think there's a lot of unknowns post pandemic. Right? Can you walk us through the journey in the pandemic and kind of how things performed over that period?

Max: Sure, Stewart. Happy to do that. When you say real estate, remember, real estate, it's a big universe, and it's gotten even bigger obviously, over the three plus decades that we've been investing in the asset class. So it's not just office buildings. It's not just shopping centers. It's logistics, property warehouses, it's residential properties, it's apartments, it's single family rentals. It's life science projects. It's data centers. It's self storage. It's affordable housing. So it's a big world out there. And each of these sectors, obviously, has been impacted differently by what happened in 2020, some in a very positive way, some in a negative way. So delving into the sectors and how each sector was impacted is going to be most important to understanding where we were, what we went through, and where we're headed. 

Stewart: So I want to hear about this, and I promise you I may be asking some uninformed questions along the way, so let me apologize in advance. But can you wind the clock back maybe to the first quarter of last year and get us to today at a relatively high level?

Max: Sure. So in the first quarter of last year, pre-coronavirus, pre-pandemic, we were really, as an asset class, we were hitting on all cylinders. We had 10 years post GFC. We went through the GFC, we came out of the GFC very strong, and 10 years of very strong returns, both income and total returns. We were feeling very confident about the asset class. And one of the most important questions we got all the time from our investors was, "When does this end? And what causes the end?" And we'd been through four cycles. We had been through three cycles previously. We knew a fourth one was coming. We didn't know what was going to cause it, and it was coronavirus. And it was the black swan event that was the coronavirus.

Max: So in March of last year, coronavirus comes to the US. We recognize that it's going to affect values in a negative way. And that started to happen in the second quarter. In the second quarter overall, our portfolios were down about 5% in value. So not too bad relative to what was going on in the public markets, but pretty significant from a property level perspective. That continued in the third quarter. Values or returns were roughly flat, and those values were down, but offset by a very strong income return. And then in the fourth quarter of last year, the first quarter of this year, we returned back to positive performance, about 1.5% in each quarter. And it wasn't ... And now, with the economy coming out of lock downs, and people returning to work and returning to their lives, we've seen some very, very strong performance in the second quarter, and expect to see strong performance in the third quarter as well. That's a brief summary of what returns have looked like.

Stewart: That is, from my perspective, very helpful. When you look across these sectors, and you named a couple, from a layperson, the thing that I always go to is “Man, this has got to have a tough impact on retail.”  And it sure sounds like a lot of people are going back to the office. But I don't have a good sense of what that looks like, so how are you viewing the major real estate sectors?

Max: Right. So again, I mentioned there are a lot of different sectors that we invest in, and some have done very well. Logistics properties, obviously, the growth in eCommerce has created tremendous demand for logistics properties. So values on warehouses are very, very strong, similar with self storage. Anything involving storage has performed very well, data center investments. Right? More use of the internet and eCommerce is creating more demand for data center type storage. Put that in the category of things that have performed and continue to perform very well.

Stewart: And really, that gets into what I would refer to as a specialty sector that, go back how many years, wasn't really on the radar screen of real estate investors. Is that fair?

Max: Yes. Traditional warehouses have been in portfolios for a very long time, but you're exactly right. Self storage, data centers, fall into that specialty sector category. So what's very interesting today and what makes our asset class really exciting, one of the things that makes it really exciting is the rise of those specialty sectors. So self storage is one, data centers is one, life science, another. You can imagine the demand for life science space today, and given the aging demographics and the fear of ongoing pandemics or what the demand for that kind of space is, that's an exciting sector. So those sectors, when you talk about retail, so let's go to the negative side for a second, retail. Right?

Max: The United States still has way too much retail space. Right? And so there is millions of square footage of retail space that needs to be repurposed in the United States. But that's something that started literally decades ago. I remember 20 years ago, a mall in my neighborhood being turned into a creative office because we didn't need seven malls in North Dallas at the time. Right? We probably only need one, and we're headed in that direction. So there's still more work to do. So retail used to be 25% of an institutional investor's portfolio. Those days are over. So retail's gone from 25% to 15%, it's probably headed south of 10. So your portfolio that used to have 25 is probably going to end up with 5% retail 10 years from now. And it's been replaced by logistics and specialty sector.

Stewart: It's interesting you bring up that repurposing because we live in Northwest Chicago-land, and relatively close to us, there's a big mall with multiple, a couple anchor tenants. And it's going into condos. They're going to take that property and redevelop it. And it seems to me that makes sense. I mean, a lot of these properties are very well located or situated, but there still ... I mean, there's opportunity in that reinvention, so to speak. Right?

Max: For sure. And that's a fun opportunity, the opportunity to take some well located real estate and turn it into a more creative mixed use type project with significantly less retail. And the retail that's there is different. Right? The 30,000, the 50,000, the 100,000 square foot store isn't there anymore. But what's really important is that the most successful retailers today have recognized that they have to be excellent in both eCommerce and in bricks and mortar locations. They have to have both to be the most successful. Now they don't need 50,000 square feet or 100,000 square feet anymore. They only need 5000 or 10,000 because a large percentage of their sales are done online. But people who shop, they want to know the store. They want to be able to touch and feel. They want to do size, they want a place to return things to. So that brick and mortar location is super important. It's just a smaller footprint today than it was. 

Stewart: It's interesting you bring that up because when you think about repurposing a mall property into residential, it somewhat creates its own demand for that smaller retailer. Right? I mean, if it's a restaurant, or a dry cleaner, or nail salon, or whatever it may be, it seems like that makes sense.

Max: It does. So today, that 15% of retail that's in our portfolio today, I would put in one of two categories. It's either in that mixed use project, where people want to be. It has a retail component, a residential component, and probably sort of a creative office component. That's the place where people go for things that they cannot duplicate on the internet. Right? It's got fountains. It's got open areas for people to congregate. It's got music. It's got activities on the weekends and Friday nights. And we can fly drones through our properties and take videos of packed retail where people want to be. They're not staying home. They want to be out and congregating. And those tenants, those classic mall tenants, the Louis Vuitton, the Gucci, the Tory Burch, the Nike, that used to go into the interior enclosed malls are coming out of the malls and they're going into this open air, experiential type real estate. So the leasing activity that we've done in the last 12 months during the pandemic with those tenants has been very impressive in those experiential type shopping centers. That's one category of retails that's still successful. 

Max: The other category is the basic goods and services where people need to shop, so that's the grocery store. The number one, the number two grocery store on the market, grocery, drug, food, dry cleaner thing, that kind of center is also in a dense location, a dense residential type location is also very successful.

Stewart: When you think about office, and our clients are large asset managers, our listeners and readers are large, for the most part, insurance companies. And I've seen kind of a spectrum of back to office strategies, some on a rotating basis. That's probably the most common that I've heard just anecdotally. Where do you think we land in the office sector?

Max: Yeah. Well, now we're talking about the two most stressed sectors. Right? We touched on retail and what's going on there. Office is the second of the stressed sectors. So similar to retail, where office used to be half of an institutional investor's portfolio, those days are over. And your traditional ... Well, office is going to be 25% to 30%, rather than 50% of an overall portfolio. The jury is still out on: Will demand increase for office or not? Our sense is that we wouldn't want to own a commodity run of the mill office building today. I wouldn't want to own a B plus building in a B plus location. 

Max: What we are comfortable owning are office buildings that are suited, are where people want to work, where innovation hubs, meaning companies that are innovative, that need collaboration in order to innovate, and they need their people to be together to grow their businesses. Right? And that's what we want to own, so those creative type office buildings. So a couple of examples, we sold Midtown Manhattan back in 2015 because our team in New York City said, "The companies that are really innovating and growing don't want to be in their grandfather's office building, the 1970s, '80s, vintage, two million square foot high rise on Park Avenue. They don't want to be there." They want to be in the meat packing district. They want to be in Chelsea. They want to be down in that part of New York City. So we sold Midtown. We bought Chelsea. Right?

Max: And Google goes there, now following that, Google went there. Google's got a big ... Apple, the technology companies now are congregating down in that meat packing Chelsea location. And the market there is good. Cambridge, Massachusetts, the seaport, and on the waterfront, adjacent to downtown Boston, very healthy, life science driven sub markets, that's where we want to own offices, those kinds of sub markets. West Los Angeles, so Playa Vista, Santa Monica, coastal Southern California, those are where the companies that are innovative, innovation hubs, their goal ... Rent is not so important to those companies. What's super important to those companies and how much rent they pay, not so important. What's really important is their ability to attract and retain talent.

Stewart: I was just going to ask you that. That's so funny you say that. That is what I was going to say, is it just seems like in today's world where we're a virtual company, and it's like, "Well, I don't want to go back to my B+ office building in a B+ location." I want to be here. And if there's somebody that'll employ me so that I can keep doing what I've been doing, I'm good to go. But at the other end of the spectrum, if going into the office is a really cool experience, that's a whole different deal. And I can see how that impacts recruiting and retention. I mean, that makes total sense. Right?

Max: Exactly. We see that. We have 21 offices in 16 countries, we have Invesco real estate. And so some of our offices already check those boxes, some don't. And the ones that don't, we've got to fix it. Right? We've got to create an office environment where people want to be, and where we can attract the best talent.

Stewart: So if I can, if you'll let me, I'm going to change gears into real estate debt for a minute. Can you talk a little bit about real estate debt space and just sort of the capital structure? I mean, from my perspective, it's not a sector that I've got a deep background on. And I'm thinking that some of our audience probably does have a deep background, but if you can kind of start us at the high level, and then we'll go from there.

Max: Yeah, would love to. And let me start with you wouldn't invest in any asset class unless you expected a strong total return. Right? So total returns are super important. And when you look at the one year, the 10 year, the 20 year, the 40 year returns of what I would call basic core real estate equity investing, those returns have been plus or minus 8% total returns, so that's a baseline to think about, if you're just going to buy into a high quality real estate portfolio, expect an 8% total return, three cycles. Right? 

Max: And there's opportunities to do better than that by taking more risk, so you can invest in high return type real estate and get obviously into the teens in total return. So that's your equity investment return expectation. And we've got to produce that, or we're not going to attract any capital. Real estate debt, we've been investing in real estate debt since I started with the company in the 1980s, and we got super active during the global financial crisis, when there was an opportunity to buy distressed debt out of banks. The good news is that was a very successful strategy. Bad news is it didn't last very long. The window closed very quickly because capital came back to the market very quickly coming out of the GFC. 

Max: What our team saw coming out of 2010, 2011, was “Okay, there's not an opportunity to buy distressed debt anymore.”  But where we did see an opportunity on the real estate debt space was through making mezzanine monies, so basically making a 70% loan to value on a property, and then selling off in one way or another, the 0% to 50% piece of the capital stack and keeping that 50% to 70% of value within the capital stack. And we started doing that coming out of the GFC and have accelerated, and are one of the most active lenders now in the country doing that. To do that now, we're getting, when you look at the returns at that piece of the capital stack, we're right around an 8% total return.

Max: So what investors love about that clearly, is they're getting that 8% return that they would also get from ... that's the same total return they would get from core real estate, but they're doing it at 70% loan to value. So most of our clients that invest in real estate debt with us to get that risk return profile, they also have an equity investment in property as well, so they're getting it in a complimentary nature. Similar total return expectation limited upside on the debt side. Right? But also, limited, more limited downside because you're at 70% loan to value. 

Stewart: And I guess when I started this business on the asset management side, the environment was so different. Right? With rates where they are, and this is my view, I don't see rates going dramatically higher, and insurance companies are really in a tough spot. And I mean, it's news to no one. And it's an unusual situation because the more top line they write in premium volume, the bigger problem they've got with trying to plow money back into a really low interest rate environment. And a lot of folks seem to be looking at real estate debt as a source for that investment income. Can you talk a little bit about the stability of that income stream, and if any sort of use cases or things that you've seen, obviously you can't talk about particular clients, but just generally on the insurance side?

Max: Yeah. No, you hit on it. As I said, total return is no one's going to invest anything if they're not going to get a competitive total return. But in addition to an attractive total return that real estate offers, it also offers a very high chance to achieve an interesting income return. So on the equity side, if you're expecting an 8% total return from core real estate, your income return is typically going to be in the 3% to 5% range on the equity side. Real estate debt, if you're making a first mortgage, your income return is going to be pretty low. Right? Slight spread over what you could get in the fixed income market. When you invest in a mezzanine strategy, you sell off that bottom piece of the capital stack, that income return of  7% to 8% is very attractive for investors today. And most importantly, the question you're asking is the stability of NAV. 

Max: So, knock on wood, we have an unchanged NAV in our portfolio through the crisis. So every quarter, we mark our loans, and that NAV hasn't changed, even through the coronavirus crisis, the reduced demand for property that we saw last year, so very stable, and the income return was there every quarter.

Stewart: So a lot of insurers are making investments through SMAs. But I have a sense that there's other structures that people explore. Can you just talk about the various structures and ways that I can get into this asset class?

Max: Sure. Yeah, no, happy to. If you're a very, very large investor, you can certainly do a separate account. To appropriately diversify a separate account, you're talking minimum hundreds of millions of dollars, and probably a billion dollar plus to do, to get an appropriately diversified portfolio. So most investors need some sort of a coming of fund. They're basically two different coming of fund structures. One is a closed-in vehicle, which would have a defined life, typically a seven plus or minus year life in a closed in structure. We tend to think of closed-in structures being appropriate for very high return strategies. So you call capital over a three year investment period. You manage the assets for another two, or three, or four years, and then you sell capital in the disposition phase and return the capital to investors. That tends to work, we think, best for high return strategies.

Max: The other structure out in the market available are open ended structures. We tend to think open ended structures work better for more core and debt type investing, long-term exposure to the asset class because investors in an open ended structure, it's perpetual life. So you can dip your toe in the water and invest however much you want to start. You can add to it every quarter. You can subtract every quarter. You stay fully invested with whatever exposure you want through an open ended structure. And we like that structure more for the core, core plus, and debt type of vehicles. That works, we think really well.

Stewart: I've learned a lot. I'm always the one that learns the most on these deals. And I appreciate you covering the equity side, the debt side, and really, frankly, opening my eyes to some of the new specialty sectors that I really hadn't thought of. I mean, there's some, as you drive north out of Chicago into Wisconsin, there's several million square foot warehouses, and I really never connected the dots between seeing something like that anecdotally and on the investment portfolio side like this. So thanks so much. I just want to close with my one question that I teach, and I always have my eye out for getting successful professionals to provide a little advice to the folks who may be earlier in their career than certainly I am. So it goes like this. I want to take you back to a date I know that you remember. This is your college graduation from your undergraduate institution. 

Stewart: Now no matter what festivities may have occurred the evening before, you, Max, are bright eyed and bushy tailed in your cap and gown. Your name starts with S, so you're kind of in the back two thirds of the thing. You've been waiting for a while. You walk up the steps, you go across the stage. You get a quick photo op with the president. They hand you your diploma. The crowd is going crazy, crazy. You go down the steps. You're just relieved at the whole thing, and at the bottom of the stairs, you meet Max Swango today. What do you tell your 21 year old self?

Max: Find something you love to do, stick with it, and work hard. Work hard at it. 

Stewart: It's good advice. Isn't it? In advising students, I'm like, "Listen, you can make ... There's a lot of ways to make money. But liking what you do is really important." Right? 

Max: For sure. I've been very fortunate because real estate has been a great place to be for the last 30 plus years. And people can see it and touch it, and they live in it, and they shop there and they work there. And while that will evolve over time, it's still the case. And it's super exciting today. Real estate wouldn't be ... Well, investors need things to diversify into, especially one of the things we haven't talked about is the inflationary environment.

Stewart: Yeah. And it's really interesting from an insurer's perspective. They've got a real conundrum, where they've got liabilities that go up with inflation and a whole bunch of core bonds that don't do well in inflation, and hedging that liability risk is not easy. Every CIO that would ever listen to this I think would agree with that. So it is obvious to me that real estate's your passion and that you like it. And I really appreciate you being on, so thanks so much, Max.

Max: Stewart, same with you. I really enjoyed it.

Stewart: We appreciate hearing new ideas from you. If you have an idea for a podcast, please email us at My name is Stewart Foley, and this is the Insurance AUM Journal Podcast. 

Download PDF Reprint


Invesco is a leading independent global investment manager, dedicated to helping insurance investors achieve their financial objectives. We understand insurers have unique investment needs, from optimizing capital efficiency and yield, to managing reserves and reporting. That's why we offer specialized solutions across a broad set of asset classes and vehicles. With $1.6 trillion in total assets under management, and $51.2 billion on behalf of insurance general accounts,* we strive to understand your distinct capital requirements, accounting tax treatment, and risk factors. (*As of December 31, 2021)

Chris Marx
Head of Insurance

View our LinkedIn Page

View the contributor page

Two Peachtree Pointe 1555 Peachtree Street, N.E., Suite 1800
Atlanta, Georgia 30309

Related Articles

Register for Insurance AUM Journal

Register today to confirm your status as an institutional investor and gain access to the latest thought leadership in the industry.

  • Thought leadership delivered to your inbox
  • Confirm your status as an Institutional Investor
  • Complete CFA Continuous Professional Development requirements

By clicking submit you confirm that you qualify as an institutional investor and you consent to allow Insurance AUM to store and process the personal information submitted above.

Lost password