Principal Real Estate is a top 10 global real estate manager1 with $95.5bn in assets under management as of 30 September 2023. Providing access to capabilities across the spectrum of public and private equity and debt, our in-depth market knowledge, experienced teams, and extensive connections across all four quadrants of real estate, help us to maximise opportunities and find the best relative value on behalf of our clients.
Principal Real Estate built our reputation as a knowledgeable and trusted adviser to institutional investors on six decades of commercial real estate experience2. We adopt a consultative partnership approach with clients, providing choice and customisation to help meet any unique risk and return objective.
We believe research is key to delivering on our clients’ investment outcomes. It’s also our fundamental factor in evaluating the relative value of each investment opportunity. We base our investment decisions on a combination of bottom-up asset analysis and top-down economic and sector analyses.
With seasoned teams of investment professionals around the globe in the United States, Europe, Singapore and Australia delivering comprehensive research and market coverage, clients can benefit from our distinct 360° perspective of real estate space and capital markets.
1 Managers ranked by total worldwide real estate assets (net of leverage, including contributions committed or received, but not yet invested; REOCs are included with equity; REIT securities are excluded), as of 30 June 2023. ‘The Largest Real Estate Investment Managers’, Pensions & Investments, 9 October 2023.
2 Principal Real Estate Investors became registered with the SEC in November 1999. Activities noted prior to this date were conducted beginning with the real estate investment management area of Principal Life Insurance Company and later Principal Capital Real Estate Investors, LLC, the predecessor firm to Principal Real Estate Investors.
Strategic corporate development
Principal Real Estate will continue capitalising on the experience of our global team with an emphasis on providing strong investment performance and service to existing and new clients.
Over the next three to five years, the firm anticipates growth of real estate debt and equity assets under management, subject to investor demand as well as the availability and pricing of attractive real estate investments.
We remain committed to our core values, being highly client-centric and investment solution oriented, maintaining a fiduciary mindset, and adhering to a disciplined approach to real estate investing.
Sector forecasts
INDUSTRIAL: The industrial sector remains among those favoured by investors in 2023. Despite a retracing of demand trends that are now closer to pre-pandemic norms, vacancy rates remain healthy, and investors continue to see NOI growth in the low double-digit range based on favourable market-to-market increases when leases expire. To be sure, the sector will face increased scrutiny in the coming months. Containerised volume through most major port markets remains well below its pre-pandemic levels and a record number of projects in the supply pipeline is poised to push vacancy rates higher. Economic uncertainty will also give investors pause for concern as the likelihood of a recession in the next 12 months remains elevated.
OFFICE: The office sector remains in a phase of correction. The national vacancy rate is 18.2% according to CBRE (as of 30 June 2023) and the sector has seen 120m sqft of negative net absorption since 2020, which is the most on record of any cycle. Although asking rents have failed to show a material downward adjustment it may be a matter of time. Office utilisation remains weak despite multiple attempts by corporate occupiers to persuade workers back into the workplace, which is sure to erode occupancy further. The adjustment process for the sector, which has seen values written down by roughly 20% to date, will likely take years before new equilibrium occupancy benchmarks are established and liquidity gradually returns to the market.
RESIDENTIAL: The apartment sector continues to face headwinds as demand has reverted to pre-pandemic norms following an abnormally strong 2021, which pulled demand forward. Strong rental growth over the past two years is starting to cool and vacancy rates are increasing due to the elevated number of new units being delivered in most markets. The sector will see some relief in the next 12 to 18 months as permitting for new units – a good predictor of future supply – is down by 18% on a year-over-year basis. Vacancy rates entering this period of adjustment were near all-time lows, which has helped buffer some of the recent erosion in occupancy rates and preserve NOI growth for landlords. Capital markets have also caused investors to hit the pause button as higher interest rates and increased uncertainty have caused valuations to adjust downward in both public and private markets.
RETAIL: Seemingly against all odds, the retail sector is enjoying a renaissance of sorts. Neighbourhood and community centres are thriving by most measures. Vacancy rates have continued to decline, buoyed by continued store openings and limited bankruptcy announcements by brick-and-mortar operators. Supply has remained scant since the end of the Global Financial Crisis, which has allowed landlords to increase both occupancy and NOI following the pandemic. Though the sector has not been immune to capital market headwinds impacting other sectors, write-downs have been restrained perhaps due to more significant marks taken beginning in 2017 when large-scale bankruptcies took hold among several large commodity retailers. Recent performance notwithstanding, brick-and-mortar retailers will face challenges within the next 12 months. Retail sales growth has faded in recent months due to economic uncertainty and a decline in household savings rates, which have been the victim of both high inflation and dwindling pandemic stimulus funds.
OTHER: Single-family rental – The sector is one of a few that are experiencing an improvement in fundamentals as demand remains healthy and rent growth is in the mid-single digits. Pressures from the supply side of the market remain a concern, but the lack of financing available for new development will curb new development over the next 12 months.
Data centres – The data centre sector remains tight, with demand continuing to increase through the first half of 2023. Occupancy remains in the high 90% range and rental growth trends remain healthy as space is in short supply, which remains a potential he remain challenging to navigate, this is one of the few sectors that is continuing adwind for the sector. Although capital markets to see an increase in demand for space despite economic uncertainty.
Student housing – Tenant demand is robust and leasing for the 2023-24 school year outperformed expectations for both occupancy and rental rates. Tenant demand and rent increases may now be positioned to outperform traditional apartments over the near-term horizon.
Life sciences – Life sciences has seen both capital market and space market fundamentals pull back in 2023. Venture capital funding, a key source of growth for life science companies, has become much scarcer during the year. As a result, tenant demand has moderated considerably for lab space.
Investment principles & strategy
We offer clients a wide range of capabilities through our investment platform, and strive to deliver consistent, risk-appropriate performance and strong relative value.
Our investment strategy and research process sit at the heart of our ability to assess relative value globally, both within and across quadrants, and to deliver on investment solutions. Our investment teams rely on our analyses and insights to inform their investment decisions.
A relative value approach to investing
We make all our investment management decisions using a relative value approach. This team-based, time-tested process includes rigorous, in-depth research and focuses on maximising investment returns that match our clients’ risk tolerances and preferences. We base our investment decisions on a combination of bottom-up asset analysis and top-down economic and sector views. In a constantly evolving marketplace, innovation is critical, whether it’s sustainable investing or ‘next-generation’ investment strategies.
Comprehensive market coverage, holistic understanding
Our experience in all four quadrants of the commercial real estate market – public equity, private equity, public debt, and private debt – gives us a holistic understanding of the market. We draw not only from the focused experience of each quadrant team, but also the insights gained from cross-team collaboration.
This helps us make a comprehensive risk-adjusted return assessment, across all quadrants, and enables a tailored approach to investing client capital based on their specific risk/return objectives.
COMPLIANCE STATEMENT
© 2023 Principal Financial Services, Inc. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal Real Estate is a trade name of Principal Real Estate Investors, LLC, an affiliate of Principal Global Investors.
