At first glance, Hines' recent purchase of a sprawling self-storage facility on the outskirts of downtown Chicago is a contrast to the gleaming office towers or luxury storefronts for which it is known.
But the industrial property underscores the global real estate firm's new investment motto: It's all about the fundamentals.
"Real estate assets tend to perform best when fundamentals matter more than sentiment," Alfonso Munk, Hines' global co-head of investment management, told CoStar News. In other words: It's not about flashy buildings; it's about underlying performance.
In the face of mounting geopolitical and economic uncertainty, the Houston-based investment manager is focusing on acquisitions targeted toward real estate uses executives are betting will be able to endure any turbulence. So far that's meant homing in on markets with population and job growth, existing demand and digital networks with a specific focus on properties such as data centers, self-storage and residential uses.
"We're operating with the expectation that volatility remains part of the environment," Munk said. "That places greater emphasis on fundamentals, conservative underwriting and markets where supply is constrained and demand is supported by long-term drivers."
Large investors such as Hines aren't backing away from dealmaking. The developer and landlord has unleashed more than $1 billion in capital over the past year-and-a-half to bolster its portfolio with those fundamentally driven deals.
A diversified focus
That has included a fully leased data center in the San Diego area; a multifamily complex in a Los Angeles exurb that's right next door to a Whole Foods-anchored shopping center; as well as a handful of self-storage facilities in high-growth markets such as Nashville in Tennessee and in Chicago.
Hines U.S. Property Partners, the developer's primary fund, is now valued at more than $3.5 billion. That has been bolstered by recent acquisitions in the living, industrial and alternative real estate sectors that Munk says are forming a new investment backbone for the firm.
"Our approach is to stay close to our assets and local teams, move deliberately where risk is well understood, and commit capital where long-term income and operating performance are expected to drive returns," the executive said. "In an environment where global uncertainty and geopolitical tensions are elevated, we're also deploying capital more selectively and often closer to home."
With a global portfolio valued at nearly $92 billion across nearly every property type, Hines' narrowed game plan is emblematic of the brewing unease beginning to take shape across the United States' capital markets. Munk and other real estate stakeholders have said that while their investment plans are unlikely to slow for the year ahead, there will be a layer of caution underpinning those commitments.
That caution will direct buyers' attention to markets where demand — generated from population, industries or geographic barriers — is strong enough to withstand any broader whipsawing and property types that are as close to a sure bet as possible.
Evolving strategy
One thing that appears to be missing from Hines' future investment strategy: office property.
It is a warier approach for Hines considering it was one of the few investment firms putting money into office property in the earlier years of the pandemic, a point when other landlords and developers were slamming hard on the brakes.
Instead, Hines over the past several years has pumped hundreds of millions of dollars into repositioning properties in some of the nation’s hardest-hit markets. The repositioning strategy was initially met with some skepticism but, with many of the country's major office markets beginning to rebuild some momentum, has since been proven to be well timed.
The firm was behind the recent completion of South Station Tower, a $1.5 billion Pelli Clarke & Partners-designed skyscraper that now soars above downtown Boston's South Station transit hub. The development, which broke ground in early 2020 but has been more than two decades in the making, is split between 680,000 square feet of premium office space and 166 Ritz-Carlton-branded condominiums on the upper 16 levels.
Just last month, the high-rise cemented an anchor deal with JPMorgan Chase that, combined with other deals Hines is close to finalizing, means the skyscraper's office space is now about 65% leased.
No longer uniform
Hines' investment focus isn't abandoning office space, Munk said, adding that the market is no longer a uniform sector. Instead, it has become increasingly bifurcated as tenants prioritize investments in top-shelf properties and the older, less desirable alternatives have continued to be plagued by myriad demand challenges.
"Quality and location matter significantly more than they did in prior cycles," he said, adding that tenants are consolidating into fewer buildings and trading up to higher-quality space.
That has meant Hines' recent capital improvement plan for office towers such as 101 California St. in downtown San Francisco or 1125 17th St. in Denver's central business district involved adding what Munk described as "hospitality-caliber services" such as tenant programming, high-end amenities and on-site experiences because "how a building is run is now as important as how it is positioned."
Those investments have since paid off with renewed leasing momentum and hefty boosts to properties' occupancy rates. What's more, with the office market's historically barren construction pipeline, landlords such as Hines are doubling down on upgrading their existing properties as a gap continues to widen between what tenants are demanding and what's actually available in any given market.
"Our view on office has evolved alongside that shift," Munk said. "We no longer treat office as a uniform sector. We continue to see opportunity in office, but it's very specific to asset quality, location and supply dynamics. We focus on assets that meet today's occupier requirements, are well located and can remain relevant over time."
And that falls right in line with the blueprint Hines is following for the year ahead across its other property types.
"Where we invest is driven by fundamentals," Munk said.