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Launching Ullico’s Real Estate Equity Fund

September 28, 2023

Jim Darcey has been in the real estate equity investment field for decades. Along the way, he has seen market booms, but he has also found success while navigating turbulent economic conditions. In the wake of the COVID pandemic, the commercial real estate market has witnessed profound capital dislocations, but Darcey, a Managing Director for Ullico Investment Advisors, Inc. (“UIA”) sees a path toward profitable opportunities for wise investors with capital to deploy. In a recent Q&A, Darcey spoke about the upcoming launch of Ullico’s closed-end value-add real estate equity fund and the upside of having capital to invest in a bear market.

As we talk today, you are preparing to kick off Ullico’s real estate equity fund. How does this fund complement J for Jobs and the Ullico Infrastructure Fund (UIF)?

Most of the institutional investors we are marketing this fund to have an alternatives allocation within their overall portfolio allocation model. This “alternatives” bucket typically includes real-estate equity, real-estate debt, and infrastructure. The idea is that if we can supply all three of these products through UIA, we can be a one-stop shop and make investing simple for our investors. J for Jobs and the Ullico Infrastructure Fund are already established with a track record of success, and now we have a real estate equity product positioned to take advantage of the current distress in the market.

Our investors know Ullico and trust we will always have the back of the American labor movement. UIA’s over 400 institutional investors now have a real estate equity product they know will be managed based on their values and priorities.

J for Jobs has been around for over 45 years and the UIF is in its second decade of existence. Has that experience helped from an operational standpoint as you prepare to roll out this new product?

Absolutely. UIA has a great track record of starting funds and operating those funds successfully through multiple economic cycles. This should be meaningful when consultants are considering where to allocate capital on behalf of their clients and underwriting prospective investment managers. They have to ask “Does this manager have the institutional wherewithal, knowledge and experience to act as a fiduciary on behalf of their client?” We can check that box without any doubt, because Ullico is a trusted name in this field.

Obviously, we need to sell the investor community on our investment strategy, which I’m confident we will be able to do, but consultants and investors won’t have to spend much time thinking about UIA’s organizational competence. That is a significant advantage.

COVID Transformed many aspects of life. How did the pandemic impact the commercial real estate market?

Well, the COVID pandemic created uncharted territory for everyone and every industry. The long-term consequences will be felt for many years. Real estate wise, the pandemic impacted all sectors, but perhaps the effect on the office sector is the most notable, with the widest and longest-lasting after-effects. When the use of office space declined as people began working remotely, office landlords suffered and continue to suffer from the effects of weak demand.

But this trend also negatively impacted downtowns and suburban office nodes more holistically. Retailers and hotels dependent on office workers suffered and urban apartments experienced increased vacancies as tenants fled to the suburbs where they could find bigger units with outdoor space to accommodate the work-from-home reality.

The effects of the pandemic, specifically the continued prominence of work-from-home, are still impacting commercial real estate and threatening to have a negative impact on cities across the country. Many urban cores rely on commercial real estate taxes as a significant component of their revenue. With vacant office buildings and empty retail storefronts comes declining building values, which results in lower real estate taxes. In a worst-case scenario, this dynamic can turn into a death spiral where it becomes harder for cities starved of revenue to provide services.

Ultimately, this makes it even less attractive for businesses and residents to be in those urban cores. Thankfully, there is growing evidence that this threat is being recognized and addressed by city and business leaders.

Thanks for the detailed explanation. How have these ripple effects impacted investing in real estate?

As a result of uncertainty in commercial real estate, capital has, to a great extent, fled the market. Equity is on the sidelines. Debt is on the sidelines. Banks aren’t lending.

This has put significant pressure on landlords to figure out how to pay off or refinance loans at maturity and fund tenant improvements for prospective tenants. This lack of liquidity isn’t likely to change anytime soon. There are billions of dollars of commercial mortgages maturing over the next several years without an obvious supply of capital available to refinance or pay them off. This reality has generated significant uncertainty, all exacerbated by the substantial increases in interest rates coming out of the pandemic.

So, market disruption can also create opportunities. How will the investment strategy of this fund play into the current real estate market?

The consultants we’ve talked to agree that this dislocation of capital will generate opportunities to take a little bit of risk in the marketplace and get an outsized return. As we look to partner with perspective sellers and joint-venture partners, we’re going to be able to provide capital in situations where there is a good piece of real estate that just has a bad capital stack. We can provide the capital required to invest in tenant improvements and building upgrades, ride out this downturn and come out the other end with good real estate.

You’ve been in this business a long time. What is an important lesson you’ve learned in your career?

I think the most fundamental lesson I’ve learned is that real estate investors are really in the service business. We are serving our investors. We have to provide them with what they want and what their portfolio allocation model demands. We need to provide them with predictability, with the returns we promised, and the services they need to manage their portfolios.

At the same time, we are also serving prospective and existing tenants. We can build the most beautiful building in what we think is a Class A location, but if tenants don’t agree with us, it simply doesn’t matter. Tenants, regardless of the sector, are always going to migrate to the product that fits their needs, and the key to this business is understanding those needs. It’s never just one answer, every tenant and every sector is slightly different, but the key is to listen to the tenants, understand what they want and deliver.

This conversation has been edited and condensed for clarity.