By Kent Elliott, Principal at RETS Associates
With continued volatility in the capital markets, investors are becoming increasingly cautious, prioritizing stability and downside protection above all.
With continued volatility in the capital markets, investors are becoming increasingly cautious, prioritizing stability and downside protection above all.
The result? Commercial real estate and private equity companies are shifting focus from acquisitions to asset management.
In fact, demand is so high for asset managers that our firm has seen executive searches in the asset management sector triple over the last year. This led us to conduct a national survey of the mid- to senior-level asset management professionals representing a portion of our 56,000-plus candidate database in the commercial real estate industry. The survey revealed a clear truth: asset managers will be commercial real estate’s most critical hiring need in 2023.
Although it might not seem obvious, our finding is good news for those looking to minimize risk and maximize returns in the current economy. Here’s how a rising emphasis on asset management is helping investors make smarter decisions amid today’s market uncertainty.
Strategic asset management leads to greater cash flow
Our current unstable financial environment has created stricter lender underwriting policies in some asset classes and may even be moving some commercial real estate equity providers to the sidelines despite ample dry powder waiting to be deployed. As a result, investors are seeking liquidity from all available sources.
Well-executed asset management can provide the cash flow needed for this liquidity. From more efficient utilities use to eliminating unnecessary spending to completing upgrades that drive occupancy and rental income, asset managers are having a measurable impact on ROI. This translates into more available capital for investors—capital that can improve the health of an asset and make for a stronger investment scenario overall.
As real estate owners lean into asset management as a means to boost returns, investors who seek out sponsors with a strategic approach to asset management are more likely to reach their investment objectives in the present landscape.
Asset managers are more directly tied to property performance
Our recent survey also revealed an overwhelming 73% of respondents noted an increased focus on their responsibilities this year—and rising accountability. Along with their existing job description, 20% of respondents are also taking on dispositions and portfolio management, and up to 15% are handling property management, market-facing acquisitions, risk management, sustainability, technology, fundraising/investor relations or other categories.
What does this all mean for investors? The profitability of a property or portfolio is growing increasingly dependent on the deft skills and business acumen of asset managers. As asset management teams take on more responsibility for investment properties, they are becoming more accountable for property performance. Therefore, it behooves investors to consider sponsors’ asset management teams as part of their due diligence before placing capital with them.
The trend of broadening asset managers’ job description gives investors an additional touchpoint for evaluating the soundness of an investment opportunity before making a financial commitment.
Manager expertise can help investors identify “hidden gem” deals
In an atmosphere of high valuations, finding investment opportunities with strong upside potential can be difficult for investors. Identifying deals backed by asset managers with a solid track record of success in a particular property type can aid investors in their search.
As might be expected, the asset managers who responded to our survey had the most experience in the four main “food groups” of commercial real estate asset classes, with 27% reporting their highest level of experience was in office, 20% in industrial, 18% in retail and 18% in multifamily. Five percent or less were highly skilled in healthcare, life science, student housing, self-storage, single-family rentals and other alternative asset classes.
Meanwhile, 29% of respondents ranked office properties as the most challenging asset type to manage, followed by retail at 25%, multifamily at 18% and healthcare at 11%.
These statistics point to two strategies that can help investors discover hidden gem deals in today’s environment: focusing on opportunities in traditional asset classes with experienced and successful asset managers and concentrating on more challenging property types supported by asset managers who are skilled in those classes.
By taking asset management teams’ expertise into account, investors can increase their potential for elevated ROI in a less stable economic climate.
Conclusion
There is abundant evidence that 2023 is the year of the asset manager. As companies utilize asset management to add value to their portfolios, commercial real estate investors who consider the connection between this sector of the industry and increased returns may be best positioned to reach their goals in the near and long term.
Posted on June 04, 2023 in Wealth Management Article
