Managing returns on the way down

Last night a bunch of former colleagues informally got together at a Grand Central watering hole to catch up. Most people seem to be doing well, maybe there was a bit more passing of business cards than normal. “It’s time to keep your head down and work hard,” someone said over the din and a beer.

Everybody expects performance to head south and there was some reminiscing about how pension fund advisors used to manage and massage returns on the way down in core real estate accounts — avoiding anything too precipitous. One manager I knew of a decade ago had a bunch of bad properties with few good prospects — somehow inevitable writedowns came in measured increments over six or seven quarters rather than all at once. The advisor apparently wanted to avoid the consultants’ “penalty box” or rouse clients’  to withdraw or stop investing. Is that happening again? NCREIF returns are falling, but we still see appreciation registering despite cap rate decompression and softening fundamentals. There were a few wink-winks among the group at the bar.