In retrospect, it's fascinating how sophisticated investors bought into the whole risk/return spectrum rationale for commercial real estate. Back in the 1980s, investors invested in real estate funds for income and some appreciation. If you wanted to take the risk for bigger returns, you did development deals. Then consultants got more involved and institutional investors began depending more on research based strategies. The pension funds had their asset allocation models. It started to get complicated.
Real estate investment managers began adapting to the market demand and realized they could sell more funds and potentially raise more money with different strategies. They distinguished between core, value add and opportunistic strategies. Core focused on well-leased income producing properties. Value add investments were touted as property enhancement or releasing plays. Opportunity started out as development and morphed into global investing, and in the end involved putting down little equity and a lot of mortgage debt on core properties.The value add portfolio managers started depending more on leverage to boost returns too and then core managers followed suit.
Of course, the capital and credit wave supercharged performance--even core funds produced opportunistic-like returns for a few years. Now the credit crash wipes out many opportunity funds, while erasing the heady gains and then some of core funds. Before it's all over the core-based NCREIF Index could lose 35-40% of its value from peak to trough. I guess that's what some pension consultant might call a risk adjusted return. Well at least the core investors have something left.
In the end real estate investors make money off the cycle, not the consultant mumbo jumbo. And investors need to remember their investment managers haven't figured out how to stay in business by telling clients they won't take their money because it might not be the best time to invest. Everyone took their eye off the ball.
Coming out of the debacle, smart real estate investors will make money the old fashioned way--riding the upcycle and selling before they get too greedy. Nobody has to worry about overleveraging, because there won't' be much mortgage debt available especially in the early going.
In the meantime, we can chuck the core, value add, and opportunistic stuff. It's all about buying low and selling high.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
