So many real estate advisors looking for new allocations to stay afloat, so many lackluster or worse returns to find in legacy funds, so much capital looking for yield, and so much of that money going only to the top performing fund managers while the also-rans run out of time.
The real estate advisory business has never experienced such a period of survival of the fittest where past performance is determining the winners and losers in cut throat fashion. General partners and fund managers with historical top quartile returns can almost take orders and rake in capital while funds with mediocre records or worse cannot raise a dime. Newcomers do not fare much better. What do consultants have to gain by recommending untested managers to their risk-adverse pension clients when they can comfortably point to proven advisors and GPs? Nothing! And their typical clients—bureaucrat state pension officers—have everything to lose by not following the advice of consultants, who they hired to give them cover.
Institutional investors, meanwhile, continue to find comfort with the bigger, established brand names for the same reason—it's harder to be second guessed by their boards. But many mainstream allocator advisors, who used to get by with middle of the road records, now fare poorly when matched against operators, with whom they would joint venture. Why should clients pay the allocator an extra fee when hands on operators have learned to turn themselves into registered investment advisors and deal directly with the capital sources?
That's not stopping a last desperate round of sales pitches in the face of assets running off books and LPs finally getting cashed out of pre-crash funds. Various pension fund conferences are rife with various marketing types trying to buttonhole attending plan sponsors for business. Advisors continue to make pilgrimages to consultants' headquarters, praying for seals of approval, and they hustle to their existing clients hoping to be re-upped in the current fund offering. But without decent track records they likely come up empty. Now these managers start to pare back staff and expenses in what may be the next phase of slowly going out of business.
But the winning advisors have their own challenge—where to place all the money they are raising and meet client expectations? The marketplace isn't exactly cooperating. The window on developing apartments appears to already close in select gateway markets like Washington DC and Seattle. We don't exactly need a lot of office, hotel or retail projects in most places. Investors remain understandably skittish about secondary markets. For the big fundraisers, buying one off properties is a long hard, inefficient slog. They may be better off acquiring large portfolios or companies owning assets, including REITs. But they take the chance on obtaining a mixed bag of holdings or buying at what may be near market peaks. It's not an easy proposition.
Pension funds, meanwhile, intellectually understand that real estate really can only deliver mid to high single digit performance over time, but given their liabilities emotionally they want and look for higher yields. So they will go for development or higher risk strategies and take their chances.
It's all a prescription for the cycle to repeat itself—some of today's favored advisors will miss their targets, investors will be disappointed, and the consultants will revise their rosters as necessary and somehow sidestep any blame.
What a beautiful business.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
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.
