It used to be when open-end real estate fund managers had queues to deal with, their clients wanted to take money back, because of poor performance. Today most open end funds have queues—totaling billions of dollars—waiting to get into these sought-after funds, which invest in core real estate concentrated in the top markets. The lumpiness of real estate and the relatively lengthy transaction process would be an advantage to advisors in the old days. They could string out sales, wait for markets to rebound, continue to earn fees, and hope their clients would change their minds when performance turned more positive. In many instances, institutional clients would back off and stay in the funds.
Today, the capital flood flowing their way ironically presents open-end fund managers with a potentially more daunting problem as prime real estate values have more than recovered since the 2008-2009 crash. The combination of low interest rates and investor -driven cap rate compression have sent prices in the coveted 24-hour cities to uncomfortable levels. It is an opportune time to sell marginal properties into the buying wave, but responsibly disposing of cats and dogs only adds to the portfolio manager challenge for meeting client commitments on the queue wanting into the funds.
Of bigger concern is whether to keep buying and even entertain “safe” development deals in the favored urban centers or venture into what amount to non-core secondary markets, which have not recovered and suffer from chronically tepid tenant demand. Any way you slice it, managers must come to terms with the obvious reality—there is just not enough core real estate to satisfy capital demand. And if they force money out or fail to sell underperforming properties, returns could be sorely compromised when the cycle turns against them in another recession.
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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.
