NAREIM 2014/15: The Year in Review
(to read the complete 2014/15 NAREIM Yearbook, click here.)
“Where Do We Come From? What Are We? Where Are We Going?”
— Paul G Gauguin
Gauguin titled his 1897 painting that now hangs at the Museum of Fine Arts in Boston with those three provocative questions. The painting expressed them through images of native Tahitian people engaged in their day-to-day lives. In the foreground, people are shown in warm tropical colors, while in the background, a mysterious landscape rendered in blue seems to present a world beyond that we do not yet know or understand.
The demands of today’s fast-paced global economy dominates our attention, but at the same time, Gauguin’s questions linger over us. New technology, global shifts of power, and changing demographics are transforming our world in ways we cannot yet fully understand or predict. This certainly poses a challenge for commercial real estate. Investments made today hinge on the behavior of people and markets five to ten years in the future – a part of the picture as mysterious as the blue landscape painted over a hundred years ago.
The real estate investment management industry as we know it today has really only been around for a little more than two decades. It is a remarkably effective tool to put the savings of millions of people to work in the real estate that surrounds and supports our global economy. Trillions of dollars in real estate assets under management and remarkable returns to investors in such a short time period are a testament to the hard work, thoughtfulness, and innovation expressed by an adolescent industry.
Despite our strength and early success, like a human adolescent we face an unknowable and quickly shifting future. We are surrounded with opportunities to build a brilliantly expanding future, but also to make some mistakes. The behaviors and skills that allowed us to succeed to this point may not be enough, therefore we must learn to use new techniques, access new information, approach work in different ways, and create new rules for a changing world.
As we face our future beyond adolescence, there is quite a bit to talk about.
The Next Generation of Leadership: Where Do We Come From?
Our adolescent industry has been mostly led by a single generation of people, whose outlooks, process, and leadership styles have been honed by the institutional transformation of real estate ownership in the 1980’s and 1990’s. They have led real estate through an extraordinary expansion of values, an urban renaissance, and created a deeper connection to the needs and aspirations of institutional capital.
The next generation of leadership however, comes from a different time and place than we did.
At almost every gathering of real estate leaders at NAREIM or elsewhere, there is invariably a discussion about Millennials. They are so different from us! We all marvel at how technologically advanced they might be; but also how impatient, networked, and lacking of knowledge or experience. For many of us, it may be difficult to imagine today’s 25 – 35 year-old associate or middle manager leading the next great investment management firm, and yet, they will…and soon. According to the Pew Research Center, as of the first quarter of 2015, Millennials make up the largest generational group in the workplace: 34% or 53.5 million – versus 52.7 million workers who belong to Generation X and 44.6 million workers who belong to the Baby Boom.
With most leadership now in their 60’s and 70’s, it is very clear that we need to make every effort to develop and support the next generation of leaders. This year, over a dozen NAREIM Fellows, students from the best real estate university programs in the country, have joined us at executive officer meetings. In the process, they have not only gotten to know the leaders of investment management, but they have helped all of us understand better where the leaders of tomorrow are coming from, how they see the world, and how we can best work together. Our annual job fair continues to expand, with over 15 NAREIM firms interviewing almost 100 students from across the country over one day in September. We have also hosted two Godfather Dinners, with Steve Furnary of Clarion Partners and Steve Steppe of Stockbridge. These dinners allowed rising leaders to sit down with two of the founders of modern real estate investment management to hear some of their best insights on leadership.
But who can learn the most here? Is it the incumbent leaders or is it those who come next? During the NAREIM HR meeting in August, there was some discussion that millennials may be teaching their elders more in areas such as how better to balance life with work, how to be more efficient in their process, how to leverage technology and new processes, and how better to define and support their networks. That could be very useful. Today’s investment management leaders grew up at a time when real estate markets may have played by different rules. Amy Price of Bentall Kennedy may have put it best at a recent meeting, “The way people in our industry have defined success in the past 20 years is very different from the way we’ll be defining success over the next 20 years.” It’s time to learn the new rules.
Leadership & Operations: What Are We?
A big part of the reason why NAREIM was founded was to answer this question in particular. What is an investment manager and how can we best operate? In the beginning there wasn’t a clear blueprint for this kind of business, and NAREIM founding members came together to compare notes about how best to operate their businesses, to discover the best practices for everything from hiring and compensation to process, reporting, and compliance. In the last 25 years, we’ve built powerful and effective investing platforms, but that doesn’t mean the questions or the search for the best operational model ceases. As we confront changes in capital markets and in real estate, the state-of-the-art of operations will change as well.
There were many in-depth operational and risk discussions where we took a step back to understand what we did that was critical to operations, what we might want to outsource, what we might need to improve, or even what we might need to invent to better manage a changing landscape.
There’s a lot to examine, consider, and potentially change. It’s going to take some real leadership to make those changes happen. We talk a lot about leadership at NAREIM, and this year was no exception. Last spring, Vince Molinaro, author of New York Times best-seller The Leadership Contract, took us through a thoughtful seminar about what it means to be a leader and how best to grapple with the challenges of leadership.
But what is leadership and what is a leader? It can be a difficult concept to define. According to Molinaro, leadership is a decision you have to consciously make and an obligation that demands you step up. Leadership is not easy – and it requires us to connect to each other, share thoughts, support each other and help make each other better at it. He asked us, “What does it mean to be a leader, and why does this matter more than ever before?”
There are so many reasons that it matters more now, but one comment from Jim Costello of Real Capital Analytics last summer stands out. He pointed out that despite the historic abundance of capital coming into this space, returns on investments are shrinking and may do so for some time to come. “Last year, investment managers enjoyed an average 10% total return, but according to NCREIF’s recent surveying, the expectation is that by 2017 those returns will slip below 8%.” The implications of this for leading successful investment management teams are serious.
According to Costello, “This means lower compensation for everyone and a much more challenging promote structure. Acquisition teams will have to accept smaller bonus pools with fewer pleasant surprises to the upside. Less promote and lower management fees means you can’t hire as fast and furious as we did in the past. Executives will find it much harder to say, ‘just wait 7 years and you’ll get a big pay day.’ Historically, promotes have defined compensation in this space – and they are no longer as reliable or attractive as they once were.”
Chuck Leitner of the Berkshire Group observed during the leadership retreat, “We are (all) good at doing what’s right for our clients, but we need to get better at doing what’s right for the business: things like getting the right people, getting compensation right, and making the tough decisions when times are hard.”
What are we? We’re leaders. We are called upon to do our best, especially now.
Disruption & Change: Where Are We Going?
Tom Goodwin, an executive at HAVAS Media, in an essay he published on March 3rd in Techcrunch.com, wrote, “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodations provider, owns no real estate. Something interesting is happening.” Disruptive businesses and technologies are upending long held assumptions about how business succeeds, and in the process are laying waste to existing businesses. How long before someone disrupts how we run real estate?
At NAREIM, the question of disruption comes up quite a bit, and it should. Our investment hold period is generally five to ten years. It took less than a decade for the Internet to eliminate newspaper want-ads. In less than seven years, Apple’s iTunes took away half of the revenue formerly belonging to the record companies. It only took five years for Uber to take away 65% of the fares paid to San Francisco taxi drivers. By the time your disposition team is done, the world may have changed.
That’s why we discussed the potential implications of co-working spaces, micro-apartments, crowdfunding, big data, and even driverless cars. It may be impossible to know exactly where the world is going in the future, but the more we examine potential changes, the better we can understand where we are today – and prepare ourselves for an uncertain future.
By so many measures, the past year has been good for investment managers, and an excellent time for all of us to examine where we came from, what we are, and where we are going. It has been a privilege to engage in those questions with the NAREIM membership, and I look forward to a continued discussion in the year ahead.← Slide Deck from Ritu Bhasin L&C 2015 Report: The Rules Are Changing →