Performance not Guaranteed: How Collaborative strategies set portfolio and asset managers ahead of the competition
By Tom Griffin, JLL President of National Investor Accounts and Dave Doupé, JLL International Director, National Investor Accounts
Tom Griffin and David Doupe have offered considerable thought and insight at several NAREIM meetings, most recently as presenters at this year’s 20/20 Investor Summit. In this article, the authors focus on a different way to drive expected levels of return which often may be taken for granted.
Yesterday, managing core properties from a portfolio or asset manager perspective might be considered a “cushy” assignment with lots of room for rope. Buildings would practically fill themselves, and the cash flow was more or less steady. Today, those dollars are fewer and only hard earned.
Only through dedicated effort and collaboration can asset and portfolio managers effectively compete to meet tenant preferences and investor demand. The most successful are embracing new levels of internal transparency and communication to drive performance at the asset and portfolio level.
Core Markets: Teeming with Capital and Fraught with New Challenges
Capital is pouring into the real estate sector faster than many investment managers can acquire suitable properties. Moreover, in the markets favored by institutional investors – principally core assets in gateway cities – the volume of capital chasing scarce product is in some cases pushing pricing beyond the dictates of leasing fundamentals.
Capitalization rates for core office buildings in U.S. primary and secondary markets averaged between 5 percent and 6 percent or less in the first quarter of 2014, according to JLL researchers. Average cap rates are below 5 percent in places like New York City and Boston, and in markets with dramatic rent growth, such as San Francisco, cap rates are nearer to 4 percent. In other words, many sought-after buildings are priced to perfection.
As history has shown, in the event of an increase in the operating or capital costs for such a building, or perhaps a spurt of competitive overbuilding, the cash flow on these core properties can quickly fall. For better or worse, buildings today tend to have narrower margins than they did before the Great Recession, and that increases the potential for asset management decisions to help or hurt profitability.
In today’s low-yield environment, portfolio managers are under pressure like never before to deliver returns and keep the portfolio in step with the parameters promised to investors. Portfolio managers are passing that pressure along to asset managers, who are under the gun to squeeze every dollar from their buildings, maximizing lease rates and occupancy while clamping down on wasteful operating or capital costs. The stakes are high, with little margin for error.
The way to increase property yields today is to execute creative and coordinated strategies at the portfolio and asset level, and that requires a new degree of communication between portfolio managers and asset managers. Here are a few essential strategies that will put the entire management team on the same performance-boosting track.
Strategies for the Holistic Portfolio Manager
Share the Big Picture. Clearly and regularly, the portfolio leader should keep the asset management team up to date on performance against industry benchmarks such as the NCREIF Property Index and relate current performance to goals. Articulate to asset managers specific fund priorities and concerns so that the entire team is working toward the same objectives.
What are the portfolio’s industry benchmarks? Does the fund have preferences to see particular sectors, such as healthcare, represented in the tenant base? Are there environmental and sustainability metrics to meet? Asset managers who understand these goals will do a better job of keeping their properties in line with the overall portfolio’s parameters.
Solicit Feedback. Provide asset managers with a clear channel to convey information back to the portfolio manager, sharing strategies that effectively manage costs or enhance leasing efforts, and warning of programs that fail to provide worthwhile benefits. All of this information can help the portfolio manager in developing portfolio-wide strategies through communication with other asset managers.
Tap asset manager expertise. A portfolio manager in the past might simply tell asset managers which assets were up for sale in the coming year, based upon a fixed, multi-year plan. Today, a savvy portfolio manager may choose to tap the asset manager’s grasp of market conditions before choosing the ideal time for a sale. Depending on the leasing market forecast, for example, the asset manager may suggest selling ahead of plan, despite an 85 percent occupancy level, rather than hold out for 95 percent occupancy and miss out on a seller’s market.
Through regular communication with asset managers, portfolio managers can identify useful strategies for implementation across the portfolio, such as methods to generate revenue, push rental rates, reduce tax liability and make properties attractive to tenants.
3 Keys to High-Performance Asset Management
Cater to Leasing Trends. In addition to operating buildings efficiently, asset managers that enhance the property’s appeal to tenants help the leasing team to fill vacant space and command higher rental rates. Recruiting has become the pivotal factor in many corporate lease decisions, so consider improvements or operational changes that will help tenants to attract and retain Millennials, the youngest and most sought after generation of office workers. Buildings that offer an amenity-rich environment, an array of food and beverage options and collaboration space gain a leg up on leasing, particularly those properties that create or tap into an environment where young workers want to be.
Leverage Existing Tenants. The people who work in the building each day represent a substantial resource for asset managers who are able to rally the tenant base behind programs or operations that also happen to move the property toward operational goals. If the property owner or portfolio manager wants to reduce the property’s environmental footprint, for instance, many Millennials will connect with that notion and engage in energy conservation or recycling activities, simultaneously adding to the property’s appeal as a desirable place to work.
Leverage Service Providers. For big decisions, effective asset managers take full advantage of the expertise at their disposal to add value. For those with a sophisticated service provider, that entails tapping experts across the provider’s entire platform.
For example, the service provider’s teams can offer perspective from capital markets, agency leasing, property management, engineering, and even tenant representation professionals to help with key asset management decisions. That input can tell the asset manager the ways that a given strategy will add value, as well as how and when the owner can monetize that value.
If capital improvement projects are on the table, for example, which aspects do the property managers feel are necessary to serve existing tenants? Which ones do the leasing and tenant rep brokers think will attract or retain tenants? Or will the disruption of construction hurt marketing during a critical leasing period? Can construction experts weigh in on the cost and benefits of strategic capital improvements? Drawing from added perspectives will empower the asset manager to make sound decisions to increase the property’s value.
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