The real estate investment management industry faces an inflection point. And we’re not talking about moving just to a higher interest rate world. Instead, industry leaders face a fundamental question of where the next cycle of value creation is coming from – and what that means for their enterprise value and organizational strategy.

 

The NAREIM Executive Officer Planning Committee is currently working on topics for discussion. Among the ideas under consideration, are:

 

1. What does the next cycle of value creation look like?

There is an assumption in CRE. You create the value from the buy. But, in an inflationary world, with higher interest rates, is value creation going to come instead from asset management and the operation of the assets. Will it instead come from leveraging a firm’s CRE data or their approach to ESG. Will it come from capital structures and new products for new investors?

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• How has the value creation model fundamentally changed?

• What does the next cycle of value creation look like – and how do you embed value creation in your firms?

• Does value creation come from the buy, the capital structures, asset classes and property types, deal size or playing into asset management/the operational needs of the deal? What is next?

 

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2. Capital structures – how are we going to raise capital for the next cycle?

How real estate investment managers invest in CRE is on the table today. With questions over both the fund maturity of closed-ended funds and the liquidity (and valuation) of open-ended funds, institutional investors are considering new structures and products, while managers are considering how to expand beyond the traditional LP base.

 

In this new cycle, what are the capital structures the industry will favor over the next 10 years and what does that mean for organizational strategy and design?

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• Future of the open-ended fund and the reliable fee stream? LPs are moving away from open-ended funds, more are wanting increasing discretion in asset-specific JV and platform deals.

• Retail and non-institutional capital. How do you structure a product and distribute to retail capital? Do you need an army of wholesalers to market to RIAs?

• Where is the investor market sentiment with long dated vehicles? How do you align demand from institutional capital and retail capital?

• What about recycling capital through partial JV sales? New strategies to keep capital working.

 

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3. Org structure & compensation – are you incentivizing the right employees?

If we’re at an inflection point, how do you create a team that creates and drives value from the next cycle? Do you already have those people? Or are you incentivizing the wrong people on your team?

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• Are we rewarding the right teams and do we have the right team structures/organizational structure in place ready for the new world order? Who is needed? What skills do we need?

• Compensation: Should an asset manager be evaluated and paid on the same metrics that acquisitions does? Should acquisitions teams be compensated based on production, performance, or quality of coverage? What about fundraising - is it all about dollars raised or is consistent client coverage the better focus? How do you think about ESG, legal, talent, data?

• Performance evaluation: What metrics are you using to evaluate employee success and contribution to the enterprise? What has changed?

• Succession planning and equity sharing/equity decisions. If the traditional compensation model of a closed-ended fund – the paying of promote and carry – is broken, how do you compensate the next generate and how do you think about succession? What fee streams do you need to build a sustainable team and business? What do employees want? Does it align with investors?

 

 

4. What does it mean for enterprise value?

If the industry is at an inflection point and is moving towards a new world order of value creation and new, different capital structures, what does that mean for enterprise value? As we review the conversations of the day, members consider what the real estate investment manager of the future will look like and share ideas on how to innovate to position their firms to take advantage of the next cycle and all it presents.

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• If the biggest get bigger and the smaller firms are protected by being niche, what happens to the mid-market firms? What AUM threshold provides protection?

• What balance sheet resources are needed to grow – and protect the firm from disruption and being caught in the middle?