NAREIM Executive Officer meeting: Key takeaways

by Sanyu Kyeyune, NAREIM Head of Programming

Oct. 17, 2022

The NAREIM Executive Officer meeting in Park City, Utah, convened the leadership of 80+ member firms, along with a selection of expert speakers and invited guests. They networked over 3 days, while hiking in Deer Valley at sunrise; driving UTVs through Wasatch Mountain State Park; sharing a cozy dinner at a historic Alpine-inspired inn, and a whiskey tasting and family-style meal at a working distillery and former saloon; oh, and content! So much content.

Presentations and the attendee list from the NAREIM Executive Officer meeting are available to members. You can download the presentations from the meeting here.

Through case studies, small-group roundtables, brainstorming exercises, candid best practices sharing, and a leadership skills workshop, here’s a look at what went down, up on the mountain:

Introducing the NAREIM Jeff Barclay Fellows

This year’s cohort proposed fresh solutions to some of our industry’s most urgent challenges:

• Building technology is key to meeting the challenges of labor shortages, supply chain, obsolete building stock, and embodied carbon. Prefabrication, mass timber and passive house, for example.

• Alternative assets are the future, but to execute an investment strategy, managers need to be able to quantify the impact of climate risk at the enterprise level.

• Blockchain’s smart contracts can bolster capital raising efforts by enabling digital asset ownership, which can be converted to executive compensation.

• Focus on teaching business acumen to address the achievement gap of the incoming class of job applicants, many of whom have had a mostly virtual education over the past 3 years.

• Consider the many uses of machine learning, and hire candidates who know how to use the latest data science systems and technologies.

The future of real estate was a common theme among the ideas shared by the Fellows. Click here to see the fellows and access full resumes. 

Compensation

Does culture, in fact, eat strategy?

One manager posed this question to the room during a discussion of how to evolve compensation models to better attract and retain talent, and develop future leaders.

The results of the 2022 NAREIM Compensation Survey with Ferguson Partners—notably the record-breaking increase in average and median base salaries—sparked a debate on how much longer the industry can compete with the 2x base salaries being offered in and outside of CRE. In addition to higher compensation, most investment leaders are making efforts to offer more flexibility and improve company culture.

What’s driving the uptick? Inflation, for one, but more so for onsite job functions within vertically integrated firms, which comprise more than a third of survey participants. Retention was behind the increases among junior- to mid-level, Transactions/Acquisitions, Investor Relations and Administrative job functions.

A majority of firms identified compensation as the bulk of total expenses, capturing all people-related costs such as payroll and benefits in the metric. At the same time, revenues have also risen year-over-year. This reflects a successful year emerging from the pandemic, marked by huge capital inflows and appreciation, and more than 15 percent net AUM growth—the highest in the history of the survey.

Benefits like unlimited PTO, remote work options and dependent care are showing up in more long-term incentive plans, or LTIPs. Since 2020, junior eligibility for unlimited PTO increased fourfold.

More than other sectors, real estate investment management tends to emphasize LTIPs. The non-promote/non-carried interest options include profit sharing, and structures that reward capital raising and AUM growth—typically over a 3- to 5-year horizon. One CEO of a public REIT spoke about offering restricted stock. But for junior hires, they concurred, cash is king.

Where are executives still struggling? For many, it’s team alignment across investment strategies. Co-investment is gaining traction among member firms, with 17 percent introducing such plans this year, but it’s not without its own risks.

At one member organization, VPs and above can invest in all of the firm’s products, using non-recourse financing offered by the firm. The loan isn’t callable unless the employee leaves under predetermined circumstances. The idea is to get employees to think like investors and provide them paths to build wealth, and it seems to be working well. But, as the head of that firm urged peers, the onus is on the organization to educate employees on the cyclicality of real estate investment, and the unpredictability of outcomes.

What’s not working when it comes to recruitment and retention? According to a few executives, recruiting strictly from Ivies, targeting business and finance majors over liberal arts disciplines, and the long-held assumption that the best hires don’t need training.

Metaverse: where real estate and digital assets meet

Jamestown President Michael Phillips detailed Jamestown's digital asset strategy, giving NAREIM members an insider view at how the firm has merged physical real estate assets in the digital realm. The result: creating value for tenants and investors using existing technology.

Through decentralization of ownership and tokenization, there are more ways than ever to reach today’s digital natives. Jamestown walked through its flagship One Times Square, an immersive virtual experience held on New Year’s Eve, drawing 50 million viewers globally across 2 live streams, and resulting in an additional 24 hours of engagement via gaming. Revenue partnerships in the Metaverse, where all of this “lives,” enable investment managers to neutralize their marketing spend. For instance, retailers could use data from physical heat maps to make location decisions in the digital space.

Denominator effect

The “What’s on your mind?” brainstorming session took the pulse of the room. By and large, inflation was top of mind, as was the need for value adjustments of at least 10-15 percent to account for this pressure. With bid-ask spreads widening, the tension between fundamentals and the cost of capital has never been higher. A show of hands revealed the discount to peak value at which most would acquire the following assets:

• Office: 50%

• Industrial: 90-95%

• Multifamily: 90%

Rent control was another hot topic, with a number of managers expressing the combined pressures of housing shortages, wage compression, resident unionization, development challenges, among others.

With more investors seeking pre-approval, leaders of a few debt shops are focusing on the most challenged assets on their books. Many say the capital markets will drive the next recession. For others, now is not the time to foreclose; instead, more debt funds, as well as insurance companies and other lenders are likely to sell off paper over the next 12-18 months. We can also expect the Fed to reevaluate all asset classes, not just real estate, over this same period.

Where should executives focus their efforts in 2023? For one, allocating capital to managers with strong track records, who can navigate the market’s dislocation and time their execution adeptly. Those with strong global relationships can position themselves uniquely in front of Middle Eastern sovereign wealth funds increasingly their allocations to real estate, for example.

Net zero, and its tension with diminishing returns

It’s no surprise that occupiers and tenants are asking more about their exposure to climate risk, and raising the bar for managers. But, a discussion of net zero cannot ignore the hurdles managers face, particularly in trying to carbon-neutralize older, existing, Class B assets. Partnering with municipalities and the technology sector is one strategy, so is improving relationships between landlords and tenants. 

For organizations with global portfolios, the pathway to net zero may be shorter, given the advancements being led by EU investors. But, with the SEC not too far behind in sharpening its own regulatory frameworks on ESG, all managers will need to assess their net zero frameworks and reconsider or rework their commitments.

From transactional to transformational leadership

For employees to feel a sense of belonging, they need to know what their organization does, and why. This can imbue a sense of purpose, and it’s the responsibility of leadership to clarify this purpose through an empathetic and inclusive approach.

View the presentations, meeting agenda and attendee list here.