Managers have the leverage in office lender negotiations, but expect price declines of 24%
NAREIM Portfolio Management, Asset Management & Acquisitions meeting, June 8
Dealing with lenders on office assets is like a “game of chicken”: Who will blink first as the loan maturity nears, the lender or the owner?
During the NAREIM Portfolio Management, Acquisitions and Asset Management meeting in NYC, members agreed managers often had the leverage when negotiating with lenders on maturing office loans thanks to the fact lenders typically don’t want to take back the keys or manage the asset themselves.
However, one key challenge was even getting the attention of some lenders until you were even in the “penalty box”. As a result, NAREIM members predicted the debt markets might not return to a semblance of normal for at least another 12 to 18 months, even though there was likely to be much more price discovery by the end of 2023.
Potential solutions included meeting with development JV regional partners, from whom debt was typically sourced, instead of leaving it the JV partner, as well as using the current market conditions to rebid vendors to look for other income opportunities and strategies.
The NAREIM Portfolio Management, Acquisitions and Asset Management was held on June 8 and involved three distinct meetings with shared networking. More than 100 people attended the meeting.
Key highlights are below. To read the full takeaways from each meeting and access presentations, polls and the attendee list, click here:
Valuations – and the impact of office on the entire market
Private real estate values are expected to drop 15% from their prior peak – with US office valuations expected to fall 24% from their peak. Out of a ranking of 17 property types, researchers revealed US office came last with returns before asset management fees of just 5.9%
It was a conversation held by Portfolio Managers and Acquisitions professionals in each of their respective meetings.
Acquisitions professionals predicted office deals would start trading again in 6 months time, but real estate investment managers should underwrite discounts of at least 20%.
For those considering office to residential conversations, don’t. “It’s like the opposite of Fight Club – everyone’s talking about it and no one’s doing it,” one manager quipped. Another, with a bank-backed firm, said they had taken a lot of calls on office-to-resi deals but isn’t comfortable yet: “We don’t know if it’s scalable for us, or if it’s just too much energy to be worthwhile.”
Real estate managers could use ChatGPT and machine learning to create chatbots for investor inquiries, answer RFPs and send property update analyses to Spotify accounts for easy listening. The use of technology within real estate investment management firms was a key topic for Portfolio Managers and Asset Managers.
During the Portfolio Management AI discussion, managers at the cutting edge of CRE use of artificial intelligence said the technology could be used for synthesizing quarterly property reports for material changes or red flags; write code to find and extract publicly available data – and even write a first draft of an investor update letter; create a chatbot for investor inquiries and even review property updates, create a podcast of asset-level issues and send the podcast to a PM Spotify account.
While 75% of firms are using tenant engagement apps, the approval process for implementing technology internally was like climbing “Mount Everest,” the Asset Management meeting heard. “It ends up being easier to use a third party and then you can usually find a loophole and get it done.”
Members advised that to crafting a successful tech team, don’t just rely on IT. Consistently inform your team on what you’re working on and the end goals of the firm. What data are we collecting? What do we need this data for? How can it lead to better decision-making? Be passionate about a product or technology to make it worth going up the chain for approval.
Staffing – and the future roles and skills of PMs, AMs and transaction pros
All three meetings discussed the evolution of their roles over the next cycle, with Asset Managers arguing that dedicated risk managers would be needed in the very near future.
According to a member poll, 57% of NAREIM member firms don’t have dedicated risk managers, despite increased risk owing to insurance premiums, loan covenant breaches and the debt renegotiations.
“In just one year, people will be taking on even more risk than they are now,” said one member. “You need to start building out that infrastructure internally.”
For Portfolio Managers, members shared ideas on how to carve out more white space to think about portfolio construction strategies and opportunities, while the Acquisitions meeting heard how members were building out talent on their teams.
Embrace the cross-training of junior staff, offering stretch assignments and special projects.
One member was tipping the scale toward more junior than senior transactions staff in-house.
To read the full takeaways from each meeting and access presentations, polls and the attendee list, click here: