There is a major shift taking place in the real estate management profession, a blurring of lines between the traditional definitions of property management and asset management. A number of factors have contributed to this change, to the emergence of what has been called Property Management 2.0.
First, there was the transition in the real estate investment market through the recession from a business in which transactions tended to generate the highest return on investment or the biggest increase in value to the current environment in which, as everyone acknowledges, it is operations that adds value to properties. Not surprisingly, that realization has driven a shift in investor perspective and a heightened scrutiny, understanding and emphasis on operations.
Simultaneously, investors, as is the case in all walks of life, are shifting generationally, and the latest generation tends to be more sophisticated and analytical in their approach to their portfolios. As for the asset managers, they make their living overseeing multiple assets, typically over a wide geography and at a remove, managing the asset as a financial investment and supervising real estate managers.
As a result of this increased emphasis on operations and the emergence of a more analytical generation of investors, the expectation is that real estate managers understand the asset as a financial investment and not just as sticks-and-bricks business. More than ever, they are expected to speak the language of the investment/asset management community, to take a seat at their table and serve much as a fund advisor would, providing guidance on the analytics of real estate management and assisting them in creating a more competitive platform and strategic outlook.
I would be remiss if I did not mention parenthetically that managers carrying the CPM designation have been trained in the science of asset management for 80 years, even though it’s only recently that the expectation has risen to meet this skill level. It’s not surprising that sophisticated investors who are digging deeper into operations put real value on that level of capability in their real estate managers.
But formal study is not enough to meet this new age of demand, to serve the asset manager and investor as a strategic, analytically based advisor. Achieving this level of sophistication at the property level is less about formal education and more about being a student of the market and understanding what the current financing terms are, what the sources of financing are and understanding the market in terms of where and how one can get an operating return on an investment. It’s much more about being a technologically astute and thoughtful operator and then applying your professional skills.
All of the analytics are there, at your disposal. At the risk of oversimplifying, all you need to do is avail yourselves of current data focused on where the market is today, projections for future direction and where the operating value opportunities are going to be.
There is much emphasis placed on NOI, but this is but one milestone on the road to true strategic management; it is not the destination. There are other, equally important, concepts such as capital deployment, renovating and repositioning properties.
And it is here, in the repositioning of assets, that much of the new emphasis will take place. I see continued cap-rate compression and the need to find value-add opportunities in existing real estate. How do you define value add? The easiest definition is to buy something that’s beat up and undermanaged, invest wisely in that property and operate it for a period of time to garner an operating return (as opposed to a transactional return).
People might look at markets like Phoenix and say that day has come and gone; those deals have been bought. But there will be more. There will be owners of older properties that are simply under-capitalized and won’t be able to invest adequately to release additional value. So there will be a steady supply of those investment opportunities, maybe not at the same price per square foot or unit, but they will be out there and in need of real estate managers who can think financially and with a strategic, forward-facing perspective.
At the recent National Association of Real Estate Editors conference in Houston, I had the opportunity to chat with Mark Obrinsky, chief economist for the National Multifamily Housing Council, who made the interesting observation that today’s class-C buildings were the class-A buildings of the 1970s.
The opportunity is there to take a well-located property, invest capital in it, reposition it, raise the rents and turn it into a solid B+ property. Such an operational success story is good for investment generally and good for the investors specifically. And it’s good for the demands of the local marketplace. Most important, that sort of process takes analytical, forward-thinking decision-making that is the domain of a successful, well-qualified real estate manager. It is the essence of property management 2.0.
