May. 25, 2017 by Erin Mullen, BOK Financial

Top Minds Talk Institutional Capital

Leading institutional investors gathered last week on May 24 for The Real Estate Council and Real Estate Deal Sheet’s second Industry Insights of the year. Each program features a keynote address and a series of panels covering a range of industry-specific interests.

The founders of EG, Michael Easson and Adam Geha, kicked off the program with a keynote presentation. Their discussion centered on the firm’s investment approach using a proprietary software system called Prisms. With the abundance of factors involved in making the over $1.2 trillion of global real estate investments that exist today, EG identified a need for a more systematic approach. Prisms combines the quantitative analysis and macroeconomic inputs to identify the timing and asset risk associated with a particular opportunity. The system is unique in a number of ways. For example, Prisms monitors the debt and equity markets on a quarterly basis based on 18 metrics. By dissecting each opportunity using this systematic approach, the software is able to determine the likelihood of a “bad” deal (defined by EG as < 5% return) and potential impact or loss given default. By looking at asset risk-adjusted assumptions holistically, EG has been able to generate positive returns on every asset acquisition to date. Adam attributes much of this success to avoiding the peak and the trough. In his words “Always leave a 15% tip” and “Kill the party before it’s dead”.

Vance Detwiler of Prescott Realty Group then led the event’s panelists in a discussion around institutional capital. The first panel, consisting of Robert Curran of J.P. Morgan, David Evemy of Sarofim Realty Advisors, Greg Kraus of Invesco Real Estate and Chris Nelson of Goldman Sachs, focused primarily on trends within the markets. Here are the main takeaways:

  1. Shift in usage – All of the panelists agreed that the use of product types will change as technology shifts and as demographics change. For example, multifamily units have become increasingly larger as more empty nester or families are electing to rent vs. own. Additionally, the impact of driverless cars on parking has some developers considering how to build parking space that can be retrofitted to serve a different use in the future.
  2. Excess capital supply – There is a lot of pent up capital that could lead to tight pricing and eventually a higher risk appetite. The hardest part to understand is why transaction volume remains so low. The inability to answer that question has left investors weary as the marketplace hasn’t shown significant trade volume.
  3. Avoiding risks – At this point in the cycle, most portfolio managers need to focus on exploiting existing asset inefficiencies. They need to manufacture value out of existing portfolio assets and avoid commodity assets that don’t have an active value-add strategy. On the other side, developers need to ensure they aren’t resting on debt structure or unrealistic optimism when evaluating a deal. The question is what a downside scenario could entail. That said, the panelists encouraged the audience to consider unlevered returns and what could happen if there were a shift in their hold period.

Ryan Bailey of Children’s Medical Center, Adam Cibik of Employees Retirement System of Texas, and David Kelly of Teacher Retirement System of Texas, wrapped up the morning with their insights on investment strategy for pension funds. All three panelists agreed the role of real estate within their overall investment strategies is to diversify and hedge inflation. Most of them did not foresee any significant shift in capital allocation. The largest change each gentleman anticipates as the cycle-end nears, is the desire to invest directly to exert more control, reduce costs and create transparency. After opening the floor to questions, most audience members wanted to know how to create a competitive edge when approaching pensions. The response was simple: come early and often, be innovative and speak in a language they can understand. At the end of the day, the pensions seek funds and managers that focus on policy, process and procedure. If a company can be consistent in their application of those facets, a pension is likely to invest.

Institutional investors face three big challenge in 2017 – market volatility, a low yield environment and meeting total return objectives. While no one can predict what the future holds, the market experts were able to identify top concerns and possible solutions as the industry moves forward into the cycle-end.

After graduating from Boston University in 2014, Erin Mullen joined BOK Financial as part of the Accelerated Career Track Training program. Erin is currently a Banking Officer in the Bank of Texas Commercial Real Estate group. She has been a TREC member for since Fall 2015.