CRE’s Golden Age of Asset Management
Precise timing and discretion are more critical than ever, according to Economist Ryan Severino.
In early 2024, I discussed what I called the coming “Golden Age” of asset management. In short, I argued that with interest rates and cap rates now rangebound (after a roughly 40-year period when both structurally declined), property performance and income returns would take on increased relative importance in driving total returns. Of course, that meant appreciation returns would become relatively less important. Since that column, many others have come around to this view as well. But this is only where the story begins, especially when it comes to the importance of asset management.
Yes, in a world where investors cannot simply bank on interest rates and cap rates declining, appreciation returns will have less of an impact than they’ve had in decades. But that doesn’t mean that they’ll have no impact. And because of this, it ironically means that investors really need to get their entry and exit points on deals correct, because there’s now a smaller margin for error. Over the last few decades, when appreciation returns were very high, investors could afford to make mistakes or risk imprecise underwriting, and deals could still look successful.
But with appreciation returns now more limited and rangebound, the cost of a mistake has gone up, especially in a world of competitive returns.
We don’t want to traffic in narratives about people falling in love with their deals and not wanting to part with them.
What that means in practice is that investors are going to have to make smarter buying, holding and selling decisions because the market will not bail out mistakes as easily as it did when cap rates were structurally declining. Of course, that will place increased pressure on acquisitions teams, underwriting and valuations. But that also means that asset management teams can add a tremendous amount of value through the hold/sell process. We don’t want to traffic in narratives about people falling in love with their deals and not wanting to part with them. But there is an element of truth to this scenario. At a minimum, it seems that many investors give much more thought to a deal’s entry strategy than its exit.
In the coming Golden Age, income returns will matter more than they have in decades.
Image by Alexander/Adobe Stock
Shrewd asset management, via a rigorous hold/sell analysis, can help investors time deals well to maximize their exit strategy. It can help them avoid holding on to deals too long and exiting at less attractive prices, or worse, simply getting stuck with a deal they would rather not own any longer. Analyzing capital markets conditions and the outlook for space markets, and having a detailed understanding of the rent roll, tenant needs and satisfaction; a building’s competitive set and renewal probability; and capital costs can help make better sell-timing decisions.
Investors really need to get their entry and exit points on deals correct, because there’s now a smaller margin for error.
In the coming Golden Age, income returns will matter more than they have in decades. But because of this change, investors will need to act cautiously to maximize their appreciation returns. Asset management’s increasing importance is not limited to just income generation.
Ryan Severino is the chief economist & head of research at BGO, where he is responsible for global and regional economic research, analysis and forecasting as well as property market research, insights and forecasting. Additionally, he is an adjunct professor at Columbia University and New York University. Severino holds a master’s degree from Columbia University, a bachelor’s degree from Georgetown University, and is a CFA charterholder.
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