Real estate is like football…is something nobody who knows me would ever expect me to say. But sometimes a sports analogy is just the perfect fit. Hear me out…
From our perch within commercial real estate, we see trends emerge. With Q4 looming, client interest in portfolio and asset performance reviews has spiked, and unfortunately, it’s revealing a theme: Investors are avoiding asset management until it’s too late. (To exit optimally, that is…) Imagine trying to operate an NFL team purely on the advice of the owner and the direction of the quarterback, without the benefit of a coach. Real estate portfolio optimization simply doesn’t work with property management (the quarterback) and acquisitions (the owner) alone. Asset Management is the coach. And the challenges can go deeper; ignoring or misunderstanding asset management’s function can allow small changes, often imperceptible to the untrained eye, to add up until they overwhelm your ability to shift course or business plan. While this avoidance of asset management could be due in part to thinking your portfolio is too small (although anything over 5 properties is large enough), we think the real cause of avoidance goes deeper – people don’t really understand the value of ongoing asset management. Nor do they know how to use it. So let’s take a closer look.
The Property Manager Is To The Asset Manager As The Quarterback Is To The Coach: They Need Each Other.
Much has been written about the failure to differentiate between Property Management (PM) and Asset Management (AM), but the mistake many investors continue to make is thinking that the distinction is purely academic. In an uncertain real estate environment, it is even more important to grasp the difference and to use it to your advantage.
The basic difference? AM is strategic & PM is operational. It’s not the PM’s job to methodically reconsider the exit plan and competitive set, track cap rates or know if a competing property is preparing to refinance at a rate that enables them to undercut rents. And those are just a few examples of what effective AM should do.
“But I Handle The Exit Strategy” Many Owners Say…Until It’s Too Late.
It’s a common refrain from smaller owners and mid-size investment teams. The flaw in this idea is the assumption that a business plan is fixed, or that it’s effective to comprehend an evolving local market based on casual, occasional check-ins. It’s not. Real estate business plans must evolve as markets change, demand drivers shift, demographics and preferences evolve. They can do so within as little as a year, and dumping the tracking of an investment into the lap of your acquisitions team alone is a costly mistake to make. Acquisitions is focused on identifying great opportunities, and structuring transactions that project strong returns. But projecting value creation and enacting it are two different things. Property Management is focused on optimizing day to day routine performance from rent collection to lease administration to the scheduling of maintenance & repairs, but they’re not in the business of “seeing the forest for the trees.” Asset Management, when done correctly, dovetails between the two. It challenges the assumptions in the draft business plan, reviews actual performance periodically and in the context of how the market is evolving to understand what’s changing or was not anticipated, and modifies the business plan over time, treating it as the living thing that it is.
Mission Critical Asset Management: What You Should Be Doing.
If you’re not already doing these things, start.
1. Standardize Your Processes.
Be sure you’ve answered the tough questions and set up the processes you need. When and how does AM have a voice in acquisitions (i.e. preliminary business planning)? Is there an approval threshold for expenses outside the budget above which the investment committee must be consulted, or below which PM can make the call? Are appraisals, property tax challenges, or insurance premium audits to be conducted every September?
2. Set A Schedule.
Especially when certain AM functions fall onto the shoulders of a non-dedicated team, a defined schedule is critical. But even if relying on external talent to carry out periodic AM portfolio reviews for a fresh perspective, timing matters. Consider these questions: How often are PMs reporting on performance, and who’s compiling or distilling the results for your investors? During your monthly budget-to-actual variance analysis exercise (and you must have one), what’s the acceptable variance threshold?
3. Rewrite Each Business Plan, Every Year.
A Hold-Sell Analysis goes far beyond whether to sell now or hold for another year. It’s a complete rewrite of the original business plan, including all key performance indicators, a review of the competitive set, the market, and the projected ROI. The key question you should ask yourself every year for each asset is…If you were to buy it today, how would you underwrite it, and what would be your new plan for an exit?
4. Maximize Skill Sets.
Whether the budget review is handled by AM and the investor reporting by your CFO, and whether the hold-sell analysis is the work of internal AM or an external consultant with a fresh set of eyes…be sure to match the skill set to the task, the region, and the asset class. Remember that just as a fantastic quarterback is simply not a coach, an experienced bookkeeper is not a CFO, and a passionate PM without training does not likely have the best perspective on your optimal exit.
AM is an approach to value creation that requires a trained lens. You wouldn’t expect your quarterback to lead the team without a coach or a playbook based on this year’s actual roster, would you?
Poonam Mathis knows very little about football, but more than a little about real estate, which at one point Wharton asked her to teach to a room full of NFL players studying real estate.
+1 Duke here: Reason for the Tite pic? I’m just a HUGE Breeze fan.