This environment calls for three things from fund managers. The first is maximizing alignment with investor preferences. Most fund managers are still focused on value-add and opportunistic strategies, even as investors are reacting to increased political and economic uncertainty by shifting to core and core-plus. Similarly, investor interest in multifamily and retail has dipped, with office, industrial and mixed use enjoying increased attention. Given the increase in competition for capital, most funds have less leeway then they once did to chart their own course independent of the prevailing investor desires.
Second, funds must have a clear macro-level view of the direction of the market. Record amounts of dry powder combined with a limited number of deals can only push prices in one direction—and the situation is hardly helped by the influx of foreign investors, to whom our compressed cap rates still look good compared to their home markets. Whether or not it makes sense to stay at the table depends a great deal on how much higher you think valuations can go. Investment discipline becomes essential.
Finally, funds need to manage and maximize operating income. Even if you believe valuations will continue to rise, operating income plays an increasingly important role in getting to a 15 percent return on exit. So it is that the quality of a fund’s operating partners has taken on heightened importance, both in the eyes of investors and for the bottom line.
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For more information, please contact Jason Burian, Partner, Commercial Real Estate Industry Practice, at [email protected] or 312-508-5935.This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.