Investment Managers Audit Ops Noting Institutional Investors, Market Slow-Down


NEW YORK CITY- Investment management firms are taking stock of their operations as many expect, and see signs, of an economic slowdown. Not only are these real estate decision-makers trying to decode messages from the market, but also from the movements of larger institutional investors, according to Tim Lee, CEO and co-founder of Olive Hill Group in Los Angeles, a real estate asset management firm.

“We’re trying to decode messages coming from the market both negative and positive and trying to finesse if, and when there is a slowdown,” Lee tells GlobeSt. “We will expect it to be much more muted than in 2008.”

After nine years of economic recovery post the 2008 financial crisis, and the historically low-interest-rate environment, real estate players are taking strides to become nimble in their outsourcing, partnerships, and portfolio even as new entrants come into the market with enormous amounts of capital to deploy. And with new players, comes a watchful eye, Lee said.

Institutional investors are deploying a surfeit amount of capital to real estate, and many are first-time investors who are making the asset class a core strategy. Nationwide, pension funds are tipping their portfolio in favor of real estate. For instance, California pensions like CalSTRS and CalPERS are transferring money from private equity to real estate, viewing it as a better performing asset than stocks and fixed-income investments.

New entrants making large acquisitions are energizing the market. Kilroy Realty brought Blackwelder, a 19-office adaptive re-use campus from Lincoln Property Company, for $185m or $1,173 per square foot, for the complex in Culver City. Allegedly, the sale was 23% above the projected price.

“When a long-term company makes a bet like that at a high price, it shows there is a long-term benefit that some investors aren’t seeing,” Lee said.

Some investors are entering the fold with a grand entrance, while others are fastening up. Alongside sole investors deploying significant capital, joint ventures are gaining popularity to help capital costs and leverage resources, beneficial to the partners involved, as well as existing and prospective property tenants, which is crucial to net operating incomes, Lee said.

Olive Hill Group has stopped outsourcing its property management, bringing it in house for greater ease in deal execution, and as mid-size operator, they’re seeing their peers join them. The ability to roll-out initiatives and campaigns easier stands out to their institutional partners and clients.

As the cycle marches on,  real estate investment is a tale of two cities. While there are some big buys, institutional buyers in real estate maintain low leverage on their properties, capping there LTV at 50% to 60% and putting up big chunks of equity, a lesson to learn from. “Having huge equity in a building will help them survive the storm,” Lee said.

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