Sponsored by IREM
By Dustin C. Read, PhD/JD
IREM’s research report, Real Estate Asset Management: A Process and A Profession, helps to demystify asset management by summarizing the results of over 90 interviews conducted with real estate practitioners familiar with asset management as both a process and as a profession.
Understanding asset management as a process means understanding that that this process typically involves a series of interrelated functions designed to enhance the financial performance of income-producing properties. One such function is business planning.
The extent to which asset managers participate in the development of business plans for the properties in their portfolios may hinge upon their relationship with acquisitions. This is the case because “business plans are built into acquisition models outlining where a company wants to go and where it wants to finish.” Many real estate executives contend that this is particularly true for value-add deals or closed-end funds with relatively short holding periods and defined exit parameters. An asset manager employed by an owner-operator clearly articulated this point: “The business plan gets defined in the underwriting assumptions at acquisition. The big ideas are conceived in advance of closing because we aren’t babysitting real estate. We are coming into deals with a value-add strategy in mind. The underwriting assumptions are incorporated into the budget on the buy side and handed over to asset management for execution.” In these scenarios, asset managers’ activities are more tactical and less strategic unless they have an opportunity to express their opinions during due diligence or can effectively advocate for a modification to the investment strategy post-acquisition.
An asset manager’s role in business planning can become more pronounced when acquisition specialists evaluate and value of a property based on its current performance, before turning to asset managers, property managers and leasing professions to assess any upside potential that may exist. Situations such as these require asset managers to “work with a team to evaluate the market, assess the physical condition of a property and outline a repositioning strategy as appropriate.” Asset managers are then charged with implementing the agreed upon strategy or refining it as necessary to achieve the objectives of ownership.
Asset managers arguably participate most heavily in business planning when properties are purchased in a stabilized condition by investors preferring long-term holds. While this may initially seem counterintuitive, transactions such as these require asset managers to continually monitor a property’s competitive position, propose corrective action when it is perceived to be in decline and succinctly convey the rationale behind any decisions that are made. They must also “establish annual goals for a property that reflect market conditions” and assess the impact of achieving those goals on an asset’s marketability in the event of sale. Thus, short-term planning must compliment long-term planning. Some of the most formal plans include matrices describing an asset’s competitive position, differentiable features, needed capital improvements, appropriate responses to changing market conditions and opportunities to strengthen the tenant mix.
To learn more about what companies expect from their asset managers, check out Real Estate Asset Management: A Process and A Profession.
Dustin C. Read, PhD/JD serves as an assistant professor of Property management and real estate in the College of Liberal Arts and Human Sciences at Virginia Tech, where he teaches courses in asset management, commercial leasing and real estate development.
Learn more at www.irem.org/resources/store/finance/finance_pubs#761.
