Best Asset Class to Start Out in, in Real Estate

LReed's picture
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Been giving some thought to this lately as I'm at a point in my career where I'm starting to think about the next move. I'm still at the analyst level but getting to the point where I ought to start thinking about where I ultimately want to specialize in. My main considerations are what product type will leave me with the most sophisticated skills and open doors going forward. What I'm thinking now is something like this;

1) Commercial Office - Just because the Argus/Excel modeling and leasing/TI work is probably the most complicated/arduous/diverse across transactions so if you can do that you can likely do anything.

2) Multifamily - Mainly premised upon the notion that it's the largest asset class and most "recession-proof", so they say, so it will leave a lot of doors open. Also one of the more diverse product types in of itself as you can do anything from garden-style suburban apartments to more urban, infill mixed use MF buildings. Additionally, it seems to be the easiest product type to start doing your own deals in, on a smaller level.

3) Industrial - Great in the sense that it's a booming market with a long growth runway, not great in the sense that single-tenant, NNN lease properties are probably the easiest to underwrite and I'd imagine big box acquisitions don't transfer as well to other product types. Not an incredible amount of diversity within the product type itself.

4) Retail - Not necessarily because "retail is dying", but rather because it's a pretty small world compared to Office or MF and I understand the underwriting can be a bit different when you start getting into % of sales and etc.

Would love to hear anyone else's take on this.

Comments (31)

Apr 14, 2019

Hi LReed, whoops, looks like nobody chimed in here.... maybe one of these discussions below is relevant:

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  • More suggestions...

Fingers crossed that one of those helps you.

Apr 16, 2019

I would put retail and office into the same category in terms of difficulty. Especially if the retail asset is a shopping center. Retail tenants have complicated leases in a shopping center.

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Apr 16, 2019
REPE_Guy123:

I would put retail and office into the same category in terms of difficulty. Especially if the retail asset is a shopping center. Retail tenants have complicated leases in a shopping center.

Agreed

Apr 16, 2019

OP - what asset class interests you the most and what type of position are you looking for? You will learn valuable skills at each.

Apr 18, 2019

I think multifamily, primarily because it's what I can see myself making my own moves in down the road. I also just tend to "get" the fundamentals and macros of MF moreso than I understand the economics behind large anchored retail centers. Why is it that there are two shopping centers within .3 miles of each other in my hometown, and one has no problem keeping every unit occupied with a restaurant/nail salon/grocery store and the other has a change in tenant at every unit, with 5 months downtime every year and a half? These are the things I'm sure you come to learn but just dealing with retail tenants in general seems like a massive headache.

I will say though, it is interesting the way the macros and micros intersect in retail. I feel like in MF it's mostly about location and high-level demographic information. What does the existing supply look like for different price ranges, how is population and income evolving and how will your delivery affect that balance? Retail seems like the stars can all be aligned on a high level but you can still lose your shirt if your tenant doesn't have their shit together. Office is probably similar in that sense. Industrial and MF seem the most macro driven.

Apr 16, 2019

I would argue for office because it is the hardest to understand, underwrite and analyze. Underwriting fundamentals and the general investment committee process are the same across asset classes, but office has some unique nuances including how to stack a building, manage tenant options, evaluate credit risk, juggle different pass-through reimbursement structures, and general asset marketing/presentation that I would argue are more sophisticated than other asset classes. I personally transitioned from office to multifamily and find multifamily much easier to digest.

That being said, I don't think there is a truly correct answer. An office developer is going to ding you if you try and lateral from a multi-group, in the same way that a multi-group would ding you vice versa. Best option is a developer that operates in multiple spaces so you can see it all at once.

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Apr 16, 2019

I would argue retail is just as complex. Shopping centers need to have the right tenant mix. There are co-tenancy clauses, REAs, kick outs, use exclusives/restrictions, purchase options, ROFRs, % of sales, recapture rights (go dark), credit risks, etc. And not all tenants have NNN lease structures.

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Apr 18, 2019

Retail is the most complicated asset class I have worked in due to all the tenant controls over a center, reciprocal easement agreements, and CAM reconciliations. Underwriting a mall redevelopment is about as challenging as it gets from a financial modeling and development management perspective.

Seniors housing is also very challenging due to the complexity of operations.

Apr 17, 2019

are there any good resources that you would recommend for learning these nuances of office? i come from a multifamily background and only recently started working with office properties and frankly have been finding it difficult to pick up.

Apr 17, 2019
Ricky Rosay:

but office has some unique nuances including how to stack a building, manage tenant options, evaluate credit risk, juggle different pass-through reimbursement structures, and general asset marketing/presentation that I would argue are more sophisticated than other asset classes.

I agree with you completely, but I would also argue that high end retail projects (so town center deals, not strip malls) have all of those characteristics with a potentially less sophisticated tenant base that would need much more hand-holding.

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Apr 17, 2019

I would argue some shopping centers/strip centers with less sophisticated tenants/non-national credit tenants need more hand holding. With national credit tenants, they usually have a process and a master leasing brokers so things are standardized. They just have more hoops to hurdle because they are just big companies.

Apr 17, 2019

Research

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Apr 18, 2019

Best place to start out is wherever you can get exposure to both unit oriented and NRA (sf) oriented asset classes. Commercial lending and capital markets analyst positions at institutional groups will usually allow access to a wide variety of asset classes. This will give you the widest net to cast once you decide to pivot to a more focused role (investment sales/development) or want to get into REPE (can sell your experience across the spectrum).

If you had to pick one I would choose multifamily because the sector fundamentals are so strong and capital will always be entering the space no matter what time in the cycle. I came out of a 3-year development associate position in big box retail trying to break into multifamily. Despite the fact that I could manage and model complicated power/community center redevelopment, which is substantially more challenging than multifamily, I had to compete against people lateraling from multifamily positions that had real experience in the space. I ended up lateraling into multifamily investment sales to round out my experience then landed the REPE job I have now because could tell a great story about my capacity to understand both multifamily and commercial real estate finance at a granular level.

TLDR - always try to start the career gaining the broadest exposure base because this will allow the highest optionality down the road.

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Apr 18, 2019

Adding on - don't ever underestimate just how ignorant recruiters are. They don't understand anything about the complexity and nuances of asset classes; all they want to see are catchwords on the resume and specific experience in their firm's asset class. For me, bypassing these idiot HR gatekeepers was incredibly challenging for certain firms. Once you get to the hiring manager you can captivate interest if you have a good story to tell.

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Apr 18, 2019

God i agree with you here. Especially since firms have started doing Hirevue. Me talking into a camera to an HR recruiter that has no fucking clue what I'm talking about is grounds for disappointment.

Apr 18, 2019

What about medical/healthcare? It's pretty diverse (skilled nursing, assisted living, outpatient, hospitals, medical office buildings, senior housing sort of, etc.), although I guess some of those share nuances with other generic asset classes.

Apr 18, 2019

Most of these are very different and share little similarity. MOB has little in common with AL/MC/SNF. Senior housing functions more like a blend of hotel/multifamily than anything else, but is still super nuanced due to all the differing levels of added care that amount to a large other income line.

Apr 18, 2019

Yeah, I was more getting at that they don't have many similarities between them, but are more loosely similar to other assets (MOB with Office, senior housing with MF, for example). You're 1,000% right on the level of nuances though, I underwrite AL/MC/SNF and there's a lot of weird stuff from a modeling perspective.

Apr 18, 2019

Retail is detail

Apr 19, 2019

So am I screwed since I accepted a job in Industrials if I eventually want to transition to a different asset class? How quick should I make the move if I don't like Industrials? Anyways, I just got out of college so my options were pretty limited.

Apr 19, 2019

No you are fine especially you are out of college. Are you in brokerage or acquisitions? Just network and have people send you their Argus? There is so much to learn especially coming right out of college. Not just in learning RE.

Apr 19, 2019

Thanks for the response. It's a buy side asset & portfolio management role. I figure that networking with people in other property types at our office will help me immensely. I have no experience in Argus and CRE in general so I'm gonna take it day by day but definitely don't want to get pigeon holed down the road.

Apr 19, 2019

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Apr 19, 2019
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