Leasing, Capital Markets, and REITs: The Other White Meat

Like most people might expect, REPE is getting the majority of the attention. This comes as no surprise since many of the well known shops are highly selective, pay handsomely, and provide employees an opportunity to refine their real estate modeling skillset and knowledge base.

However, not everyone can get a shot at a top REPE firm like Blackstone, Carlyle, or Fortress. So what else is there and how much worse is it?*

Below I've listed some other areas within RE. Feel free to answer any of the questions or add your own to get some more points of view in this bitch:

  1. Capital Markets (Placements / Investment Sales): This fits into RE essentially how IB fits into corporations, so it's gotta have something going for it in terms of RE exit opps, right?
    A) How difficult is it to get into this field at a top firm?
    B) How is the career progression / earning potential?
    C) What are some highlights as far as actual work / skill sharpening?
    Top Players: Eastdil Secured, CBRE, JLL, HFF, Cushman & Wakefield

  2. Leasing: Although it's not as high profile as a lot of the acquisitions / dispositions that you get in Capital Markets, I guess you could contrive this to be "deal experience" since leasing requires at least a modest amount of underwriting and negotiating. However, leasing can be pretty lucrative if you have the flow.
    A) How does it stack up against Capital Markets in each of the 3 questions above?
    Top Players: Same as Capital Markets minus Eastdil

  3. REITs: From what I understand, in the RE family, these guys are sort of like the mature, older, more conservative siblings while REPE firms are the balls-to-the-wall, all-or-nothing detention-bound hot shots. A lot of the time they get less respect because they generally have lower comp and less demanding work (little or no workouts and distressed situations, less leverage and less overall creativity in the strategy due to the focus on core investments instead of opportunistic) but maybe this is just a myth.
    A) Is this just a myth? Are there solid gigs on par with REPE? (No, not C-suite execs, I'm talking analyst through VP)
    B) Same as the others: difficulty of entrance to a top firm? career progression / earning potential? highlights of the work?
    Top Players: Vornado, GGP, Boston Properties, Simon Property

Like I said, this is hardly an exhaustive list so throw out whatever you want. Just trying to learn a little myself while spreading what little insight I have. Also, I left off developers because I wanted to focus more on the financial side. Plus I think a lot of people have a better understanding of what developers do since they interface more with the community.

*(joking, obviously "worse" depends on one's perspective. but a lot of us do share a similar one.)

 

Another path to consider would be Appraisals at a firm such as Altus Group. Any thoughts how this would compare to the above opportunities when it comes to transitioning to REPE?

 

Good overview. I would also add that while it is natural to want to start at a top REPE like Blackstone, Carlyle, Fortress, TPG, KKR, etc, it should not blind you from approaching other paths. From my experience, if you are able to work at a mid-sized REPE you will have the ability to progress rapidly in terms of knowledge and experience due to a flatter organizational structure. In other words, you have the opportunity to gain tremendous exposure to equity sources, financial modeling, capital structure, and waterfall structures because you will work closely with the partners of the firm. This can eventually set you apart when you transition to one of the top firms that I mentioned above.

 

Re: #2, I don't think HFF does any leasing. Leasing jobs tend to be commission-only, and any discussion of leasing doesn't have much of a place on a site like wallstreetoasis.com , BUT if you can make it happen, you'll be able to put together interesting deals. I know multiple guys in leasing who do their own development deals on the side. In fact, some of the biggest developers got where they are solely because of relationships with tenants.

 
Best Response
  1. Capital Markets (Brokerage)

You're right that brokerage is to commercial real estate as i-banking is to corporations. There are some differences. For one thing, IBD is much more about providing advice, service, and analysis than brokerage is. Brokerage is all about sales. Brokerage analysts/associates do build Argus runs on prospective buildings, but the perception is the job is not nearly as thoughtful or analytical as a banking job. So even within real estate, the premier exit opportunities will go to RE IBD analysts, not brokerage analysts. The earnings potential within the industry can be very high, particularly at the senior level. Brokerage MDs at most firms get paid a predetermined cut on their revenues, so the rainmakers in top markets can earn solidly into the seven-figures, but it is very cyclical.

  1. Leasing

Leasing used to be all landlord representation, and then somewhere within the last 10-20 years the tenant rep came into being (from what I hear). It seems the tenant reps actually get the lion's share of the leasing commission on any given deal. Again, as with capital markets, this can be huge. This job is even more about sales and relationships, and even less about analysis, than Capital Markets. As a result, the senior guys with a lot of relationships get paid insanely well, but I can't imagine the rank-and-file sees very much of that. And the exit opportunities as a junior person from this sort of role will be weak.

  1. REITs

I can comment a little more intelligently here than I can on #1 and #2. I used to work in RE IBD and covered REITs; now I work at an RE PE fund. The top New York office REITs (BPO, VNO, BXP, SLG) are fairly selective and like to hire from the same talent pool as the big RE PE funds (RE IBD analysts), although they tend to get the guys that couldn't land a gig at a good fund. The pay is a bit of a discount (I've heard ~$150K at one of these REITs vs. ~$200K at a PE fund for a first-year associate coming out of a banking analyst program), and the lifestyle is roughly the same. The selectivity and pay decline sharply from there, and the vast assortment of REITs in the Midwest, West, Mid-Atlantic, and South pay far less and hire people from more diverse backgrounds.

In terms of your "older, more conservative" vs. "balls to the wall hot shot" analogy, I think this conveys the sense that REITs and PE funds do the same thing but have a difference in culture and attitude. In reality, I think there are much bigger differences in strategy and objective, and you would probably find the culture of major PE funds more likely leans to the the Wall Street, white shoe conservative side, and the REITs are more the "bricks and sticks," colorful real estate guys. REITs buy real estate for a totally different reason than PE funds. They are buying for yield and want income-producing property that will generate cash flow and require no work. Underwriting assets like this is very simple. PE funds are looking for broken properties and capital structures that can be restored; once there is cash flow, it's time to sell (preferably to a REIT).

There are some REITs that will engage in slightly more complicated deals (the VNO, BXP, SLGs of the world I mentioned earlier are among them), but it is much less common. It goes against the reason for having a REIT, which is to generate pass-through rental income that can be passed through the trust on a tax-free basis to the investor (investor is then taxed, but it avoids the corporate-level double-tax). This protection doesn't apply to the buy-fix-sell strategy of most PE funds; and a REIT that adopted that as its business model would lose its REIT status.

 

Yeah, I would just add that the better opportunity fund sponsors do not (and should not) have a "balls to the wall," "all or nothing" investment approach. In the last cycle, there were a lot of new entrants into the opportunistic investing space which led to strategy drift and a climb up the risk curve. A lot of these guys used incredible leverage, expanded into secondary and tertiary markets, and engaged in spec development. This often led to "all or nothing" returns...with more nothings than alls.

A good opportunistic strategy, in my mind, is generally built around creating solutions for temporary distress. In the current cycle, the most successful funds seem to have been the ones who were able to target the correct distressed components in complicated capital stacks to take control of valuable assets and return them to core quality for sale to a REIT or REIT-like buyer (as opposed to buying high-yielding tertiary assets that are priced cheaply for a reason, which core buyers would never touch). Also, some of the largest funds like Blackstone and TPG make use of their significant size to go after platform opportunities which they argue generate excess returns due to a smaller pool of buyers that can compete on these deals.

I would not say these deals are differentiated from REIT deals by virtue of being "balls to the wall" or "all or nothing," but rather are distinguishable in terms of their complexity and management intensity.

 

While I completely agree that primary players that were sophisticated enough to find arbitrage opportunities in distressed capital structures have been successful, I am not completely sold on the strategy of chasing portfolio deals. From my experience, portfolio transactions tend to inflate individual asset pricing thus producing above fair market valuations on aggregate. However, the motivations are quite clear, there is economies of scale in terms of acquisition fees, disposition fees, Asset Management fees, promote fees, etc. Due to the size, the GP does not have to rely on the investment breaking some of the waterfall hurdles because a lot of the fees are fixed over the investment period.

 

Feuerwerk, I agree: I am not totally sold on the portfolio thesis either, but it plays a very prominent role in the fundraising story the megafund firms sell, so I thought I'd mention it.

One recently popular portfolio strategy of which I am particularly skeptical is the REO-to-Rental strategy whereby many major funds are trying to aggregate pools of REO houses and rent them out. I can't see the economies of scale that can be created in this business, and the effectiveness of these funds at pricing housing stock. Given the capital being poured into this market seeking the same type of deals, I smell a bad thing brewing:

http://www.bloomberg.com/news/2012-06-13/private-equity-has-too-much-mo…

 

Agreed. Deploying a fund to acquire REO single-family and convert them to rentals with a planned exit once the housing market recovers may seem like a good play in thesis. It does not seem to make much sense from an operational and profitability perspective.

Operationally, the controllable costs will be high as compared to multi-family as it will be difficult to establish a regional presence. For example, in multi-family you can have a concentration of 3,000+ units in major markets and you will gain cost savings for obvious reasons (think on-site maintenance, contracts, etc). it will be difficult to acquire a mass of REO in the same geographic area. Considering that controllable costs can account for about 50% of total costs, I would consider it a huge risk.

As far as profitability, I consider it more of a niche investment play for small PERE shops as the funds will be rather small. A $100m fund will have enormous purchase power given that the median home price is around $160k. Small funds are not attractive for institutional investors.

It is however an interesting talking point, we had one of the top PE firms come to our office recently to pitch the idea and obtain feedback. And a few months later they partnered with a developer to raise a fund for just that purpose and eventually plan to take it public.

 

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