What's impacting real estate investment funds and their operations?

Despite the continuing pandemic, investor confidence has been rallying.

While the global volume of CRE investment fell significantly in 2020, the last quarter of the year experienced a surge of 84% from the previous quarter to $290 billion USD. This is compounded by a growing segment of individual investors who are looking to a more stable asset class than the stock market.

Concurrently, focus funds – funds that specialize or focus on a market, asset, etc. – are expanding. Real estate is attracting more investors seeking less risk. There are more debt funds for investors seeking income. And there are more sector-specific funds – student housing, seniors housing, industrial, multi-family – offering investors the appeal of healthy asset classes.

And so, moving farther into 2021, the pace of commercial real estate investing continues accelerating. More institutional, non-institutional, and individual investors are searching for opportunities to place their capital. As they do, there are some key trends and challenges impacting investment funds and their operations:

1. The need to manage complexity quickly

2. More stakeholders demanding more information – now

3. Too much data, not enough data management

4. Growing internal resourcing gaps

5. Higher risk of poor decisions

1. The need to manage complexity quickly

Fund managers are finding it challenging to address both increasing regulatory requirements and investor expectations. Pandemic upheaval has placed immense pressure on public funds and those governed by regulatory bodies to act quickly and decisively to manage asset allocations. In some asset classes, valuations have fallen dramatically, compelling rapid reallocation decisions. Other funds are under pressure to capitalize on new investment opportunities.

In many instances, funds have become more aggressive in seeking assets they may not have previously. In all instances, speed is essential to capitalize on shifting investment windows. “The commercial real estate industry became somewhat complacent following the last financial crisis in 2008 because real estate has been a stable asset since then,” says Paul Maloney, Real Estate Software Consultant at Altus Group. “For fund managers who must make decisions today – this may be the first time they have had to make these kinds of complex decisions.”

Choices regarding dispositions of existing assets or entering into new asset classes require rigorous but speedy decision-making approaches. For funds with dozens, hundreds, or thousands of assets, managing the data, valuations, and modelling to make these decisions in today’s compressed time frames is an arduous undertaking.

2. More stakeholders demanding more information – now

Every investment fund stakeholder wants more information. Tenants are asking asset managers about rent relief and early lease termination. The investment committee wants to know more about strategy. Lenders want information regarding potential tenant loan covenant breaches. Investors want details about current portfolio management.

Traditional reliance on spreadsheets for modelling and reporting is under pressure as stakeholders seek frequent information that is timely, transparent and consistent. Stakeholders want a clearer, bigger picture of the state of the market, current fund performance and the view going forward.

3. Too much data, not enough efficient data management

The most successful CRE investment funds prioritize information management to acquire meaningful information and respond quickly and strategically to protect the fund. Yet, many investment funds struggle with unorganized, impractical data. Often, mountains of data reside in myriad, hard-to-access locations and analysts are unsure about how to use it to assist in decision making. This problem compounds over time, becoming more difficult to address.

4. Growing internal resourcing gaps

Fund management requires a variety of specialized skills and expertise, and the right people doing the right things at the right time. Meanwhile, the COVID-19 pandemic has accelerated the digitization of work. In the commercial real estate sector, there is now intense demand for workers who are able to effectively utilize technology, from cloud computing and artificial intelligence to software development and data analytics.

Yet the competition for these talents is stiff. Acquiring employees with technology expertise is a priority for companies in virtually every industry. Among senior executives in the commercial real estate industry worldwide who were surveyed for the Altus Group CRE Innovation 2021 Report, only 25% indicated their firms were well-staffed with the right IT skills.

The widening skills gap impacts the ability of funds to respond to changing market conditions and their shifting operational needs.

5. Higher risk of poor decisions

Today, the risks of overpaying for or undervaluing assets, or simply taking too long to make a decision, are very high. Ultimately, vigilant management of data-driven decision-making at the operational level supports well-informed strategic decision making.

“Every real estate investment fund today is looking at where to place their capital. If you want to move from one property type to another or into a new property type, five years ago, you had a window of few months. A year ago, you had a few weeks. Now you have a few days,” says Alex Jaffe, Director of Advisory at Altus Group, who has seen first-hand the critical need for accelerated, smarter decisions when it comes to operating a fund.

For better or worse, recent experiences have changed the real estate industry and amidst the turmoil of the year, commercial real estate investment funds scrambled and adapted to address change. Now, with a better understanding of what the next normal looks like, funds must take the opportunity to put into place a fund operating strategy that will lead to sustainable success.