Increasing importance of property operations

The Increasing Importance of Property Operations

Joe Stampone Start a Career, Start a Company 8 Comments

Real estate value add is shifting from acquisitions to operations

Real estate value add is shifting from acquisitions to operations

I talk to a lot of students and aspiring real estate professionals and the vast majority want to be deal guys. They want to be the rainmakers working in acquisitions, wheeling and dealing. While acquisitions is sexy, it’s becoming increasingly important to be a good at operations.

As part of a lean team, I’m involved in all aspects of the business from sourcing and closing deals, to executing the business plan. While you can still win on the buy through information asymmetry’s or fortuitous timing, I experience first-hand how deals can achieve out-sized returns based on great onsite property management and attentive asset management.

There are a few trends that will continue to push the value away from acquisitions and toward operations:

The marketplace for buying and selling property is becoming efficient
Driven by the internet and the institutionalization of the business, online marketplaces and high-quality data are readily available. Many segments of the business are still highly fragmented, but there’s a push toward online networks for the purchase and sale of assets such as Auction.com.

Capital is becoming a commodity
One of the unique skills that good acquisition guys possess is the ability to access investors and pitch their deal. While that will always be a valuable skill, real estate debt and equity crowdfunding platforms are opening up a whole new world of capital for private real estate deals. These online networks, which enable anyone to connect with investors, shift the value from sales to track record and deal quality. With more efficient capital markets, it’s more likely that high quality deals get done and crappy ones do not.

If you’re just starting out in the business I advise you to learn more about leasing and marketing, construction, the permitting process, negotiating cable contracts, energy efficiency, preventative maintenance, and insurance. These things aren’t glorious, but they’re incredibly important. Merely underwriting deals isn’t a skill, the ability to envision a better use, then execute on that vision is.

  • Joe I think you make a great point about the need for operational excellence being driven not just by where we are in the cycle but more importantly by structural changes in the marketplace. Value add deals are always about the execution but as real estate becomes more commoditized more and more deals will rely on their value add components to hit targeted returns. Excellent post.

  • Well-said Giovanni. I hope that real estate education and young real estate professionals just starting out in their careers focus more time and energy on understanding the operations of an asset. It’s not sexy, but it’s what drives the outcome of most deals. Thanks for your continued support.

  • Maximilian Herget

    Deal Joe,

    Your observations hit home. I started my career in acquisitions some months ago
    and undoubtedly share your opinion that real value is increasingly created
    through superior asset & property management skills – and not solely
    through financial engineering (as before the 2008) nor outstanding sourcing
    & closing capabilities.

    To leverage the value of a property significantly investors have to adapt an
    approach that includes both the property as well as the transaction level –
    this becomes especially true when we look at value-add and opportunistic
    investments (which more and more investors will inevitably have to do – due to
    yield compression in core/core+ markets).

    Even when adapting a somehow holistic approach to value optimization, I believe
    that operational abilities will be substantially more important to unlock the
    potential of the asset. As information and capital are becoming a commodity,
    the contribution that acquisitions can have to leveraging the property’s value
    will be reduced to mitigate risk (by making sure that investor is not
    overpaying, applying financial leverage prudently). Real bargains are already extremely
    scarce….

    In other words: We are witnessing
    the democratization of real estate, as its getting more and more important who
    you are and not who you know. This development will shake up the real estate
    heavily.

    With this in mind we will see the job profile of real estate professionals changing
    drastically – but I guess that’s worth another posting.

    Best regards from Portugal

    Max

  • John Sweeney

    Joe,

    Based on your observations here on the importance of operating ability, what do you think are the long-term implications to the allocator fund model, considering a typical allocator’s primary value add is through sourcing and the buy/sell decision?

    In connection with the above question, it seems that no matter how many crowdfunding platforms emerge, institutions will continue to prefer a professional intermediary to “trade the commodity” for them. Many institutional investors lack the ability to most fast enough to invest directly in a deal regardless of the situation, and it’s difficult to see how posting the deal on an online portal changes this (after all, virtual data rooms have already existed for some time, and institutions are generally still slow to pull the trigger). So in that sense, one could argue that there will always be a need for allocators that investors have entrusted to underwrite and close deals quickly.

    So despite both of these trends you have identified, it’s hard to see the allocator fund model going away any time soon. Your thoughts?

  • Hi John,

    Thanks for the thoughtful comment and sorry for the slow response. I think the allocators/funds are more of a pure commodity, typically only differentiated by the relationship they have with the sponsor.

    Things will change as sponsors build public track records and respected brands, crowdfunding platforms evolve, and the typical HNW investor is educated on the risk/benefits of direct investing.

    I’m happy to discuss this in more detail. Perhaps it makes for its own blog post.

    Thanks for reading.

  • Well stated Max. I couldn’t agree more.

    Thanks for reading!

  • MHB Fant

    Joe, thanks for the great article. My question is, what is the most efficient way to learn about: “… construction, the permitting process, negotiating cable contracts, energy efficiency, preventative maintenance, and insurance,”?

    Any advice or tips on where to read about the topics is much appreciated.

  • @mhbfant:disqus Iyou can read everything and talk to people in the business, but there’s no substitute for rolling up your sleeves and doing it yourself.