Recent disruptors have created unprecedented uncertainty in the capital markets. The COVID-19 pandemic, continuously escalating interest rates and bank failures — some occurring simultaneously, if not one after the other — have given way to a precarious feeling and cautious operating practices in the commercial mortgage space. The news is peppered with reports of pullbacks in debt placements within specific asset classes as lenders scrutinize deals more closely.
Given these events and their impacts on today’s commercial real estate landscape, it’s not surprising that investors are now prioritizing stability and downside protection in their portfolios. As a result, commercial real estate companies are increasingly looking to their asset managers — those who make high-level leasing, budgeting and operating decisions for properties within a company’s portfolio — to find innovative ways to cut costs and drive operational efficiency and value for their properties while lenders pump the brakes for a while.
“A rising emphasis on the role of asset managers can make all the difference for brokers and lenders when considering where to place debt in commercial real estate.”
Asset management positions are in much higher demand than they were just a year ago. A recent RETS Associates survey of midlevel and senior asset management professionals revealed these jobs as the commercial real estate industry’s most critical hiring need in 2023. In fact, an overwhelming 73% of survey respondents reported an increased company focus on their responsibilities this year.
These findings have distinct implications for those in the mortgage origination and debt spaces. A rising emphasis on the role of asset managers can make all the difference for brokers and lenders when considering where to place debt in commercial real estate. A borrower who has invested in a solid asset management team may prove to be the most reliable borrower — and that may be the difference between performing and nonperforming loans in the coming months and years.
Driving revenue
With many asset classes being affected by the pandemic, asset managers are being relied upon to develop new strategies and create solutions to improve property performance. These strategies and solutions are driving revenue for owners, increasing cash flow and enabling them to more easily meet their debt obligations. This, of course, is exactly what financial institutions look for when granting loans.
From reducing utility expenses to eliminating unnecessary spending and implementing improvements that raise occupancy rates and rental income, asset managers affect measurable change on net operating income. A borrower with a robust asset management platform strengthens their position when approaching a lender and increases their chances of closing a deal as they mitigate risk for these institutions.
As investors have shifted their focus from short-term gains to long-term sustainability, asset managers are playing an increasingly important part in helping them achieve their objective. This is also good news for those who place commercial mortgage debt during times of instability.
Portfolio profitability
Investment companies are tasking asset managers with significantly higher levels of accountability in their jobs. According to the RETS survey, in addition to their existing responsibilities, 20% of respondents also handle dispositions and portfolio management. Up to 15% of asset managers cover property management, market-facing acquisitions, risk management, sustainability, technology, fundraising and investor relations, or other categories. These statistics represent a vast expansion of the traditional asset management job description.
Fortunately, along with added responsibilities has come a rise in compensation. According to data from the 2022 National Real Estate Compensation and Benefits Survey by CEL & Associates, asset managers saw the highest growth in total compensation among industry peers in both 2021 and 2022.
The RETS survey found that compensation was the No. 1 reason why asset managers would consider making a career move this year. It’s encouraging, however, that the majority of respondents reported being happy where they are — another stabilizing factor for investors who are leaning into asset management. These findings indicate that asset managers are becoming more deeply tied to portfolio profitability than ever before, making their role in property performance increasingly significant.
Firms that are making greater investments into their asset management teams and asking them to assume additional responsibilities are taking a more holistic view of this role. They recognize that strong asset management leads to greater profitability. At a time when debt underwriting has become especially strict, looking for deals that include broader asset management involvement could help mortgage brokers and lenders identify winners in a crowded marketplace.
Mitigating risk
When considering where to place debt during a downturn, mortgage originators will obviously lean toward the most promising and least risky opportunities. Taking asset manager experience levels into account can help with risk mitigation.
The four main “food groups” of commercial real estate asset classes still lead the way when it comes to expertise in asset management. Respondents to the RETS survey reported having the most experience in the office sector (29%), followed by industrial (21%), retail (17%) and multifamily (16%). Meanwhile, respondents had relatively little experience in alternative asset classes such as health care, life sciences, student housing, self-storage and single-family rentals. Given this feedback, traditional asset classes may be safer bets for mortgage originators in the current climate.
Asset managers identified offices, mentioned by 30% of respondents, as the most challenging property type to oversee in 2023. Retail followed closely behind at 25%, while multifamily and health care accounted for 13% and 11% of responses, respectively.
While some investors may prefer to stick with less challenging property types, borrowers with a successful track record in some of the more demanding asset classes may represent a better risk profile among deals in these product categories. With investment firms increasingly turning to asset managers to improve portfolio performance, assessing a team’s level of expertise in a particular deal’s asset class — as well as its ability to manage some of the more challenging property types — can help mortgage brokers and lenders make more informed decisions.
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The shift toward asset management prioritization is a significant trend in commercial real estate that’s driven by the need for stability and downside protection in a volatile market. As investment companies increasingly turn to asset managers to drive value and cut costs, they are providing those in the debt space with greater reassurance and a clearer pathway toward financing transactions that are beneficial to both lending institutions and borrowers. ●
