We’ve all seen movies that depict the frantic activity on the floor of the New York Stock Exchange. When the market is on a huge bull run for the day, or in absolute freefall, staying calm and focused is critical to success. The Real Estate Private Equity day-to-day is not nearly as intense as one of the exchanges, and market swings don’t occur as quickly. Yet there can be tremendous pressure and long hours as a deadline looms for a bid on a property, a Planning and Zoning meeting, or a closing.
But what about when the real estate marketplace is frothy? Or in major downturns like 2007/2008?
Not A Deal To Be Found
One of the driving forces behind the REPE market today is interest rates. Not loan interest rates for REPE deals (although that is a nice benefit), but comparative rates for other investment opportunities. Because US treasuries are back at historic lows again, domestic investors are challenged to find places to invest that will generate much of a return. This has caused a flood of money into the stock market (fueling record highs on the Dow and NASDAQ), into real estate in general, and into real estate private equity specifically. REITs and PE funds are sitting on record stockpiles of cash, and can’t find suitable projects to invest in.
Cash sitting idle in a fund is torture. Undeployed resources burn away at yields and impact the fund’s return on investment and other performance metrics that drive earnings for the fund managers. When a fund can’t find deals within its investment profile, it may resort to looking at deals with more risk in order to get funds deployed. This is why in today’s market you see Core funds competing to purchase assets that typically fit the upper end of a Core-Plus fund, Core-Plus funds dipping into Value-Add territory, and Value-Add funds looking at traditionally Opportunistic deals.
But what does this have to do with your REPE career as an analyst?
You’ll sit in the meetings and hear Directors and Managing Partners talk about the lack of deal flow. Idle capital. Insane competition. Lost deals. You’ll begin to wonder if there is something you can do to help. At 10:00 pm when you’re alone in the office toiling away on a model that isn’t hitting the number you want it to hit, you’ll feel it: the temptation to be a little more flexible with your assumptions. You’ll whisper to yourself that if you can just make this deal work, the fund will be able put more assets to work and make goal for the year. You’ll be tempted to make the deal work to try and help the firm.
Don’t do it. Stick to your your job: analyze the deal accurately. Investment Committee or Managing Directors have the responsibility of tweaking the investment parameters to address the current market; you do not. Your job is to provide them accurate information about investment opportunities. They need accurate and timely analysis. They need you to be consistent: every model, every property, every time. You will build a long-term career in REPE if you can keep your cool, even when the market is a hot mess.