These 4 Topics Are Defining The Future Of Real Estate Funds

Last year was good for real estate, and the hunt for yield continues in 2017, with many investors allocating up to 10% of assets to real estate, driving down cap rates. Better-than-expected results over the last couple of years have caused investors to recycle distributions they are getting back with the same investment firms and managers.

As a result, fund managers were holding over $200B in cash at the end of 2016, ready to be deployed back into the real estate market. Following what seemed to be a temporary pause in 2016, many CRE professionals are cautious of where the real estate market is heading in 2017 and where it is in the cycle.

As 2017 looks to be an active year for new real estate fund originations, Bisnow chatted with Zurab Moshashvili, a director at New York City-based accounting firm Anchin Block & Anchin to gather his insights into the four biggest topics surrounding real estate funds.

1) Technology

In 2017, according to Moshashvili, it is all about technology, technology, technology. In New York City, there already exist several software products and technologies that track real estate activity in the boroughs on almost a real-time basis. This helps track trends faster and in a more organized manner.

“Millennials are urbanizing because they want to be closer to work,” Moshashvili said.

There are tools that track and also foreshadow these demographic movements on a macro level.

Property managers and owners are leveraging tools to help properties become more efficient, monitoring resource and electricity consumption that self-adjusts to save energy.

Perhaps most importantly, cybersecurity is becoming paramount to a CRE business’ success. Investors expect cybersecurity measures to be implemented by fund managers. This is one area in which fund managers tend to be lagging. They must make cybersecurity the forefront of their operations in 2017 and going forward, Moshashvili said.

“Technology and the business risks it presents has changed the world significantly, and fund managers and fund administrators they are working with must keep up,” he said.

2) Outsourcing

Outsourcing has become a norm in the real estate investment fund industry, with investors expecting real estate fund managers to work with fund administrators to outsource back-office functions.

Funds that operate properties are not as eager to outsource operations, accounting or back-office functions at the property level. Fund managers will have to decide if outsourcing is right for their business while balancing the expectations of investors who expect third-party administrators to act as overseers.

“Fund managers cannot assume that what was done with legacy funds will work for a new fund as funds are recycled back to them,” Moshashvili said.

3) Valuations

With the increase in real estate values, focus on valuations of real estate investments remains high. Real estate funds will need a robust valuation policy that will hold up to challenges by auditors and investors. It remains unclear whether the real estate market will experience turbulence in 2017, and fund managers will need to be prepared to support valuations more than in recent years.

4) Market direction

As 2017 progresses, we may see a negative impact on the CMBS loans backed by retail assets. America’s largest retail stores, including JC Penney, Sears and Macy’s, have been closing hundreds of stores across the country, driving up vacancies that may not be absorbed quickly, impacting owners’ ability to service debt in a timely manner.

Many international investors still view the U.S. real estate market as attractive compared to the rest of the world, particularly when it comes to Class-A properties. As a result, cap rates on Class-A properties have continued to decrease. Class-B and C properties are also fundamentally strong, and there may be a shift of domestic investors to such properties in 2017. 

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