Mastering Real Estate Asset Management: Investment Strategies and Portfolio Optimization

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Asset management deals with the impact of a property or portfolio of properties in your investment profile. An asset manager optimizes your investment so that you can maximize returns and mitigate potential risks that are inherent in real estate investing.

The types of properties that they manage are classified by sector, such as:

• Residential and student housing
• Commercial real estate assets, including, but not limited to:
  • Hotels
  • Short-term rentals
  • Storage facilities
  • Retail and office buildings.

Key Responsibilities of a Real Estate Asset Manager

Asset managers can take different approaches to their work, but they all have similar responsibilities throughout the property’s lifecycle. That lifecycle has three phases: acquisition, holding and disposition.

1. Acquisition

Asset managers have two key responsibilities during this first phase of the property’s lifecycle.

• Advise investors or acquisition teams to help them determine whether a particular property is priced right and a good fit for the portfolio. They may also help secure funding for its purchase.
• Help create a business plan defining the short- and long-term goals for appreciation, cash flow and investment returns and presenting a strategy for achieving them.

2. Holding

During the holding phase, asset managers focus on financial performance to maintain adequate cash flow, while also focusing on obtaining the best return possible while protecting the portfolio against risk.

• Hire property managers and other individuals to oversee day-to-day operations.
• Create a budget for operating expenses and other major investments.
• Forecast the property’s net operating income and predict investors’ returns.
• Track key performance indicators.
• Conduct financial analyses to monitor the property’s performance and identify opportunities to reduce costs and increase revenue.
• Perform ongoing market research to identify trends and evaluate the property’s competitive advantages and disadvantages.

3. Disposition

Disposition refers to the disposal of a property from the portfolio.

• Identify properties in danger of losing value or requiring more capital spending than the asset manager can justify.
• Provide guidance on sale price.
• Calculate return on investment.
• Determine how sale proceeds might be used to purchase a new property.

How Asset Management Differs From Property Management

Asset management is responsible for the property’s financial performance as an investment asset, similar to a stock or bond. It views the property in the context of the portfolio to maximize long-term and short-term returns on investment at both levels while protecting investors against risk.

Property management, on the other hand, focuses strictly on a building’s or complex’s day-to-day operations. The property manager serves as the asset manager’s boots on the ground, so to speak, helping to execute the asset manager’s strategies by performing tasks like:

• Advertising and marketing units for rent
• Procuring tenants
• Executing leases
• Collecting rents
• Resolving tenant issues
• Managing maintenance and repairs within budget
• Maintaining financial records

Investment Strategies in Real Estate Asset Management

Asset managers choose one of several strategies to meet a property’s, and thus a portfolio’s, investment goals. Each strategy has its own way of balancing return potential against risk.

Core and Core Plus Investment Strategies

Just as core investments such as blue-chip stocks are long-term investments that create a strong foundation for a stock portfolio, core real estate investments serve that purpose for real estate portfolios. They’re high-quality, turn-key or nearly turn-key properties that provide predictable cash flow with little risk.

Their value tends to come from income generation rather than capital appreciation, so returns are often lower. You might think of these properties as the Dividend Aristocrats of the real estate world — price growth is slow and steady, but dividends provide income as you wait.

In a blog post on the Origin Investments website, co-CEO Michael Episcope uses a Walgreens store with a 30-year lease as an example of a core investment. The long lease will provide stable income for decades to come. And assuming the building has been well maintained, the asset manager won’t have to divert that income to major repairs or improvements. Ideally, the property would be modestly leveraged — 40% to 45%, according to Episcope.

For better growth potential, asset managers might implement a core-plus strategy by purchasing a property with similar characteristics as a core property, but requiring more debt, more capital expenditures for minor improvements and perhaps a longer lease to make the most of the property’s potential.

Value-Add Investment Strategies

A value-add investment strategy looks for properties with stronger growth potential, albeit with higher risk. “Potential” is the operative word with this strategy because, as Episcope’s Origin Investments blog post noted, value-add properties often require higher amounts of debt — up to 75% — and typically have little or no cash flow at acquisition. But repairs and upgrades, improved management and more effective leasing strategies, or a combination of these, could result in higher rents and stronger appreciation.

Example

A good example of a value-add investment is a run-down apartment building that’s in a desirable location, but because of its poor condition compared to neighboring buildings, has a high vacancy rate — despite below-market-value rents and relatively lax tenant qualification requirements. Repairing and upgrading the building could increase its value and also attract better-qualified tenants willing and able to pay higher rent.

Opportunistic Investment Strategies

An opportunistic investment strategy is similar to a value-add strategy, but with higher risk and higher growth potential. However, that growth is likely to be at least a few years away because of the extensive work needed to increase the property’s value and begin generating income.

Opportunistic investments include unfinished buildings, land for development and the conversion of a building from one use to another — from vacant hotel to an apartment building, for example.

How To Maximize the Value of Real Estate Assets

If you’ve ever invested in an actively managed stock mutual fund, you probably have a sense of how real estate asset managers make decisions affecting the portfolios they manage.

Fund managers select investments they believe will meet their fund’s objectives based on analyses of the company’s performance and economic and market trends. After they acquire a stock, the managers track its performance and its effect on the overall portfolio. They buy and sell shares as needed to hedge against risk and increase the fund’s value.

Real estate asset managers play a similar role; however, whereas a mutual fund manager has no control over the the performance of companies held in the fund, asset managers are fully accountable for the properties in their portfolios, including their overall financial performance. That gives them much more control, but it also means finding and executing the best strategy for the portfolio and each property within that portfolio.

Asset managers use market and economic analysis to identify opportunities and risks affecting the properties. They also define a set of operational and financial key performance indicators to measure the performance of the portfolio and the properties within it against their objectives.

Common KPIs include:

• Income
• Operating expenses
• Operational efficiency
• Return on investment
• Occupancy rates
• Vacancy rates
• Lease renewals
• Tenant satisfaction

If a property or the portfolio is lagging in any KPI, the asset manager can revise the strategy. For example, it might refine processes at the property management level to improve tenant satisfaction and encourage lease renewals, or reexamine budgets to reduce costs. Alternatively, it could offer incentives for tenants to renew their leases or sign longer ones.

Risk Management in Real Estate Asset Management

The kinds of risks asset managers try to prevent include the market risks all investments face, where economic conditions can adversely affect supply and demand. That risk can impact the overall market or a particular segment, such as office buildings.

In fact, a recent article from the Deloitte Global Economics Research Center identified the office sector as an area of concern in commercial real estate lending because of “elevated vacancy rates and falling valuations.” These issues are the result of a post-pandemic return-to-office rate of just 50% of pre-pandemic levels, Deloitte noted.

Risks can get even more specific, affecting just a particular property. Local building and zoning codes, construction-induced vacancies and labor shortages can all hamper the investment objectives. So can the loss of a retail major tenant to closure, or difficulty selling an asset at the end of its lifecycle.

Debt also poses risks to asset values. Although debt is necessary for acquisition and for value-adding repairs and improvements, delays in producing those returns can have a devastating effect on ROI.

Risk management is perhaps the best example of the importance of competent asset management. It takes deep knowledge about the market, finance property management and every other aspect of asset management to foresee the many types of risk and create strategies to minimize their potential impacts.

Final Take

The goal of real estate asset management is to maxmize investors’ return on investment in a single property or, more commonly, a portfolio of properties. It accomplishes this by creating strategies for optimizing the properties’ financial performance while shielding them from risk. It measures the success of these initiatives through the use of key performance indicators, which identify areas of success and opportunities for improvement.

For more information about real estate asset management, tap sources such as the Institute of Real Estate Management and the CRE, The Counselors of Real Estate. Both have useful information for investors and real estate professionals, along with member directories where you can find a qualified asset manager.

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