“Institutional Wisdom” is an Oxymoron – Part I
Institutions are high in the food chain of capital markets for commercial real estate owner/operators. When they are properly motivated, an institutional investor can provide huge amounts of capital in short order. They typically demand no less than perfect performance and generally require no more than a pledge of your first born. But are they wise?
Let’s start with the “golden rule”: He who has the gold, rules. Do your prospective institutional investors have gold at the moment? Maybe they’ve already allocated all the capital in their current fund, meaning that it might be a few months until they’re able to make a firm commitment. It could be that they have funds, but what you have to offer – asset class, location, anchor tenant, development, color of the awnings or direction of the wind – may already be covered by some previously committed investment. Realize that they are dating several companies for each allocated slug of capital; so even if they really like you, some other deal may get through the approval process first and you’ll be left spinning in the wind.
Let us assume for the moment that now the institutional investor not only has capital to invest, but your offering fits their current profile and you’re still in the hunt for their interest. Does “institutional capital” equal “institutional wisdom?” If we use a circular argument (that institutional investors know what they want), then by definition they are wise when they invest in what they seek.
But are institutional investors, in looking at the overall market over time, generally wise in the ways of real estate? Those who stay employed are at least successful with their investments (or perhaps have photos of their boss not appropriate for YouTube). Had you invested in the early part of the last decade, you were deemed smart. Had you invested at the peak in 2007/2008… you probably don’t look as good. But there are bad deals made in great markets, as well as great deals made in down markets. How do we decide if we follow the “wisdom” of institutional investors?
The point I’m getting at is that as with all advice, look at the biases of the source and weigh the benefit of compliance. When a 25-year-old MBA from Harvard tells a CEO with 30 years of experience in apartments to dump properties in certain market and invest in others, is this wisdom? What if the 25-year-old controls access to institutional capital, either directly from a fund or in a secondary offering? Should the advice be considered “wisdom?”
In this case, the 25-year-old has never worked directly with real estate. He or she can make no distinction between a hammer and a nail, a good property manager versus a phony, a good versus a great tenant. There’s a great book understanding, but no practical knowledge of real estate. Nonetheless, this youngster controls access to institutional capital. Do you change your business plan to fit their preconceived notion of what is “wise” to do?
Remember that many successful real estate leaders have become bullheaded over the course of their careers. One does not build a significant real estate portfolio – to where you will have access to institutional capital – without taking some short cuts and being myopic on many issues. So like when high- and low-pressure fronts collide, a storm is usually in the making. When someone who has “been there, done that” comes up against an “I’m smarter than you, and by the way I control your access to capital” attitude, expect there to be many conversations behind the back of the other on how wrong is the thinking of the other.
Continued next week, Part 2…