The process of owning and
profiting from commercial real estate is more complicated than
buying and selling. Of course, buying and selling always receive
the most attention, because that’s where large fees and
commissions are paid, but they are not the only means to increase
investor value. In fact, as real estate markets, like equities
markets, have become more efficient, creating above-market returns
for investors on purchase and sale has become more perception
than reality.
Henna views the lifecycle
of commercial real estate ownership as a six-step process.
-
- Evaluation
- Acquisition
- Renovation
- Cultivation
- Disposition
Remarkably,
most large fund managers are focused on acquisitions and dispositions,
the two places where professional brokerage firms broadcast
opportunities far and wide in search of the highest prices for
their clients. From the investor’s perspective, this makes
some sense for dispositions, but it makes little sense to acquire
widely marketed transactions,
since it precludes any value creation at acquisition. But with
large capital commitments to invest and benchmark returns compounding,
fund managers often seek this path of least resistance. Further,
they don’t aggressively pursue the day-to-day opportunities
to create value, instead placing properties into a holding pattern,
hoping markets improve, and then disposing of them in response
to timing incentives set forth in the operating agreements with
their investors. Amazingly, some professional fund managers
source almost all or their transactions through commercial brokerage
houses for convenience, but then avoid the houses for dispositions,
in order to avoid paying commissions.
This
is completely backwards.
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