Why Asset Managers Should Be In On Acquisitions

The days when asset managers were relegated to back-office functions has gone, according to TIAA-CREF’s head of asset management, John Cornuke. He argues that asset managers should be involved in every acquisition, helping assess tenant improvement costs and the feasibility of investment strategies.

PrivcapRE: Asset managers could be called the “unsung heroes” of successful real estate investing. So how do they add value to the investment?

John Cornuke, Senior Director, Global Real Estate and Head of Asset Management, TIAA-CREF: If you use the analogy of a football team, asset managers are the lineman; they are the guys in the trenches who actually make things happen. Our asset-management team is involved with an acquisition from the outset, beginning with the due diligence process. We are always asked, “What is your long-term plan for this asset?” My team has deep knowledge of the local markets; we understand local economic fundamentals and key trends that can impact each asset. After acquisition, we implement active strategies to stabilize the property, manage it efficiently, and generate the highest possible return.

How does having asset managers involved in the buy decision impact a deal?

Cornuke: Our team brings a different perspective to the ownership equation. For example, we evaluate basic metrics such as floor-plate dimensions, leasing opportunities, and which local industries are growing or weakening. Is there evidence of a shift in the business climate from one industry to another, such as from finance/insurance/real estate sectors to tech? If a property has upcoming vacancy, what strategies can we implement to retain tenants or to re-lease the space? Asset managers should always have a seat at the table.

So how is space being used differently today and how does it affect tenant improvement costs versus a decade ago?

Cornuke: Technology firms started the trend of moving into legacy buildings and renovating the space to accommodate modern work-style preferences, but many conventional businesses are now following suit. Tenants are reconfiguring these traditional spaces to create open floor plans and exposed ceilings. The few private offices are in interior locations while bench seating for most employees is around the periphery. Businesses are adding staff, yet taking less space; the old standard of 150-215 square feet per person now 85-150 per person.

Employees today are encouraged to come to the office rather than working at home. And in the office, they find collaborative spaces and a range of support services, including Wi-Fi-enabled common areas, breakout rooms, workout facilities, and concierge services. Collaboration between employees is encouraged, while amassing paper is discouraged. Essentially, today’s office space is designed for millennials, and aging baby boomers have to adapt. Because these trends are changing how space is built out, the feasibility of transforming older space affects the acquisition process.

What can asset managers do to help turn a troubled asset around?

Cornuke: Our bread and butter responsibilities are maintaining the stability of well-located, well-leased assets, but it’s so rewarding to change the trajectory of a problem asset. We ask ourselves, “What drives tenants and their employees? How can we provide the services they want?” Often, we can implement a number of positive changes starting with the parking facility and working up through the property. Is there easy access to parking?  How can we improve building safety? How can we update an obsolete, uninviting lobby? All of these factors can improve the property’s performance over time. Conversely, it’s also crucial to know when attributes beyond our control will limit success so we want to be prudent, investing capital only when property returns will be significantly enhanced.    

What property types and geographic regions are performing well in terms of tenant demand and leasing?

Cornuke: It always depends on specific property location. [But] the office sector has undergone a huge turnaround from the depths of the recession, as has industrial. In some markets, we see some office tenants holding onto excess space in anticipation of new hires. And the industrial sector is doing very well, benefiting from both stronger manufacturing activity and the growth of e-commerce. The housing sector has also been robust, particularly in urban areas as empty nesters move downtown. Both high-rise and garden apartments, especially those with desirable amenities, are in demand. All in all, I’m bullish about real estate.