Winter is coming and investors should prepare for both the best and worst
- September 1, 2022: Vol. 9, Number 8

Winter is coming and investors should prepare for both the best and worst

by Geoffrey Dohrmann

It has been nearly 14 years since the collapse of Lehman Bros. on Sept. 15, 2008. In response, total returns posted by the NCREIF Fund Index – Open End Diversified Core Equity (ODCE) declined 10 percent in 2008 and another 29.7 percent in 2009.

Ever since, ODCE has posted positive returns for 12 consecutive years (including the first few quarters of 2022). Seven of these years posted double-digit returns, with total returns ranging between a low of 7.62 percent in 2017 and a high of 22.18 percent in 2021.

The prior downturn in returns (1991 and 1992) happened in response to the savings and loan crisis of the early 1990s. Following that much less severe decline in total returns (6.26 percent in 1991 and 5.5 percent in 1992), the index posted 15 consecutive years of positive returns, nine of which were in double digits.

When will we see the next correction in the real estate markets? Many have posited that continued rising interest rates will eventually spell the end of this particular cycle. On one hand, REIT returns — which many believe are more forward looking and therefore tend to lead upticks and downturns in the private equity real estate markets — have been decidedly down for some time now. Are the public real estate markets trying to tell us something?

On the other hand, pundits have been predicting the end of this cycle for more than seven years, and still the markets continue to hold up.

What we do know for sure is that eventually this cycle will end. Hopefully, now, the institutional and non-institutional investor market will be able to recognize the next downturn as what it is — a perhaps long overdue correction in market pricing — that will, as it has in the past, be relatively short-lived.

Throughout most of the six books of George R.R. Martin’s epic series A Song of Ice and Fire, the reader and characters are repeatedly warned, “Winter is coming.” It never does (at least in the books he actually finished). But the reader is led to believe it inevitably would. (The televised version of the story, the Game of Thrones series that aired on HBO, extended the story beyond what Martin wrote, and winter did come.)

Well, for all of us in institutional real estate (and registered investment adviser land), winter is coming. We all know it. We can feel it in our bones.

As I’ve written before, riding high on a bull market is a little bit like flying on an airplane with too much food and booze and not enough fuel. It can only feel good for a while.

Many of you reading this have been through real estate downturns before, so you pretty much know what to expect. But many of you have not.

Our publication sponsors have grown weary of my pontificating about the importance of preparing their clients for the next turn in the road and my warnings to not pull back on visibility or communication with their clients.

And yet, if we look to the past, time and time again we’ve seen some investment managers lose market share during a downturn precisely because they allowed themselves to become invisible. They decreased their profile in the market as well as the frequency and character of their communications with their clients at precisely the time they should have increased these. On the other hand, some managers communicated too much, forgetting that listening to their clients and acknowledging and responding to their concerns is the most important component of any communications effort.

No one likes to think they would be the latter kind of investment manager. But the burden of communications rests not just on the shoulders of a firm’s marketing and client service team, it rests on the shoulders of everyone who is client facing and shares the responsibility for listening to client concerns.

For those of you facing your first downturn, be aware that downturns lead to a complete meltdown in capital fundraising results, property transactions and debt capital availability. Investment management fees drop with property values. All of this ultimately leads to layoffs of now superfluous key personnel and support staff, while the volume of requests for time and information from clients accelerates dramatically.

The first thing you need to do is prepare yourself both mentally and emotionally for what’s ultimately coming. It’s also wise to consider career options so you have alternatives should your number be called when the layoffs begin.

I’m not advising you to panic, mind you. It’s simply wise to anticipate all possibilities and prepare for both the best and the worst. And I think your clients — and, if you’re an investor, your boards — expect no less of you.

At any rate, at the very least, it’s important to be careful. Be very, very careful. It’s a wacky world out there.


Geoffrey Dohrmann is president and CEO, publisher and editor-in-chief of Institutional Real Estate Inc.


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