The rough patch in commercial real estate that has coincided with the rapid rise in interest rates and marked by a dramatic reduction in investment sales is translating into operational changes for real estate investment managers.
The 2023 Global Management Survey, recently released by NAREIM and Ferguson Partners, illustrates how real estate organizations have increased efficiencies across key functional areas over the past six years.
The 2023 survey, which featured 83 respondents, focused on what firms were doing in 2022, when the slowdown in the industry was just beginning. It also asked what firms were planning to do in 2023.
Based on same-store survey participants, the study found that participants have reduced headcount by 29% across five key functional areas in the past six years. Capital raising professionals led the efficiency charge, closely followed by asset and portfolio management teams.
These efficiency gains were also coming as real estate investment managers were steadily increasing assets under management (AUM), but the pace of growth slowed in 2022 and could turn negative in 2023. In 2022, “the median investment management firm reported net AUM growth of 7%–a pace of growth 50% less than 2021 and 170 bps below the annual AUM growth reported over the prior five years,” according to the survey.
Overall, 68% of firms increased net AUM year-over-year in 2022, down from 86% of firms that reported AUM increases in the previous survey.
To compensate for slower growth, 38% of respondents in the survey expected flat or reduced headcount by year-end. That was almost double the 20% figure from the 2022 survey.
WMRE sat down with Zoe Hughes, CEO of NAREIM, and Scott McIntosh, director, Ferguson Partners, to discuss the findings.
This interview has been edited for style, length and clarity.
WMRE: Tell me about the history of this research. You’ve been doing it for more than a decade, correct?
Scott McIntosh: It’s a comprehensive study of management and operational practices in real estate investment management space, assets under management, head count, organization composition, workloads, outsourcing, turnover and other factors.
All of these factors impact how real estate investment managers operate. The results of our analysis give a granular, detailed view of industry practices and dynamics. Firms that participate get a detailed report highlighting market information across all those operational areas. They can understand what the industry looks like in terms of capital raising, full-time employees, etc. This year we had 83 firms, which is an all-time high in participation and represents a cross-section of the industry. There are global, regional, core, high-yield, opportunistic firms, vertically integrated, non-vertically integrated. This kind of cross-section gives us strong, rich data.
Zoe Hughes: One of the key things I hear from our members is that it is exceptionally powerful to understand how your peers are shaping their organizations in terms of efficiency, data, ESG.… That’s why we think it’s really impactful. It gives you key takeaways in how to think about competitive advantages and helps share practices to see what’s working and what’s not.
As we look to the results a bit, you can see the slowing in AUM growth. That is expected. The data is full year calendar 2022. So, as you think ahead for 2023, the survey that will come out next year, we would expect that AUM will go down. That slowdown is not fully reflected in this survey, but we can see what is to come. That will have impacts on margins and revenues for 2023.
WMRE: What would you point to as some of the key takeaways from this edition of the research?
Zoe Hughes: A key takeaway is the efficiencies. We are seeing investment managers become much more efficient. Looking over the prior six years of survey, you can see it across functions. The way we measure it is by per billion of AUM. The number of full-time-employees per billion of AUM has come down. Firms have gotten more efficient.
WMRE: Are there particular strategies driving these efficiencies?
Zoe Hughes: We don’t give definitive correlations, but one thing we can see in the survey is a wider adoption of chief data officers. There’s a prevalence of data as a distinct function. The same is happening with ESG. These weren’t around a few years ago. With data, it’s not just part of IT. Data strategies have emerged. But we can’t say that real estate investment managers are all doing one thing. They approach this in different ways.
Scott McIntosh: On the tech front, the exact drivers are not parsed out here, but we do ask a question about underlying organizational structures around tech, for instance. One data point is that we ask about cross-functional tech committees. These are committees across organizations with different perspectives driving decisions. This year 41% of respondents have cross-functional committees, up from 30% two years ago. I think that’s something organizations are leaning into as the pace of AUM is slowing and it’s becoming harder to achieve organizational efficiencies.
Zoe Hughes: Anecdotally, we also are really hearing some firms embrace how to use AI or ChatGPT in the business. They are exploring how we can get more rote, automated work done so that people can focus on doing the higher level, value-add work. Those discussions are ongoing as we speak. We’ve got to figure out how to do it safely. But they are current conversations that are happening.
In addition, this year we see that 13% of respondents have a chief innovation officers. You see growth there. You didn’t see that positions five years ago. And this is not a siloed function. It is embedded in the business and we’re seeing innovation officers that report directly to the C-suite. That is critical to any success.
WMRE: Your research also breaks down efficiency by functions and there were some differences there. Can you talk about that?
Scott McIntosh: Over the past six years, overall, these organizations have gotten more efficient. Then we do look function by function, and see how efficiencies flow through to frontline real estate functions.
Zoe Hughes: You also see this in back offices. There are efficiencies across the board. We focused on front office functions since this is where the bulk of staffing is. And it is on a same-store basis. These are the same firms.
Scott McIntosh: Also, it’s not that firms haven’t grown headcount. They have grown. But their portfolios have grown faster.
WMRE: You also mentioned ESG earlier. Is this something that real estate investment managers are devoting resources to as well?
Scott McIntosh: This wasn’t a dedicated job function even five years ago. In terms of resourcing, you see some interesting bifurcation. We ask, “Do you have a head of ESG?” For organizations with under $15 billion in AUM, about 20% to 25% have it. For organizations with over $15 billion in AUM, over 80% have a head of ESG. Large, global firms are very keyed into this, while slower and midsized firms are trying to stay on top of it. About 80% have cross-functional ESG committees.
Zoe Hughes: In the U.S., even if you don’t have a dedicated ESG head, it could often be part of asset management or a portfolio manager leading this. If you don’t have resources for an ESG head, you do often have a committee driving this strategy.
WMRE: Is that true even with some of the pushback that’s now emerged against ESG of late?
Zoe Hughes: When you look at ESG and DEI [diversity, equity and inclusion], it is about resiliency. It is about strong talent management practices. For assets, it is the resiliency long-term. There have been headlines of political pushback. We are very mindful of that. But if you look internally at organizations, it is strong asset management and strong talent management.
WMRE: In terms of efficiencies and looking at it based on AUM, what will happen with next year’s study given what we know about the investment sales climate and the revaluation process overall? Should we expect to see the AUM/FTE number change?
Scott McIntosh: We’ve seen gains in efficiency over the last six years, but we are at an inflection point with AUM growth slowing. It’s going to be more difficult to preserve these efficiency gains. So, if we think about implications, and we ask about staffing levels and headcounts for 2023, we found that nearly 40% of participants expect flat or reduced headcounts in 2023 vs. only 20% that expected that in the previous survey. The industry is reacting to slowing growth and looking to right-size their staffing levels.
Zoe Hughes: Those are conversations that are happening. What is the value in a market where there are so few deals? It’s a quick-changing market and people are cautious, so it will be interesting to see how things go. The cost of capital—both debt and equity—is a major consideration as well.
Another thing we will look at is outsourcing. A lot of firms will look at their core competencies and say, “How do I stick to my knitting?” They will stick to asset management and portfolio management. Firms will have to say, “Where am I great?” ESG and data, for example, are split about 50/50 in terms of outsourcing. How can firms leverage external resources the best? That is where C-suites’ heads are at right now.
Scott McIntosh: There will be assessments [about] the costs and benefits of doing something in house. … Investor relations reporting is being kept in house. That is your client. That is your capital base. But on leasing, we see that a majority of it is outsourced. You can lean on brokers.