Unfortunately, landing a career in commercial real estate is not as easy or simple. From core funds to development, from REITs to PE shops, from breaking in to exit opportunities – this article attempts to run the entire gamut of commercial real estate in less than 2,000 words.
Let's dive right in ...
Risk & Reward
With commercial real estate, it’s easiest to think of investment opportunities from least risky to most risky and then analyze the players in each category.
- Least Risky: Core Investing
- More Risky: Value-Add and Opportunistic Strategies
- Most Risky: Real Estate Development
Core Investing is all about stability and getting high single-digit returns by operating existing assets. There’s less risk when a building is already operational and generating rental income backed by long-term leases from the tenants – think of the GM Building in New York or a class-A regional mall as example core investments.
Since these are stable assets that provide a steady income stream to the owners, pension funds are the main investors in core funds.
You also see Real Estate Investment Trusts (REITs) – both publicly traded REITs and private REITs – in this space, as well as core real estate funds run by real estate investment managers such as AEW and RREEF. The big, diversified financial companies like J.P. Morgan and Morgan Stanley also have real estate arms that invest in property directly.
A Little More Risk, A Little More Reward …
After you leave this Core Investing space, you get into Value-Add and Opportunistic Strategies – the line between these two types of strategies can be blurred, but Opportunistic funds usually seek higher returns than Value-Add strategies.
Value-Add strategies will often invest in Core-like assets that have some sort of upside through re-development or lease-up of vacant space. Opportunistic strategies can do the same, but they can sometimes add more leverage to juice returns. Like I said, the line between the two can be blurry.
Returns are typically in the 15 – 20% range, but may go higher depending on how risky the strategy is. Some REITs and core funds managers dabble in this space (more toward Value-Add), but this is where PE shops enter the picture since returns are more attractive.
At the riskiest end of the spectrum is real estate development – and the players there are all over the map.
Some REITs actually have large development pipelines and land banks and invest significant resources into constructing new properties – examples include AvalonBay [AVB] (apartments) and ProLogis [PLD] (industrial), which had a $4B global development pipeline at the market peak back in the boom times of 2007.
Private equity can sometimes be active in development, but usually only as the capital partner to developers. This is where the PE shop will fund a local developer that has the development expertise but needs funding.
Then you also have large private companies like Opus that focus on real estate development.
Risk = Reward?
Based on the descriptions above, you might think that real estate development offers the highest potential returns and the highest pay since it’s also the riskiest.
But you’d be wrong since it’s a boom-and-bust business.
While PLD had a $4B development pipeline at the market peak, it dwindled down to less than $500MM after the market collapsed; three of Opus’ five major subsidiaries filed for bankruptcy in the past downturn. Sure, they made money when the market was good, but they lost their shirts when the market turned bad.
This is not to say that real estate development is “bad” – just don't jump into it expecting to make bank right away. It’s great if you’re into the brick-and-mortars side of real estate, but otherwise think about the other options above.
You’ve also got asset management firms and hedge funds that specialize in real estate securities (REITs) across the globe. If you want to blend real estate and the public markets, these can be good options.
How to Break Into Commercial Real Estate
As with everything else in finance, at the entry-level you’re just a high-paid spreadsheet monkey.
A typical “path” for breaking in is to go to a target school and then get into real estate investment banking – that’s what many of the top people at the biggest real estate firms and REITs have done.
Mike Fascitelli, CEO of Vornado [VNO], is an example of a real estate big shot that followed this path. He went to Harvard for his MBA, started at McKinsey, and then went to Goldman as a real estate investment banker. After several years at Goldman, Steve Roth lured Fascitelli away from banking to work at VNO.
But you don’t have to follow that path to break in – and an MBA isn’t even a prerequisite.
The best example is Jonathan Gray, the co-head of Blackstone’s real estate group – Gray started at Blackstone with just an undergraduate degree from Wharton and worked his way up to become co-head of the entire real estate group by age 35. At age 37, he was busy pulling off the EOP acquisition, the biggest private equity buyout ever!
Yes, Wharton is a target school and it also happens to be one of the top undergraduate schools for real estate – but more importantly, it has a great real estate alumni network.
Just like everything else in finance, leveraging your alumni network is essential to breaking in.
Other top undergraduate schools for real estate in the US include UC Berkeley, USC, and Wisconsin – these are well-known institutions, but they’re not the Ivy League and they’re not the ones that immediately come to mind when you think of a “target.”
Real estate is very much a “who you know” business and having a well-connected alumni base is critical – if you’re at a school without much of a presence in real estate, your next best option is to get an MBA at a school with a strong real estate program.
If you’re already out of school and working, you could get involved in trade groups like ICSC, ULI, or YREP if there’s one in your area.
Whatever you decide to do, networking is even more important in real estate than in other industries so start pounding the pavement as soon as possible.
But I Want to Build Buildings!
While many top real estate jobs required work experience and/or more than an undergraduate degree, development is one area where undergrads from all different backgrounds can get in right out of school.
So if you’re in this boat and you’re interested in real estate, you’re better off using your career center and alumni network to get in and focusing on development rather than PE, REITs, or anything else that might prefer experience and/or advanced degrees.
One thing to help you out: Pick a major that lends itself to real estate development. Example majors: real estate, civil engineering, architecture, or construction management.
Since development is much more bricks-and-mortar than other RE-associated industries, knowing these subjects is valuable for breaking in – and you’ll get the alumni network to help you land a development job.
If you don’t know what major and/or school is good for getting into RE development, just ask around and see what types of jobs most graduates get – if “real estate” is a common answer, you’ve found a good match.
Breaking Into REITs
Real Estate Investment Trusts (REITs) are investment vehicles that are exempt from corporate income taxes as long as certain criteria are met; the main one is that REITs must pay out 90% of their taxable income as dividends, which means that they have little cash on hand and are constantly issuing debt and equity to fund their operations.
Historically REITs were more passive vehicles that focused on owning properties and escalating rents over time, but today they’re more dynamic and many REITs buy, sell, develop, and manage properties and 3rd party joint ventures all the time.
A few of the larger REITs in different segments include the Simon Property Group [SPG] (shopping malls), Boston Properties [BXP] (offices), AvalonBay [AVB] (apartments), and Prologis [PLD] (industrial).
Since REITs are completely vertically integrated, you see all sorts of different job opportunities there; on the operations side you’ll find developers, property managers, and acquisition people who deal directly with properties.
On the capital markets side you’ll find finance people who work on equity and debt deals to fund the REIT’s operations.
If you want to get into the operations side of a REIT, it’s similar to what you need to break into RE development: get a real estate-related undergraduate degree and network with alumni.
But if you’re interested in capital markets, you need real estate investment banking experience or an MBA – REITs are one of the main exit opportunities for RE bankers since you advise REITs all the time as a banker.
Bottom-line: if you’re more interested in finance, go the banking route and look for REIT exit opportunities; if you’re more interested in the bricks-and-sticks part of real estate, skip banking and go straight into development or acquisitions.
Compensation: Boardwalk or Baltic Ave?
Unfortunately, there are few good data sources on real estate compensation – but in general, pay is commensurate with risk and expected returns, at least on the buy-side.
The main exception is development – it’s the riskiest investment class and yet the pay is also the worst.
You might think of Donald Trump and say, “Aha! Real estate development is where the money’s at!” but don’t be fooled by the celebrities: there is big money to be made in development, but not in the way you might expect.
The real money in development accrues to those that put their money at risk in the developments.
To complete construction of a new property, the developer itself only puts down a very small portion of the total equity – maybe 5% or less. Many times you will find that the developer simply contributes their land basis as the only equity in the project. The developer will then use debt and mezzanine financing to fund the entire construction cost.
So, start with very little money in the project and then add the fact that there’s no cash flow from properties that are under development until tenants move in and rental income starts flowing.
Even the fees the developers charge are not great compared to the overhead, so there isn’t much money left to pay salaries to employees.
Developers don't make money until the project is built, fully-leased, and then either sold or refinanced as an operating building. Until that happens, expect to be eating ramen noodles.
So do not get into development if money is your main goal – only do it if you’re interested in building and construction side of real estate. You will not make it big until you have enough money to invest in development projects yourself.
For core funds and REITs, pay is consistent with base salaries for recent graduates elsewhere in finance – the main difference is that you won’t receive Wall Street-like bonuses in these jobs because the fees and returns are lower than in PE, for example.
On the private equity, hedge fund, and asset management side, compensation is similar to what you would earn at non-real estate funds. So real estate PE is similar to normal PE, real estate HFs are similar to normal HFs, and REIT-focused asset management is similar to normal asset management.
And on the investment banking side, you don’t see much of a difference at the junior levels between real estate banking and other groups.
Be careful of getting pigeonholed: just as actors get typecast over time, you will also get typecast the longer you stay with the same job. So if you get into real estate and don’t like it, move on as quickly as possible or it will become more and more difficult to find a non-real estate job.
In addition to moving up the ladder, investing in real estate yourself is another possibility: a number of friends have amassed nice little portfolios of multi-family assets. It's not uncommon to get a few friends or relatives together to purchase small rental properties.
Raising a small fund of your own is also possible, but just as with starting a hedge fund you need to raise some seed money to get started – you would go to friends and family first, show solid performance, and then approach a broader set of investors once you can point to results.
Do You Have an Edifice Complex?
It’s a great field to get into, but don’t expect to become Donald Trump right away.
Until you have enough cash to fund massive real estate developments by yourself, you won’t see your name on any buildings.
The long-term prospects for real estate are always positive. After all, the world isn't making any more land anytime soon.
Even More on Real Estate
If you want to learn more about the modeling and valuation side of real estate, check out the new Breaking Into Wall Street Real Estate & REIT Modeling course, which covers both individual properties and REITs via case studies of an apartment complex, an office development and sale, a hotel acquisition and renovation, and Avalon Bay, a leading apartment REIT. Life on the Buy Side readers will also receive a free $47 PowerPoint bonus course.
Even if you have no interest in the course, you can learn a good amount from the free sample lessons and quick reference guides on the page.
Note: This article was also featured as a guest post over at Mergers & Inquisitions.