NAREIM Executive Officer Meeting takeaways

Oct 4-6, 2023

At the 2023 NAREIM Executive Officer meeting in Deer Valley, Utah, on Oct 4-6, members and the incoming Fellows class brainstormed solutions to industry challenges around upskilling and developing talent, debt financing and credit, AI and machine learning, culture and more.

The 2023 NAREIM Jeff Barclays Fellows guided the industry on what it must do to evolve, with an emphasis on seeking new ways to apply AI and machine learning, engage the industry’s newest entrants, and rethink approaches to ESG.

Liquidity & cost of capital:

NAREIM members heard from a trio of key actors in the debt capital markets space—the largest money center lender in real estate investment management, a private debt fund and a life insurance company. They concurred: financial institutions need managers to transact their existing loans with them, in order to bring back capital. And they’re willing to give creative borrowers some time.

Lender priorities:

· Asset surveillance

· Working through exposure with hard maturity dates

· Addressing issues at the property level

Who lenders are negotiating with:

· Borrowers that will de-leverage in exchange for more runway

· Buyers who are passionate about an asset and need more time

· Owners of quality assets with broken capital stacks

Views on office in the next 3 years:

· Don’t rely on Argus models for office valuation – the assumptions are too rigid

· Limited capital available from ultra high-net-worth investors, but it’s inconsistent, very limited and non-scalable

· Lenders would like to see a re-pricing of all office assets, and are seeing virtually no runoff

· Assets need to flush through the system in order for the market to evolve, which will take time

· Maturity events signal opportunities in office

· Non performing loan sales could lead to a boom in opportunistic capital being raised to take advantage of the distress

What concerns lenders:

· Uncertainty around when steady-state demand will settle out in the office sector

· Office re-trades triggered by capital markets movements

· Kicking the can down the road, with growing credit spread risk

· Slowdown in payoffs

What makes lenders hopeful:

· Lenders expressed optimism that more monetization will happen to pay off loans so that financial institutions can redeploy capital

· Lending portfolios are strong and in the right part of the risk spectrum

· Monthly conversations with regulators about distressed portfolios

· Educating regulators on key action items like covenant or maturity defaults

And the big question: How do lenders feel about taking back keys?

One said: "We don’t want to take everything back. But will we? Yes, if need be."

Upskilling & compensation:

Staffing was another headlining topic at the meeting. Here’s what NAREIM members had to say:

· Organizations that make a strategic pivot often don’t have the talent to get to the next destination

· Natural attrition (poaching) is most pronounced at the Associate level

· More pressure to attract and train talent in a down cycle is putting more emphasis on cash compensation over long-term incentives

· Among key corporate functions, Data Strategy, IT, ESG are most in demand by NAREIM members

· Good problem-solvers are easiest to upskill

· Cross-training and retraining provide opportunities to get diverse teams to speak the same language

· The Capital Raising function leads in departures by senior-level employees

· As a result, some firms are looking to NOI generation instead of Capital Raising for returns in the next few years

Culture & leadership:

The former CEO of several global brands shared best practices on culture with NAREIM members:

What are the qualities of the best C-suite executives?

· Adept at listening, giving and receiving constructive feedback

· Skilled at creating a positive culture

· Compensate fairly to engage rising talent

· Create a culture of challenge, where pushback is rewarded

· Give people the safety to make mistakes

· Write a strategic plan and engage employees in implementation and goal-setting

· Define job roles and set expectations early and clearly

Office:

The future of office lies with small and medium-sized enterprises – who will favor pre-built spaces requiring hospitality-like and tenant engagement services.

Walking through an office-to-residential conversion case study, members discussed how office assets can be refocused post-pandemic. With just 7% of all US offices suitable for conversion, members said demand for office in the near-term will be driven by small and medium-sized organizations. Larger tenants were still trying to understand how they will utilize space in the future.

That shift however brings with it an operational intensity, with the need for pre-built spaces that are move-in ready and high levels of tenant engagement, such as events several times a week to attract employees back to the office building.

Other highlights from the office session included:

· “It’s not about cap rates anymore, it’s all about the unlevered yield.”

· Seller financing is the only way to get things done right now

· This is a generational buying opportunity in office

What’s on your mind?

One member said they had 15 AI use cases currently underway, with some AI and machine learning use cases including:

· Use of Microsoft Co-pilot on Teams calls to take notes, create highlights and draft action items

· Drafting the first version of an RFP

· Predictive maintenance. Using drone footage of assets with AI for maintenance checks, with updates relayed back to asset and portfolio managers

· Drafting the first version of an Investment Committee memo

· Drafting PPT presentations

Where AI was being used to take notes and write action items, members said there were restrictions to its use, such as not allowing it for investment committees, HR meetings and board meetings.