For my summer internship, I wanted to learn how real estate investment managers could create alpha, or put in another way, beat the market. At Exeter Property Group, a fund shop based out of suburban Philadelphia, I was able to learn how one elite organization creates alpha by keeping the freshest pulse on the market, and expertly handling uncertainty, the investor’s gambit, by rapidly responding to the fluid needs of their tenants.
My journey to Exeter began at Cornell’s Baker Program in Real Estate, where I learned how to value real assets through Discounted Cash Flow, comparable and replacement cost analysis – all of which taught us how to be good buyers. We then studied real estate economics, and the fundamentals which govern the flow and ebb of space and asset markets – this taught us how to contextualize value. Finally, we learned, by navigating the legal language in mock contracts, that a commercial property’s economic value is anchored in its leases.
As a former military officer who was most at home conducting raid operations, Cornell’s classrooms gave me the tools to deftly create spreadsheet models and draft in-depth investment memos. Yet, as we neared summer our professors reminded us that deal-making is as much an art as it is a science. Exeter showed me that alpha is created when art is expertly married to science. Like most other investment managers, Exeter has ready access to vast quantitative data sets. As expected, my mentor, a partner and the regional Investment Officer of the firm’s largest market, had a natural grasp for real estate numbers. He swiftly calculated incremental yields and was able to amortize TI dollars to additional rent in his head.
However, the best lessons I learned were of the art form, and this enabled me to understand what fundamentally drove the well-manicured financial models. First, deals don’t make themselves. The purchase price of a property, or the face rent of a lease, are arrived at via a calculated game of give-and-take between buyer and seller, or landlord and tenant. In a competitive market, the best of these players are lightning fast in responsiveness – because time kills deals – and are creative, yet relentless, in overcoming every obstacle on the path to a signed P&S agreement or lease.
Most importantly, I learned that though you should track rents, cap rates, and sale prices on any number of databases, your competitors do so as well. While this research paves the foundation for making sound investment decisions, alpha is created when you are able to create value where others cannot. A buyer and landlord’s professional track record creates a healthy deal pipeline. These pipelines are built with expert market knowledge, and are made truly powerful via the local relationships built by the firm’s investment officers. These relationships bring the opportunities that ultimately yield above-market returns.