Go see them. Talk with them. Have a photo taken with them now because the entrepreneurial deal-driven real estate manager and their firms are becoming obsolete.
In their place are those who bring a combination of capital market, operating company and technology-driven decision-making expertise to real estate investing.
Two recent personnel decisions by industry leaders - Prudential Real Estate Investors, Short Hills, N.J., and the $100 billion California Public Employees' Retirement System, Sacramento - are evidence that only senior executives who can apply these skills to real estate need apply.
PREI last month hired Bernard Winograd as its chief executive officer. Mr. Winograd formerly was the chief financial officer of Taubman Centers Inc., a publicly traded real estate investment trust based in Bloomfield Hills, Mich.
Among his accomplishments was a role in designing and using the Umbrella Partnership REIT structure - which allowed limited partnership investors to trade units for REIT shares and defer taxes - to take Taubman public in 1992 because refinance money dried up. Almost 70% of REIT public offerings since then have been structured as UPREITs, said Martin Nass, a partner and practice leader, real estate, with Lamalie Amrop International, New York, an executive search firm that placed both men in their current positions.
The California Employees' fund in May hired David Gilbert as its senior investment officer for real estate. Mr. Gilbert was a vice president of real estate investment banking at J.P. Morgan & Co. before accepting what many consider to be the toughest real estate job in the pension industry.
Mr. Gilbert's achievements include the liquidation of the Prudential Realty Trust and a role in advising Mitsubishi Estate in the Rockefeller Center restructuring. He now oversees a $5.7 billion portfolio.
The hirings are pivotal because each has been a market leader, yet each has suffered with the worst symptoms of the real estate recession.
PREI's Real Estate Separate Account has rebounded from a low point of charges of overvaluation by a former employee and a queuing up of investors representing 25% of the fund's assets to exit.
CalPERS now has a leader of a real estate portfolio that has lost more money than some pension funds have invested in property.
"CalPERS had the choice of going to another sponsor, an adviser or a consultant," said Mr. Nass. "That was the 'me-too approach'.
"They wanted a change agent," he said. "They wanted someone from the capital markets.
"That is the future of the real estate industry. The next four years won't be as it was in the last 10 years," he said. "You are going to go to the public markets to raise money through offerings. He (Gilbert) may in fact create a REIT. He may be mandated to purchase additional real estate assets in foreign countries."
Prudential already has confirmed that new real estate investments will be grounded in capital markets integration. The parent company, Prudential Life Insurance Co., last month acknowledged it would examine converting general account investments into high-return and/or more liquid strategies, using public and private real estate operating companies, mezzanine debt and commercial mortgage-backed securities. And, that philosophy extends to the insurer's investment advisory subsidiary, said Rick Matthews, a spokesman.
Mr. Winograd said the new strategy was important to his signing on with PREI.
"The two decisions by Prudential (the general account and separate account strategies) are two sides of an overall strategy," said Mr. Winograd. "What they are looking for is what every institutional investor is looking for.
"There has been frustration with institutional real estate assets for a lot of reasons - illiquidity, hard-to-measure performance," he said. "A lot of performance is in capital appreciation, which is hard to measure.
"Basically what they (senior management) decided to do was 'let's reduce our exposure to our traditional mode and to invite people to invest alongside us'. That is what I found interesting," said Mr. Winograd.
"I think the real estate executives in the year 2000 are going to be people like these two: capital markets background with strong leadership and management skills," said Mr. Nass.
Using technology to make investment decisions also will be a desired trait for the real estate senior executive, said Mr. Nass.
"They (Messrs. Winograd and Nass) understand the concept of technology in this industry," he said. "Technology in the real estate industry is in its infancy."
Real estate is moving from companies focused on financing, building and managing individual assets to corporate entities that finance enterprises, said Barry Libert, managing director of Arthur Andersen's Transformation Group, Boston.
This "corporatization" of real estate will require senior executives who are competent in developing business, organizational, capital and technological strategies, said Mr. Libert.
"As we move from single asset-based financing (to building companies) advisers will need the skills they never had," said Mr. Libert.
H. Rennyson Merritt III, a director with Boston-based Aldrich Eastman Waltch, agreed with Mr. Libert that real estate managers have been lacking these "core competencies."
"It's been an entrepreneurial seat-of-the-pants business," said Mr. Merritt. "That is really changing.
"The industry de-facto has matured," he said.
"In a growing market you can be in the way and be successful," said Mr. Merritt. "When things get tight, you have to manage success. The most successful ones are the ones that managed themselves successfully. We are now just starting to build real companies," he said. "We built real assets before."
The trend that is fusing real estate and the capital markets had its origins about 10 years ago as first generation real estate managers began adopting professional asset management techniques concomitant with the collapse and bailout of the savings and loans.
Deal-driven real estate firms became asset management firms, which then began to use portfolio managers to monitor multiple property portfolios, according to John McMahan, chairman of The McMahan Group, a San Francisco-based management consulting firm, whose clients include real estate managers, real estate investment trusts and pension funds.
"The next shift was from portfolio management to research people," said Mr. McMahan, a former pension fund real estate money manager. "That opened up the whole idea of non-real estate people working in real estate.
"Once you started to get into portfolio management and research, you started to ask a lot of the capital markets questions," said Mr. McMahan. "Why should we be in real estate?
"The old paradigm was how fast can you get money out; where do you find the deal?" said Mr. McMahan. "The new paradigm is how does real estate fit into a portfolio?"
About the time real estate managers began adopting professional asset management techniques, the U.S. property markets crashed as U.S. life insurance companies and commercial banks stopped making commercial mortgages and refinancing maturing mortgage debt.
Liquidity gradually was restored with debt and equity financial engineering techniques used by other industries. The Resolution Trust Corp., followed later by investment banks, used property-pooled asset-backed securitizations.
"The economic events during the past five years illustrate that, in the absence of traditional capital sources, there are financial markets ready, willing and able to provide the necessary capital and liquidity to an otherwise stagnant market," said Steve Jackson, vice president in the Chicago office of Richard Ellis Inc., a real estate advisory firm.
"What this portends for the future of the commercial property industry is a significant step toward increasing the efficiency of one of the world's most inefficient market systems," said Mr. Jackson, who oversees Richard Ellis' capital markets and portfolio services initiatives.
Capital markets expertise alone won't maximize value. According to Blake Eagle, real estate operating experience also is crucial, which is the strength of the public REIT market.
Mr. Eagle is a director of a real estate partnership - Bentall Co., Vancouver, British Columbia - that is owned by three pension funds that recently hired a chief executive officer. The new CEO, Mark Shuparski, "is a young dynamic guy with an MBA," said Mr. Eagle, the former real estate consultant with Frank Russell Co., Tacoma, and chairman of the real estate department with the Massachusetts Institute of Technology in Cambridge.
"He's a true operating officer who happens to run a real estate company," said Mr. Eagle.
"That is different than the deal guys that worked themselves up to CEO," said Mr. Eagle. "More and more, real estate companies are looking for business operators with capital markets savvy, not just deal guys."
"It's the changing nature of the business," he said. "Real estate is an operating business and it needs managers. (Mr.) Winograd is a perfect example of that.
Mr. Winograd's selection "is a tremendous boost for the real estate industry largely because we are getting a guy of his talent and experience to run one of our major companies," said Mr. Eagle. "We are seeing real estate as an operating business, and in order to maximize returns, the industry is moving toward business leaders and business managers."
In light of these trends, Mark Decker, executive director of the National Association of Real Estate Investment Trusts, can't resist a bit of professional gloating.
"It is clear to those of us in this sector that we are going to be the dominant force, if we are not already," said Mr. Decker. "Though we are small (compared with the private real estate industry) we are healthy and we will rapidly grow.
"The idea of institutions owning bricks and mortar will be anathema another 10 years from now," Mr. Decker said. "You can't compete with a well-run real estate company. They (private owners) can't compete for capital and the management REITS bring."