How to Break Into Commercial Real Estate and Build an Empire
This is a guest post from Mike Moran, CFA, a portfolio manager at a long-only asset management firm. He started Life on the Buy Side to teach you what it’s like working in asset management, hedge funds, and more.
When it comes to commercial real estate, you’ve got two choices: do something extremely risky, or do something boring and conservative.
OK, you could also pick something middle of the spectrum – but what fun is that?
If you have your sights set on building a real estate empire, you’re going to have to take the leap and embrace the risk with open arms.
Here’s how to do it:
Risk, Reward, and Reality
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 – Acquire and Operate Existing Properties
- More Risky: Value-Added and Opportunistic Strategies – Improve Existing Properties
- Most Risky: Real Estate Development – Build Completely New Properties
Core Investing is all about stability and getting high single-digit returns by operating existing assets. There’s little risk when a building is already operational and generating rental income – think of the GM Building in New York or a class-A regional mall as example investments.
Since these are stable assets that provide a steady income stream to the owners, pension funds are the main investors in core funds – firms that specialize in acquiring and operating existing properties.
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.
REITs are like private equity firms but for buildings rather than companies – they acquire, operate, (possibly) improve, and then sell properties to earn high returns.
After you leave this Core Investing space, you get into Value-Add and Opportunistic Strategies – this is where the investors try to make substantial improvements and renovations to existing properties rather than just acquiring and operating them.
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, but you mostly see private equity shops like Blackstone here – a high single-digit return is horrible for PE, so it makes more sense for them to focus on riskier strategies.
At the riskiest end of the spectrum is real estate development, and the players there are all over the map.
Some REITs have large development pipelines and invest significant resources into constructing new properties – examples are AvalonBay [AVB] (apartments) and Prologis [PLD] (industrial), which often have multi-billion-dollar pipelines.
Private equity can sometimes be active in development, but usually only as the capital partner to developers.
There are also large private companies like Opus that focus on real estate development without the pressures that come from being publicly traded.
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: It’s a boom-and-bust business, and developers are also the first people to get fired in a downturn.
While Prologis 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.
This is not to say that real estate development is “bad” – it’s just that you shouldn’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 if you’re not, think about the other options above.
There are also asset management firms and hedge funds that specialize in real estate securities, and even shops that invest in REITs – if you want to blend real estate and the public markets, both of 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 who works on deals all day – whether that’s at the core funds or at private development companies.
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 $36 billion Equity Office Properties acquisition, the biggest private equity buyout ever (at the time)!
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: I wouldn’t be surprised if Gray tapped his network to land his gig at Blackstone right out of school.
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 school.”
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.
Got Real Estate Development?
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 break in and focusing on development rather than PE, REITs, or anything else.
Q: Do I need investment banking experience to break into development?
A: No, no, and no. In fact, you might have too much experience if you actually do real estate IB and want to break in afterward – an entry-level development role would be a step backward.
Development is significantly different from real estate IB or PE, and they shouldn’t even be in the same category.
Q: Wait, but what should I do with my life if I don’t do investment banking first?! Otherwise everything is meaningless!
A: 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 they have little cash on hand and are constantly issuing debt and equity to fund their operations.
Historically, REITs were 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 use so many different investment strategies, there are all sorts of different job opportunities there.
On the operations side are developers, property managers, and acquisition people that deal directly with properties.
On the capital markets side, you’ll find finance people that 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 – 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 aspect of real estate, skip banking and go straight into development or acquisitions.
Compensation: What Compensation?
Unfortunately, there are few good data sources on real estate compensation – but pay tends to be commensurate with risk and expected returns, at least in buy-side roles.
The main exception is development – it’s the riskiest investment class and yet the pay is also the worst.
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, the developer simply contributes their land basis as the only equity in the project and then uses debt and mezzanine financing to fund the entire construction cost.
Most of the returns will go to the 3rd party investors that come up with the rest of the funds – and to make things even worse, 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.
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.
As with other buy-side jobs, the buy-side itself is the end-game. Once you get there, it’s just a matter of working your way up until you become the next Jonathan Gray.
Be careful of getting pigeonholed: 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.
And unlike buying entire companies, the capital requirements for real estate are far lower and you don’t need to raise hundreds of millions of dollars just to buy a house.
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.
Whither Real Estate?
It’s a great field, but keep your expectations in check.
Until you have enough cash to fund massive real estate developments by yourself, you won’t see your name on any buildings.
And if you want to become as famous as a certain real estate developer – and maybe even become President of the United States as well – it might just be easier to get your own reality TV series instead.
Even More on Real Estate
If you want to learn more about the modeling and valuation side of real estate, check out the BIWS Real Estate Financial 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.
There are also real estate private equity case studies based on stabilized multifamily, value-added office, and pre-sold condo development deals.
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How to Break Into Asset Management in Germany – from a Part-Time, Non-Target, Distance Learning MBA Program
So, what about those part-time MBA programs? Do banks and finance firms take them seriously, even if they’re online? What about continental Europe recruiting vs. the UK?
Today you’ll learn about those and other topics from a reader who recently broke into the finance industry in Germany.
This reader also did an internship at a Fund of Funds (FoF) so as an added bonus you’ll get a crash-course in all things FoF as well.
That’s quite a lot to cover in one interview, so let’s get started.
Walk Me Through Your CV
Q: You mentioned before we started that you had a unique history.
Can you tell us about your background and where you were coming from before getting into finance?
A: Sure. I started out doing engineering at a non-target university in the UK – finance firms ignored it, but engineering and technical companies and even the government recruited there.
It was right after the dot-com bust when I graduated and the job market back then wasn’t great for IT people – so I went to the UK Government and worked there for around 8-9 years as an engineering project manager.
A few years ago I had the opportunity to go work for the government in Germany – around that time I had realized that engineering wasn’t for me and that I wanted to move into finance instead.
Toward the end of my contract working for the government, I started a part-time (2.5 – 3 years) distance learning MBA program from a university in the UK. The goal was to re-brand myself and get a business background in the process, and then to use the degree to move into finance.
I did a lot of networking to find contacts while in Germany, and finally found a private equity fund of funds that was looking for English-speaking interns.
I worked there for half a year, and recently landed a full-time offer at the German office of a US-based asset management firm.
Q: That’s quite a story. Before we jump into recruiting and how you got your current role, let’s take a step back: why did you like Germany so much and what made you want to stay there? I’m just curious personally.
A: It was quite random – I was just placed there by the UK government and happened to like it quite a bit. I had also spent 3-4 months there previously, so I jumped on the chance to move back.
Q: And you managed to get the internship and the full-time role without being from Germany originally and without knowing the language?
A: I do speak German conversationally, but I’m not quite good enough to use it for business. So if I were applying for an M&A role at an investment bank, I would never get in (see: more on investment banking in Germany).
They are looking for native-speakers there because you’re working with domestic German companies all the time and for the times they do deal with English-speaking companies in Germany, the level of English of most German graduates is of a very high standard, so they have little reason to recruit a non-native speaker.
A lot of HR departments here list the German language as a requirement, but outside of IB/M&A-type roles it’s rarely required to do the job.
When I applied to the asset management firm I just joined, I went through a recruiter – the original ad I saw asked for a native German speaker, but then when I spoke with the recruiter they indicated that it wasn’t really necessary.
You can get away with this because in fields like trading, asset management, and so on you’re dealing with global investors where English is the standard language.
Recruiting and Breaking In
Q: Right, that makes sense. I think in most countries for traditional IB/PE roles you need to know the local language but outside of that you can get away without being a native.
So what were the key steps to breaking into finance in Germany? Did the part-time distance learning MBA program actually help you to re-brand yourself?
A: It helped a bit and allowed me to meet people who worked in the industry, but overall it wasn’t terribly helpful in terms of actually getting interviews through the degree. My program was not very consulting or finance-centric so there wasn’t much of a benefit for those fields.
Networking also proved to be quite difficult – I reached out to a lot of contacts via LinkedIn and similar online databases, and made plenty of cold calls and cold emails, but most people were simply confused as it is not as common here.
That is a big cultural difference and traditional networking is not accepted like it is in the US / UK. I made some good connections for the future, but wasn’t able to find anyone who could directly help me to get a job.
I found both my positions and won interviews by looking at job postings and ads online and then contacting the recruiters directly – you’ve mentioned before that that’s not a good use of time in the US / UK, but unless you’re currently a student at a well-known university here, that’s about all you can do to get in.
Q: I’m surprised that the degree didn’t help you at least in terms of being taken more seriously when you contacted people in the industry. Did they just not respect distance learning programs?
A: Actually, the main issue was that MBAs are not viewed the same way here as they are in the UK and US.
The university system in Germany is much different and you complete the equivalent of Master’s-level study at the undergraduate level – so getting an MBA won’t necessarily get you more points.
The other factor working against me was that I had an engineering degree from undergraduate – many places here won’t even consider you unless you’ve studied accounting or finance in undergraduate.
Q: Wow. I guess I should add a clarification to that “Your major doesn’t matter that much” advice.
What about the recruiting process itself? Is it similar to the UK with assessment centers and competency questions?
A: First off, since I wasn’t going through standard graduate recruitment, I had no assessment centers.
Beyond that, it was quite different for the Fund of Funds and for the asset management firm – the FoF process was relaxed since it was an internship, and most of the interview questions were “fit”-focused.
The investment managers sat down and spoke with me for 30-60 minutes each, and chatted about my background and knowledge of finance – but they never went in-depth into advanced technical questions or anything. A few weeks later I received an offer there.
Since the asset management firm was US-based, interviews were very similar to what you see at banks and asset management firms in the US – several rounds of interviews with people from different groups, with more technical questions thrown in and a more diverse set of questions overall.
This one was also not for a graduate-level position, so I imagine it would be somewhat different if you were just out of school or in school and interviewing for the same role.
Q: What types of people were they looking for? Were many of your co-workers also foreigners?
A: It varies, but at the Fund of Funds the investment team was mostly German with a few others from Europe and further afield. They wanted people who knew a bit of German and who had the technical skills to analyze investments – it was very small, so they were much more focused on fit there.
At the asset management firm, as I mentioned, the technical bar was higher and they were looking for people to spend more time at the firm and not just hop to the first exit opportunity that comes their way.
As with most other countries outside the US, there is not as much of an obsession with exit opportunities and hopping around constantly, so people actually stay at the same company for more time on average.
Q: Any other differences with recruiting in Germany that we should know about?
A: Oh yes, I could probably write a book about that one:
- You need to include your photo on your CV here. Technically firms are no longer able to discriminate against you, but you’re at a huge disadvantage without a photo as everyone includes them.
- CVs are usually at least 2 pages and emphasize Education over everything else – it’s at the top even if you have years and years of work experience. Sometimes CVs go on for 3-4 pages and list every single academic achievement.
- If you’re a non-native German speaker, you should include your language skills in the Personal Information section; you also list your Date of Birth and Marital Status at the top.
Q: I think requiring that information in the US or UK would result in lawsuits.
A: Yeah, the culture is quite a bit different here.
In terms of language skills, if you see an advertisement from a multi-national company in English, you can assume it’s OK to apply in English and work there without knowing the language – but if it’s all in German then the language is probably required.
Job references are also very important here. After every job you’ve been at, you receive 1-2 pages of written references stating how well you’ve done there and what your achievements were.
Even at US-based and other foreign companies here they still expect to see these references, and you’re at a big disadvantage if you don’t have them or if they say anything negative.
Q: More lawsuit material if you requested those in the US / UK – and it’s written evidence, too.
What about CV review and interview selection?
A: In general, it’s difficult to get the first interview here but once you’re in you have a high chance of moving forward. They spend a lot of time reviewing CVs and selecting first round candidates based on those, sometimes inviting only 1-2 people to interviews.
That’s the opposite of what you see in the US / UK where they might invite dozens to interview, only intending to hire a few.
Finally, some advice for you if you’re not a native and you’re interested in working in Germany: going through recruiters can work to your advantage. They are actually helpful here and can get you past HR staff when you don’t meet the officially stated language requirements.
And as I’ve mentioned, go for asset management or trading rather than M&A.
All About Funds of Funds
Q: OK, that was quite a download of recruiting-in-Germany information.
Moving on, I’ve gotten a lot of questions about Funds of Funds, what they are, what you do there, and how you get in – can you explain briefly what a Fund of Funds is and the work you do there?
A: Sure. A Fund of Funds is simply an investment firm that invests in private equity funds rather than buying companies directly.
To give an analogy, it would be like an index fund that invests in other index funds in the stock market as opposed to the original index fund that picks individual stocks to invest in.
Funds of Funds may invest in anything from venture capital firms to small and large buyout firms to anything else within the world of private equity.
Most of the day-to-day work consists of due diligence – analyzing existing funds, seeing what kinds of investments they’ve made, and whether or not they would be a good fit for us.
You make 2 main types of investments at a FoF: primary and secondary.
- Primary: You invest in a PE firm as it’s doing a round of fund-raising and looking for new investors.
- Secondary: You buy an existing stake in a PE firm from someone else in the secondary market who’s looking to sell.
Most of the work on the primary side consists of due diligence, analyzing investment teams at PE firms, looking at previous deals, historical returns, and so on.
We did a lot of benchmarking of funds against the sector as a whole and against other funds within the geography we were looking at, and we discussed everything with General Partners. Most of my time there was spent writing up due diligence findings and there was a lot more qualitative work than quantitative work.
On the secondary side, there was more quantitative work since we were looking at funds that had already made a few investments. So there was some price modeling involved to see what was reasonable, what type of carry and management fees made sense, and so on; we also did some basic DCF analysis to verify the valuation but it wasn’t anything hardcore.
Q: So are Funds of Funds a big asset class in Germany? Is the industry there developed?
A: It’s not yet a big asset class here – there are quite a few buyout and VC firms, but only a handful of FoFs and most of them are part of bigger financial institutions here.
PE has been hit hard following the financial crisis and Funds of Funds suffered even more than normal PE firms – many institutional investors backed out or decided against investing, so firms never had a chance to grow properly.
Q: What about recruiting for FoF? What kinds of questions did they ask you?
A: They didn’t ask me much about investments, investment ideas, or which funds I would invest in – it was more about my motivations for wanting to move into finance, what my future goals were, and so on.
That was mostly because I was career changer – other interns received more technical questions about accounting and valuing companies, the economy, and the European debt crisis.
Overall I would say that FoF interviews are similar to investment banking overviews, but generally less technical even though they’ll still ask the normal accounting/valuation-type questions.
Q: What about the work culture there? I’m assuming it was quite a bit different from what you see in private equity / investment banking?
A: It was much more relaxed than what you see in banking or at direct investment funds (PE/VC).
There wasn’t much time pressure to do things because we weren’t competing for specific deals that banks were marketing to PE firms – so we had more time to discuss investment ideas internally and talk through things.
They delegated quite a lot of work to the interns, so we did many of the initial assessments and the screening, and then sat down with the investment managers to talk through ideas. They were quite receptive to well-thought out investment ideas, even though we were interns and had limited experience.
Q: And now I have to ask the obligatory hours / pay question…
A: Hours at the Fund of Funds were generally between 9 – 6 each day, with work sometimes extending a bit later depending on how busy we were at the time. Work came in peaks and troughs – if a lot of direct funds were fund-raising, we would have to analyze everything at once and make decisions quickly.
But during other times of the year (especially the summer months), things were very quiet because hardly any funds were fund-raising.
The investment managers themselves might work later due to internal investment committee meetings, but the latest was normally 8 or 9 PM, with weekend work extremely rare.
Base salaries were close to what you would earn starting out in IB or asset management, but maybe a bit less overall (possibly also due to being in Germany, which has a lower cost-of-living than the UK).
Bonuses were substantially less than IB and perhaps even other asset management firms – there’s just not as much money to go around since Funds of Funds don’t have the same levels of management fees and carry that you get in direct Funds.
Q: After working at the Fund of Funds, you moved onto asset management – but what do most people do? Is it possible to get into private equity from FoF?
A: Most people who start out in FoF stay there and build their careers there – you don’t really have the required skills (LBO modeling) to go into private equity.
If you do leave, the most common and obvious exit opportunity is moving into asset management – quite a few people from my firm actually left to move into larger asset management firms.
Q: So why did you make the move, personally, rather than staying in FoF?
A: I could have stayed there and had a comfortable lifestyle – but there were a few things I didn’t like:
- There wasn’t much career progression aside from becoming an Investment Manager and then a Partner – it’s not like banking, PE, or even trading where you have levels in between.
- I wanted faster-paced work because that suited my personality much better; I also wanted more of a front-office role where you make investments directly.
All along, I was actually more interested in trading but it was a long-shot where I live as the majority of trading desks are located in Frankfurt.
The job that I ended up with at the asset management firm was actually different from the original one the recruiter set me up for, so I would reiterate something that you have said before: that you are not necessarily interviewing for the job you think you are!
Q: So you’re planning to move into trading from there?
A: Yes – maybe stay here for a year or two, and then leverage my connections to move into a trading role.
That’s a very indirect path to trading, and it probably wouldn’t work as well for IB/PE – but luckily trading is one field in finance where they do care more about results than pedigree/work history.
Q: Right, well good luck with making the move – and thanks again for taking the time out to chat!
A: No problem – hope you learned a lot.
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