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 & 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.
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 Dominate Your Industry-Specific Interviews: Real Estate, Energy, FIG, and More
You’ve applied to over 100 banks, networked with 230 bankers, and have been pounding the pavement since August.
And now you’ve lined up 10 first round interviews, most of which are for the M&A and generalist pools.
But then you notice that you’re also set to interview with a mysterious FIG (Financial Institutions Group) banker, followed by 2 oil & gas bankers from the Houston office.
And who knows, maybe you’ll land a real estate, mining, airlines, or healthcare interview to make things more fun as well.
So how will it be different? And how can you get up to speed on all the accounting and valuation differences, recent deals, and everything else if you only have a few days – or a few hours – to prepare?
Everyone lumps investment bankers together, but that’s not really how banks operate.
Banks have product groups that focus on specific deal types – M&A, Leveraged Finance, Equity Capital Markets, and so on – and then industry groups that do all sorts of deals – but all within a specific industry, such as technology, industrials, healthcare, financial institutions, energy, real estate, and so on.
At a bank, you might interview specifically for one of the product groups, or you might interview for one of the industry groups – or you might just interview for a “generalist” position, be placed in the generalist pool, and then select your group later on.
Most investment banking interview guides focus on standard questions that you might get in any group.
But there are important differences when you interview with specific industry groups – so let’s get started with the festivities.
Most of the Time…
Interviews are not dramatically different – if you’re interviewing with a FIG banker, he’s not going to say, “Since this is FIG I want you to build a detailed model and valuation for Citi right now – you have 30 minutes.”
You still need to know the standard “fit” and technical questions, and you will still get questions on those.
Industry-specific interviews require you to shift your answers rather than come up with completely new ones.
How to Shift Your Answers
Focus on these 4 questions (or categories of questions, as in the last case):
- Why This Group?
- Tell Me About the Industry
- Tell Me About a Recent Deal in This Industry
- Industry-Specific Technical Questions
The first 3 are not terribly difficult as long as you’re prepared – the technical questions can be more problematic, but there are ways to get up to speed quickly.
Why This Group?
Answer this one by linking it to something in your background: a school project, an internship, someone you met while networking, family, friends, and so on.
Let’s say that all your experience has been as an engineer in the technology industry and there’s no obvious reason why you’d want to work in an oil & gas group.
But maybe you have a distant relative who is in the business, or maybe one of your friends started working at a big energy company recently – you can take something small like that, spin it, and turn it into a “I had always been interested in tech, and still am, but recently I started talking to [Person Name], who made me really interested in energy…” story.
If you don’t have something specific in your background, you could always talk about industry news or recent deal activity making you more interested.
Once you’ve established this spark, give 1-2 solid reasons why you want to work in the group after someone or something made you interested.
Going back to the energy example, you could talk about how it affects not only everyone and every economy in the world, but also geopolitics. You could also talk about being interested in promising but controversial technologies like hydraulic fracturing and how quickly the industry is changing due to rising energy demand in emerging markets.
They don’t expect you to be the next T. Boone Pickens – they just want to hear something intelligent from you.
Do not attempt to BS something on the spot here – and don’t say something silly like, “I’m interested… because… it’s so interesting!” (yes, I’ve heard that one before)
Tell Me About the Industry
It’s easy to go “off the rails” and ramble with this type of question.
Use the following structure to describe an industry:
1. Give an estimate of the total market size if you can get it, and say whether it’s growing, mature, or declining. Also mention a dominant recent trend.
Example for FIG: “Financial services are the biggest industry on the S&P 500, so it’s a huge market in the US – it is relatively mature, though there are pockets of growth in some areas such as risk management. The major issue in the industry, especially post-financial crisis, is regulation and how capital requirements for banks will change in the future.”
2. Next, sum up the major players and the sub-industries in 1-2 sentences. Most industries have a few global, diversified companies that do everything and then have smaller companies that focus on more specific segments.
Example for FIG: “It’s split into segments such as commercial banking, insurance, investment banks, wealth management, and investment firms. A couple huge banks, such as BNP Paribas, RBS, Barclays, Deutsche Bank, and JP Morgan, operate in all these segments, while there are also more specialized firms like Goldman Sachs that may focus on just one or only a few of these segments.”
3. Close with a recent trend or recent news in the industry. This shows that you’ve been keeping up with deal activity and reading the WSJ, DealBook, and other news sources.
Example for FIG: “Recently as banks have been recovering from the financial crisis, everyone is thinking about new regulation and the adoption of Basel III – that will have a big impact on banks’ capital structures, how they do business, and how they issue dividends.”
Bankers don’t expect you to know everything, but they do expect you to have done some research – otherwise you won’t seem interested and they’ll give the offer to someone else.
Where Do You Find This Information?
Now I’m going to save you 10 hours of time spent frantically searching online by sharing these resources:
- PricewaterhouseCoopers M&A Industry Insights
- PricewaterhouseCoopers Industry Research
- Deloitte Industry Research
Yes, you read that correctly: Big 4 firms like PwC and Deloitte regularly publish industry and M&A research for free.
Some of the reports on those sites are too specific to be helpful – the “Outlook” or “Overview” ones for entire industries are the best.
But that’s the best way to get this information quickly assuming that you don’t have access to Capital IQ, Factset, or other tools that bankers have.
If you can’t find what you’re looking for there, Google searches for [Industry Name] + M&A or + “Market Size” also work, but take longer.
You can also look in industry-specific publications like the Oil & Gas Journal – but they’re more useful for researching deals rather than industry trends.
Tell Me About a Recent Deal
M&A deals are the best ones to discuss and the easiest to find information on, so here’s the structure you should use:
- Name the buyer, seller, purchase price, and multiples.
- Give background information – what does the buyer do? What does the seller do? How much revenue and EBITDA do they have (or other metric if those are not relevant, e.g. total assets for a bank)?
- Explain how the deal came together if it’s public knowledge, and why both parties were motivated to get it done.
- Conclude by summarizing what Wall Street thinks about the deal, and how the industry will be affected in the future.
Let’s say you’re looking for information on the Intel – McAfee deal for a technology group interview. Do a Google search for “wsj intel mcafee deal profile” and you get the deal profile page as the first result.
Most of the information is right there: Intel, the huge semiconductor company, was the buyer, McAfee, a security software company, was the seller. It was an all-cash deal worth $7.68 billion, with an EBITDA multiple of 17x and revenue multiple of 3x (rounding multiples is less controversial than rounding your GPA).
This one’s not a great example because the profile doesn’t list anything besides the numbers – but if you do a few searches you can find other articles on how most investors were scratching their heads at the deal – there were no obvious synergies and it came as a surprise to everyone.
The official rationale was so that Intel could target more of the mobile chip market and get into network security, but few others thought it made sense.
Going forward, more companies might start to focus on security for mobile devices and solutions that protect everything from desktops to laptops and mobile devices to web-based applications.
But What About…
If you’re having trouble finding recent deals, look in the M&A reports from Big 4 firms I linked to above; simple Google searches for “[Industry Name] biggest M&A deals” can also give you names at the very least.
If the WSJ and searching online don’t give you good results, you could take another approach and find equity research instead.
Yes, you can find this research without working at a bank: just sign up for a TD Ameritrade account and you can get free Credit Suisse reports on most large companies.
Other brokerage accounts can work as well – Scottrade, for example, also offers free research.
So if you can’t find analysis of a deal in the WSJ, find equity research on the buyer or seller just after the deal was announced and look up the multiples, numbers, and rationale there.
If you can’t find relevant metrics, just get the purchase price for the deal and get the financial metrics yourself by looking at the acquired company’s annual report on their investor relations site.
You’ll find conflicting reports on technical questions for specific industry groups: some interviewees claim that they’re uncommon, while others (especially in Canadian mining groups) claim that interviews can be extremely technical.
So there is no universal rule – the only generalizations that apply are:
- It’s good to be familiar with the basics and the high-level view of how companies in the industry are different.
- Some industries are more different than others. Financial institutions (banks and insurance firms) are by far the most different compared to normal companies; oil, gas, and mining are also different but less so than financial institutions, and REITs are also different but less so than banks.
Technology, consumer, and retail are the most “normal” industries because they have straightforward business models; others like healthcare, industrials, and utilities are not quite “standard” but are also far less different than the 3 groups above.
Here’s a quick run-down of what you should know for the “most different” industries:
- Banks / FIG: Understand how they’re different (balance sheet-centric, loan portfolio drives everything, traditional metrics like EBITDA are meaningless because Interest is Revenue for a bank); also know how valuation differs (P / E and P / BV multiples and the Dividend Discount Model) and why regulation and regulatory capital are important.
- Oil & Gas / Mining: Understand how they’re different (balance sheet-centric, energy/mineral production drives everything, can’t control prices or revenue); also know how valuation differs (Production and Reserves multiples and the NAV model).
- Real Estate / REITs: Understand how modeling individual properties is different from REITs; know the key metrics and multiples like FFO and AFFO and key lingo such as NOI and cap rates and how the business model works.
I can’t list every single industry here because I just don’t know enough personally – but most other industries have much smaller differences, such as slightly different metrics and multiples and revenue or expense projections.
For example, an Internet company might project revenue based on unique visitors and conversion rates rather than # of products sold to customers; a key metric might be EV / Unique Visitors, especially if it’s unprofitable.
Resources for Technical Question Prep
Everything useful I’ve found is listed below:
- Banks / FIG: Damodaran – Valuing Financial Services Firms, Updated Version, Bank Balance Sheet Overview – Bionic Turtle
- Natural Resources: Oil & Gas Company Valuations – HFBE (This is fantastic), Damodaran – Valuing Commodity and Cyclical Companies
- Real Estate: Definitions of Key Terms, REIT Overview, FFO and AFFO
- Airlines: Financial Models
- Company Models in Different Industries (Banks, Energy, Industrials, Insurance, Retail)
And then there are good old books, but you probably don’t have time for that if it’s 3 AM right now and your interview is at 9 tomorrow.
Models & Models (and Interview Guides)
If you want to learn these concepts in more depth, you can also check out the Breaking Into Wall Street Bank & Financial Institution Modeling course (based on JP Morgan), the Oil & Gas Modeling course (based on the $41B Exxon Mobil – XTO deal), and the Real Estate & REIT Modeling course (based on AvalonBay, a multi-family REIT).
These are not introductory-level courses. If you cannot build a 3-statement LBO model easily, stay away because these are both more complex than even the Advanced Modeling course.
And before you ask, if you’re in Canada or Australia, mining is 95% the same as oil & gas and lessons specifically on mining will be added in the future.
That’s how industry-specific interviews are different, the key questions and concepts to focus on, and how to do the research necessary to answer the new questions you might get.
If you have any other good resources for these groups and these types of interviews, post a comment below and I’ll add it.
And if you actually made it to the end of this one, congrats – hopefully you don’t have too many questions, but ask away if you do.
Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews