"We only invest in one or two of every hundred deals we review."
Theoretically, investing in commercial real estate should be simple – buy a property, renovate it, lease it, and sell the building. In practice, commercial real estate investing is far more complicated.
“There are three distinct stages to the investment process,” says David Vincent, CFA, CAIA, Investment Products Specialist at New York-based real estate investment firm Cadre. "The first step is acquisition, which includes identifying, evaluating, and structuring the investment. Then comes the execution of the business plan, during which we would seek to renovate or lease-up an asset to improve operations. Finally, we realize our investment in the disposition stage.”
Sourcing investments is a heavy lift in itself. "We see thousands of transactions annually from our network of owners, operators, brokers, and other market players," says Ryan Munoz, Director of Investments at Cadre. However, the company rejects the vast majority of opportunities before they proceed to the next stage of the investment process. Most are inconsistent with Cadre’s investment strategy, which takes into account market and microlocation fundamentals, risk profile, asset class, asset quality, and sponsor quality, among other factors.
At Cadre, the first step is to look at the metropolitan areas that the company considers ripe for investment. "We want to invest in markets with above-average growth, the right demographic trends, and sufficient numbers of real estate transactions," Vincent says.
Cadre relies heavily on its internal Data Science team, which leverages machine learning techniques and data science to identify the most economically favorable markets. This approach has led to identifying the "Cadre 15," [1] the top 15 U.S. markets with strong potential for attractive risk-adjusted returns. "Our Investments team spends the majority of their time proactively pursuing opportunities in those markets,” Vincent says. The team revisits the list on a regular basis, adding and removing cities as fundamentals change.
Investment experts go through a rigorous underwriting and due diligence process to further narrow down their potential investments. That includes creating a robust discounted cash flow model and investment memorandum, satisfying an extensive due diligence checklist, and negotiating legal and lender documents.
In total, around 500 deals a year are subject to financial and operational reviews. "We usually only invest in one or two of every 100 deals we review," Munoz says. "Getting investment committee approval is a very rigorous, challenging process.” Cadre’s institutional due diligence sets the company apart from several other, less rigorous platforms. Each investment typically requires hundreds of hours of diligence for Cadre’s investment professionals prior to closing. Cadre’s principal investments also include personal and corporate investments from Cadre and its principals, as well as incentive fees to align interests with investors.
Once an existing property is acquired, the company begins to execute its business plan for that asset. At this point, Cadre begins to run the property as a business. That may mean completing renovations, leasing up vacant space, or reducing operating expenses. (Development deals, which require building an asset from the ground up, would enter construction at this point.)
Cadre's investment experts monitor the property’s financial performance as the business plan stabilizes. At the same time, the company's Data Science team continues to assess the economic strength of the property's market. Such analysis can lead the team to shift away from the original business plan, such as selling earlier than planned in a market Cadre believes is slowing.
That time may come either earlier or later than expected. In fact, as the economy improved in the second half of 2021 and real estate took off, the team decided to take advantage of the hot property market. While it doesn’t always work this way, and the investment timeframe is sometimes extended, “Our primary goal as fiduciaries is to generate attractive returns for investors, which sometimes means taking profits earlier than expected," Munoz says.
[1] The Cadre 15 is a list of metropolitan statistical areas periodically identified by Cadre as commercial real estate markets with strong potential for risk-adjusted returns. The Cadre 15 is developed through a combination of quantitative and qualitative analysis, including predictive analytics and on-the-ground intel. Quantitative analysis involves forecasting two-year growth projections for each market and asset class based on various variables known to drive market appreciation including but not limited to population growth, employment, rent growth, new construction, and occupancy. Qualitative analysis involves a review of quantitative data by our industry experts. There is no guarantee that an investment in a Cadre 15 market will be successful.
