With private equity and venture capital deals in real estate plunging 34% over the past year, the industry faces unprecedented challenges. At the IMN CFO & COO Forum, top CFOs shared how they are navigating these turbulent waters and evolving their strategies for success.

To address these issues, we’ve compiled key takeaways from the Real Estate CFO Perspectives breakout session at the IMN Real Estate CFO & COO forum.

Table of Contents

• Panelist profiles
• 5 innovative moves in today’s market
• Fundraising and investor relations
• Banking and financial management
• Market outlook and future trends
• Key takeaways

Moderated by Paul Jhung, Partner at CohnReznick, this panel brought together experienced CFOs—leaders who are reshaping strategies to thrive in today’s unpredictable real estate market:

• Jennifer McLean, CFO at Kushner
• Joshua Israel, CFO at The Davis Companies
• Wesley Wilson, CFO at Avanath Capital
• Phil Bottfeld, CFO at Wexford Real Estate Partners
• Sean Cunningham, CFO at Integrated Capital Management

Panelists mentioned cautious optimism and described adopting new approaches to the current market environment, such as:

Panelists characterized 2023 as a “stay the course” year for many of their organizations. This was a change from the aggressive acquisition strategies in 2021 and 2022. Deal flow didn’t necessarily decrease, but most deals didn’t make sense as the approach to deals is more measured and strategic.

Many organizations have redirected their focus toward their development pipelines. The goal is to create value from the ground up for potentially better returns when acquisition prices may not align with expected returns.

One panelist mentioned having approximately 18 projects in various stages of development across New Jersey and Florida, with roughly 10,000 units in the pipeline.

The changing market conditions require more creative approaches to deal structuring. A speaker noted, “We are having to be very creative in terms of looking at deals. How can we manage them more effectively? How can we capitalize them so that they make sense for our portfolio?”

Panelists mentioned approaches like:

• Preferred equity: Investing in rescue capital opportunities like deploying preferred equity in situations where sponsors need capital.
• Alternative investments: Looking at high-tech investments and private credit opportunities that funds might not have considered in previous market conditions.

Some organizations are using modular building operations to reduce construction costs and timelines. One panelist described completing four buildings in six months at less than $200 per door, a contrast to traditional affordable housing development costs that can reach up to $1 million per door in some markets.

This approach works well in areas with average rents of $1500-$1800 per month. And, local governments strongly support these projects, with mayors offering free land and tax abatements.

Funds are exploring new asset types and bolting them onto existing strategies, such as single-family operations using affordable multifamily properties as a hub-and-spoke model. This approach supports affordable housing by clustering single-family homes around larger multifamily buildings to share resources and management. It also involves using affordable debt funds to finance both multifamily and single-family properties.

Panelists described how the current market impacts capital raising and investor management:

Fundraising now takes longer. One panelist reported a capital raise stretching to two years instead of the usual 12-18 months. Additionally, investors now prefer debt over equity, signaling changing views on risk and returns.

Panelists mentioned spending more time providing investors with detailed financial data and future projections. They’re also offering concessions like reduced fees, co-investment options and increasing investor input on key investments. Some funds are also exploring performance-based tiered fee structures.

Institutional investors are cautious and currently lean towards debt, while family offices and high-net-worth individuals are more flexible and opportunistic. Both are important capital sources, but the panelists noted that family offices are more agile in their investment decisions.

Bank failures and consolidations have disrupted treasury management for many funds. Panelists described new challenges in managing cash and banking relationships like:

• Opening multiple accounts across banks to spread risk.
• Moving cash daily between accounts to maintain minimum balances.
• Using money market accounts to earn 5% on idle capital.
• Creating pass-through accounts at investor-approved banks.
• Spending more time on daily treasury functions.
• Managing new requirements like heavy cash compensating balances of up to 50% of credit lines.
• Adapting to new banking relationships after mergers.

Due diligence and risk management for banking relationships are now part of a fund’s operations. Firms are creating bank health checklists and conducting more frequent analyses of their banking partners.

The panelists also noted that some banks are using credit facilities as a way to gain real estate industry exposure without classifying it as CRE on their balance sheets.

Market outlook and future trends

Distressed assets

The speakers noted an increase in distressed asset opportunities, especially from institutional funds and REITs trying to raise liquidity. Some firms offer rescue capital to struggling sponsors through preferred equity positions.

Panelists were optimistic about interest rates, the potential for more reductions, and how this might change market dynamics. However, they also mentioned predictions of trouble coming for many asset owners in 2025 and 2026 due to high leverage, even with lower interest rates.

With challenges come opportunities, and those who adapt find themselves in a better position for the future. Finding creative ways to source deals, deploy capital, and adapt to financing challenges can help funds thrive through uncertainty and seize future opportunities.

Author: Danielle VanHest, Content Marketing Manager, Agora

Access the Full Article