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Managing partner and founder of Park Madison Partners, Nancy Lashine ’81 has more than 25 years of real estate experience providing placement and strategic consulting services. Lashine is also a Real Estate Circle Leader and member of the MBA Real Estate Program Advisory Board, and she is chairing the 2012 Real Estate Symposium Steering Committee. In a recent interview with Kate Crosby ’13, she shares insights about the industry that make for interesting and motivational reading whether you're a real estate industry veteran or new MBA on the job market.
Please tell me about Park Madison Partner’s business model.
Fundamentally, our business model is relationship driven. Park Madison Partners was formed in 2006 as a real estate capital advisory firm. Our primary business is based on matching institutional capital with real estate private equity funds. Today we are focused on both equity and debt, as we are seeing more opportunities for debt investors as there are fewer debt sources in the market.
We try and focus on our core competencies without taking on assignments that do not fall into our areas of expertise. We maintain relationships with institutional investors across America and Canada as well as affiliate with groups that have a presence in Europe, the Middle East, and Asia. Generally, we represent strategies with a shelf life of two to five years, as a result of the longer investment periods demanded today.
What do you see as the biggest challenges facing today’s real estate industry from both a fund raising and principal investing perspective?
Both are difficult today, which is unusual. Generally we see a seesaw effect between fund raising and deploying capital; i.e., when it is hard to raise money, it is easy to find great investments.
It is interesting to have both sides tell us they are having difficulty, and there are some important conclusions to draw from that., We’ve seen values decline and we are looking at a huge wall of maturing debt that needs to be refinanced without an obvious source. Banks are becoming healthier and are in a better position to take assets back or force a short sale. Securitization, which was such an important part of the last capital cycle, is back, but volumes are still relatively low. We’re going to see the role of special servicers grow and be redefined during this workout period. Meanwhile, there is plenty of equity available in the market. So there is support for pricing of high quality, well located assets and in selected cases, prices are back to 2007 levels.
It’s really a tale of two markets from an investing standpoint. Investors are running to CBD, urban infill, the five Gateway Cities (New York, Boston, Washington, DC, Chicago, and San Francisco), as well as to multifamily because of available financing and the current demographic trends. This run is pushing pricing to near peak levels – I am, of course, only speaking about the U.S. at the moment. Investors may ask where is the best relative value: ‘Should I invest in the secondary or tertiary cities?’ There isn’t much institutional interest in the secondary and tertiary cities so you can find higher yields, however, in these locations you are competing with local money. The challenge for investing today is avoiding the lemming effect.
To be a good investor in 2012 you need to have two skill sets; first, financial skills to buy debt, deal with banks, and make money on the buy or work out situation; and second, you have to be able to hold a property and add value to it. You can’t buy quality assets cheaply by the pound any longer. You need to know how to improve an asset, and for the better assets, you need to know how to lease them up. There just aren’t enough cheap products out there like, for example, the Bank of America portfolio in 1992, where the underwriting was so cheap that you didn’t need to flip it. The challenge of buying well and managing well is a difficult balance. Many can do one, but few can do both.
The conclusion with respect to fund raising is that it is challenging because of several factors. Firstly, the U.S. institutions have mature portfolios and therefore less new capital to invest. Secondly, much of the new money in the market want direct investments, not funds. And thirdly, most managers stayed out of fundraising post the 2008 financial crisis until 2011 or 2012. So the markets are very crowded with managers reentering the market looking to raise funds. Finally, one of the biggest challenges for the real estate private equity industry today is an inevitable consolidation. Some managers will be able to sell their businesses and others may just fade away. Managing a firm to profitability today requires foresight, an honest self-assessment, and very hard work.
How have the real estate investment preferences of pension funds and other institutional real estate investors changed over the past few years, and what do they prefer today?
Wow, well I don’t know if you’ve read the recent article entitled "Paradox of Choice" in Institutional Investor, but essentially what we are seeing is a supply-demand imbalance. There are currently too many funds in the market, and we are looking at a period of great shake-out where many managers won’t survive because they won’t be able to raise capital in this competitive environment and compete with the larger players. It is essentially the natural selection process of the investment management business.
As larger firms change their line of business structure as a result of the Volker Rule, new groups spin out from Morgan Stanley, Goldman Sachs, etc. and create a huge array of new transition and competition within the market.
Park Madison covers about 500-700 North American investors, and each investor has his/her own rules, and they generally don’t all want the same or even one thing. There really is appetite for all different shapes and sizes of deals. There are trends but, overall, you can find something for everyone.
Most institutional investors have been in the U.S. for 10 to 30 years and have mature real estate portfolios. As a result, the general trends we are seeing include: a move toward fewer managers, shifting allocation emphasis away from opportunistic opportunities and back toward core and value add investments, and lower leverage across the board. Large public funds are focusing more on separate accounts or direct investments. Another trend is a reallocation of real assets. Endowments and foundations, for example, realized in 2008 that they had mismeasured the risk of illiquidity and have reduced their percentage allocation to real estate. They may still have high allocation in real assets, such as energy, but the overall result of reducing illiquidity means less capital in the market for new managers.
Something to note today, however, is that everyone still wants performing real estate. After the 1991 downturn, investors started questioning if they should even keep real estate in their portfolios. You don’t hear that now; real estate investments have a long-term place in private market portfolios, as they should. If you look at which assets have fared the best over the last 10 years, the number one asset class is REITs.
Park Madison Partners has had a great deal of success raising internationally focused real estate funds. Can you share some of the challenges of fund raising for an emerging or international market funds?
Emerging markets by their nature are a challenge. In each emerging market you will find very few managers with proven or even limited track records. Therefore, not only are you betting on the market, but you are also betting on the fund manager. This compounded risk is singlehandedly the biggest challenge all institutional investors face in emerging markets.
There is generally also development risk in emerging markets due to lack of institutional-quality products, and many emerging markets do not have established mortgage markets. The lack of a mortgage market means that commercial assets were built with all equity and sold as condominium shares or strata title. So, in order to acquire the existing stock, you may have to buy a single asset from multiple owners. This is usually just too difficult so the assets remain unmarketable. Another huge challenge is that you might find a really good real estate team in an emerging market, but the chances that they have ever operated as a fiduciary before or if they even understand what that means is small. Marrying real estate expertise and the expectations of a fund manager is a great challenge. Sometimes a partnership works well for first funds because the fund manager brings the capital, but eventually the successful local team asks, ‘Why are we giving half of the profits to the capital partners?’
Currency can also be a challenge. For example, consider the appreciating euro in the early 2000s, when investors who took the lead and bought the euro up front when they made their fund commitments but before it was called for investment made their return in currency alone. However, looking at Brazil in 2008, when the real moved 50 percent, if a fund had been fully hedged, it would have cost too much. When considering currency risks, long fund cycles and strategies in these markets tend to be necessary. Vietnam is an example of this. It has seen so much volatility that if you’re in a Vietnamese fund you’ve gone from gains to losses to gains again – all on paper and due to currency shifts and all in one fund investment cycle. Another issue is the whole question of how do you conduct business in certain markets from a corruption standpoint managing international standards and U.S. standards.
Where do you see the greatest opportunities going forward?
It’s a good time to be an investor in real estate, and a great time to put capital out. We are raising capital as quickly as possible, and I think we’ll look back on 2009-2013 and say it was indeed a good time to be investing. Now is a very good time for someone like us who knows the business to be in the mix of new equity and debt transactions as well as the capitalization of manager firms and mergers and acquisitions.
A key element to Park Madison Partner’s success is its management of industry relationships. Do you have any advice to current students on how to nurture and create a successful network?
Managing relationships is a huge topic that should not be overlooked; I think it’s the most valuable skill that someone can have. Always remember that the world is round: What goes around comes around. Even in your first year out of business school, always be nice and take the 20 minutes to talk to your classmates on the phone. People who you don’t remember will remember you, and there is a give and take – it will all come back.
You never know where connections and opportunities are going to come from. Be friendly and follow your instincts with relationships. Your integrity is the most important thing you have, but after that, it is your relationships.
As the new chair of the steering committee for the 2012 Real Estate Symposium, are there any themes within the current real estate environment that you are targeting to explore throughout the event?
It’s a committee process; I have some ideas but expect to let the committee dictate the agenda. On the capital markets side, I would like to see a panel on special servicing, which is grossly misunderstood and underestimated, focusing on their impact on deal flow. Examining the motivation of special servicers and how that will play out in the market should be very interesting.
We’ll also likely have panels on debt and equity markets, New York City submarkets – Uptown/Downtown, Midtown and everywhere else. The residential and retail Downtown markets have already been established, but we are starting to see the Downtown office in its beginning phases. It’s interesting to understand where to invest in NYC today, what the relative opportunity of a Park Avenue building versus Hudson Street is today. The Symposium provides a good opportunity to review and discuss the interesting deals getting made right now.
What first attracted you to real estate, and what advice can you give current students on taking advantage of Columbia to position themselves for a career in real estate?
Real estate is an entrepreneurial business, a quantitative business, and a people business. Wrapping those three into one industry was a sure winner for me; nothing else came close. Real estate is full of competitive people, and competitive people like to measure success, so there are objective measures to strive for and an energized environment. But if you’re also a people person, real estate is filled with very interesting people and characters and it is hugely entertaining and gratifying. There is also so much freedom within real estate from a company perspective. You can work for a big company, small company, and everything in between.
When considering a job opportunity, I would strongly recommend to always work with people you consider to be great people. It’s the same in school; take the professor not the course. Chose people over a job description. Also, take risks and take them early; if you don’t take risks you’ll never know what you like or don’t like. Getting started, talk to friends and family who will listen and try to really become self-aware, don’t take things for granted. Figure out what you’re good at and what you like because if you follow your nose you will be successful.
Last, on the investment front, don’t assume you’re smarter than other people. Local knowledge in real estate is key. Stay open minded in entrepreneurial pursuits to find partners. Partners are incredibly valuable in growing perspective and allowing for better lifestyles.
What aspect of your experience as a student at Columbia Business School has been most beneficial to your career?
I was a dance major in college so coming to business school took me on a completely different track than where I had been. However, that is something that I would encourage everyone to do; the experience of doing completely different things in life and having a chance to explore is really important.
Columbia put me on a career path – the people I met and the exposure to the world of business and financial markets opened my eyes to a world of things I didn’t understand before. I built many long-term relationships in connection with this fantastic institution. Today the opportunity to go back to Columbia and interact with students who are so smart and who think about their careers and their lives from the perspective of people who were born, frankly, when I was graduating from Columbia and starting my career has also offered an additional learning opportunity. Do you know the Dylan lyric, “ah but I was so much older then, I am younger than that now”? I feel very fortunate to still be a "student" and affiliated with Columbia Business School. I know now, how much more I have to learn.