Real estate asset managers strive to maximize opportunities and manage risks for investors.

You may not be a newbie to the world of investing — you have the basics under your belt: a 401(k) or 403(b), Traditional or Roth IRA, and maybe even a brokerage or robo-advised account. But now, you’re wondering if you should take the leap of adding some real estate investments to your portfolio.

Directly buying, owning and operating income-generating real estate on your own comes with significant responsibilities. For example, you have to understand basic principles of sourcing investment properties and underwriting, major capital may be required, and you may find yourself dealing with property upkeep and tenants or hiring a third-party manager.

If you’re not up for handling such scenarios, then there may be a simpler way to experience the potential benefits of investing in real estate, without the commitment of personally owning and managing property. For many, the options of real estate investment funds and trusts provide a win-win solution.

Just like many actively managed mutual funds, and even a portion of ETFs, when you invest in a real estate fund or a real estate investment trust (commonly known as a REIT), you usually get a team of people working on your behalf. For example, real estate funds and REITs typically employ property managers whose general responsibilities address the daily operations and maintenance of properties.

Then, there are the asset managers who oversee the success of the larger, collective real estate portfolio. If you own stock or bond funds, then you may already be familiar with the role asset managers play in evaluating which securities to buy, sell and hold within those funds.

Real estate asset managers make similar decisions, but instead, they assess the long-term durability of property values, tenant retention rates, and when to purchase or sell real estate assets, among many other items focused on maximizing the value of the portfolio.

Here’s a deeper dive into six reasons why real estate asset managers are so crucial to a successful REIT portfolio.

The 6 things asset managers do to protect real estate investors

1. Constantly look for ways to maximize the value of each property

“An asset manager looks at each property as an opportunity to create value,” explains David Collins, Modiv’s Chief Property Officer. That may be achieved through negotiations with tenants on issues like lease terms and tenant improvement (TI) allowances, as well as enforcing the terms of the lease.

Asset managers must also consider which capital improvements or expansions might help increase the value of a property. Those enhancements might entail something relatively simple like upgrading a property’s landscaping or more extensive modifications to ensure that a building can obtain a Leadership in Energy and Environmental Design (LEED) certification.

In addition to enhancing the property’s value, Collins says these improvements can often attract higher-quality tenants and generate desirable economic arrangements. The upgrades may also lead to “stickier” tenants who stay in the properties longer, thereby eliminating the loss of income that results when rental spaces are unoccupied.

2. Partner with tenants to ensure their needs are continuously met

Managing real estate properties involves much more than collecting rent checks and waiting for property values to appreciate. Real estate asset managers must be true partners to tenants and understand their industries, business models, and the factors that can help drive their success. This requires ongoing communication with each tenant and learning as much about their business as possible.

Tenants’ ongoing needs must be addressed, and those needs often change over time. For instance, Collins shares an example of an industrial building leased to life science companies requiring laboratory equipment and special accommodations within their space. The nature of their work, the equipment they use, and the space configurations required will evolve over time. Asset managers who don’t work closely with tenants to ensure their needs are met run the risk of higher turnover.

The value of the space may also decline if it ceases to be appropriate for the types of tenants it was originally designed to serve. That could bring losses for the investors in that property. Therefore, asset managers must consistently evaluate improvements to help ensure the space remains relevant for tenant needs over time.

3. Identify risks and manage them effectively

With traditional investments, there is often one main factor that drives returns. When it comes to stocks, that factor is corporate earnings, and with bonds, it’s what is happening with interest rates.

By contrast, a variety of factors can have a major impact on the returns of real estate investments. These include local property tax rates; the quality of the market area where a property is located; the value of nearby properties; proximity to major transportation corridors; and even weather patterns, given the prevalence of natural disasters like hurricanes, flooding, tornadoes or fires in certain areas.

The manager of a real estate portfolio must be able to accurately assess these risks and take steps to mitigate them effectively. Sometimes that can mean diversifying the portfolio across regions, sectors and property types so that investors are not overexposed to any one kind of risk.

The same broad trends that influence the stock and bond markets, like the state of the economy, impact real estate values, too. Therefore, asset managers must understand these factors so they can determine what the overall impact will be.

“For example, COVID-19 severely impacted hotel properties, given the restrictions that were placed on travel. On the other hand, industrial properties, such as warehouses and fulfillment facilities, did quite well due to the boom in e-commerce brought on by the pandemic,” Collins says.

The expertise needed by asset managers to gauge the potential impact of these various risk factors is gleaned through extensive and continuous market research and analysis.

4. Oversee property management

A number of tasks are performed to manage a portfolio of real estate holdings, and asset managers typically oversee the teams of people responsible.

Collins explains, “Assets managers are like the conductor of the entire process, and they are responsible for the overall performance of the assets.”

Asset managers are often in charge of hiring property managers and coordinating with them to ensure each property runs as cost-efficiently as possible. They may also coordinate the efforts of real estate brokers involved in the purchase and sale of properties, as well as the leasing agents who help attract tenants. Asset managers also typically handle and negotiate a range of contracts — from purchase and sale agreements to tenant leases.

5. Visit sites to monitor their portfolio value

Managing real estate investments is not a task that can be performed behind a desk. As Collins shares, “There’s no substitute for seeing the properties and meeting the tenants in person.”

Onsite visits are critical to ensure properties are being managed well, identify what state they’re in, and determine when repairs and upgrades might be necessary. Relationships with tenants are often improved when they see that owners and managers of the property are regularly on site, too.

Site visits also provide the managers with a better understanding of how the tenants are using the space. For example, if a tenant in a space has made a substantial investment to make the site appropriate for their needs, it’s a good indication they plan to be a long-term tenant.

Alternatively, visits might reveal that a tenant is not doing their part to maintain the quality of the space. That can be an indication that the property manager may need to become more involved or that the tenant may not be a good candidate for a lease renewal.

6. Manage the overall investment portfolio

Last but certainly not least, asset managers must manage the assets within the overall investment fund. It is their job to ensure that the cash revenue each property generates flows to investors after expenses, and that the property is being used and maintained in ways that will enhance its long-term value.

Asset managers must use this information and insights to determine when properties should be held or sold and how those changes will impact the overall portfolio.

A valuable source of diversification

If you’ve gained experience investing in the stock and bond market through your retirement plans or personal investments, you may be ready to consider alternative assets like real estate to further diversify your portfolio.

Historically, the returns on real estate have not been closely correlated with those of stocks and bonds because of the wide range of factors that can influence real estate values. Owning assets that are less correlated to the broader markets can lessen the volatility of your overall portfolio.

You don’t have to become a landlord to benefit from current income and the potential capital appreciation that real estate may offer. When you invest in real estate through a fund or REIT, it puts an experienced real estate team on your side.

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The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.