April 26, 2023

JF3156: Pros and Cons of Institutional Real Estate Investing ft. Deborah Smith



Deborah Smith is the co-founder and CEO of The CenterCap Group, a boutique investment bank providing strategic advisory, capital-raising, and consulting-related services to private and public sector companies and fund managers across the real estate industry. In this episode, Deborah discusses which investments are better suited for the high-net-worth vs. institutional categories, the advantages of working with institutional capital, and the effect COVID had on commercial real estate.


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Deborah Smith | Real Estate Background

  • Co-founder & CEO of The CenterCap Group
  • Based in: Stamford, CT
  • Say hi to her at: 
  • Best Ever Book: House of Cards by William Cohan
  • Greatest Lesson: Don’t make investment decisions based on emotions.


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Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel, and I'm with today's guest, Deborah Smith. Deborah is joining us from Stamford, Connecticut. She is the co-founder and CEO of the CenterCap Group. They are a boutique investment bank solely focused on real estate, and have an unrivaled foothold in real estate, investment banking and advisory. Deborah, thank you so much for joining us, and how are you today?

Deborah Smith: Thank you so much, Ash, for having me on the program.

Ash Patel: It's our pleasure. Deborah, before we get started, can you give the Best Ever listeners a little bit more about your background, and what you're focused on now?

Deborah Smith: Sure. So our firm, as you rightly pointed out, is a boutique real estate-focused investment bank based in Stamford, Connecticut. We do all things real estate; that is our motto, that is our philosophy, and that is our objective. So we provide services that are across the capital rising spectrum. We do corporate advisory on a transaction basis, as well as doing corporate finance consulting, to help companies realize their growth aspirations.

Ash Patel: This sounds like it caters to a certain threshold of people. Is there a minimum to become a client?

Deborah Smith: If you can afford our fees... [laughs] We mainly deal in the institutional world, so our transactions tend to be on the larger side. We work with managers particularly that manage between $2 and $5 billion of real estate; we raise capital for programs that can raise anywhere from 25 million up to a couple hundred million dollars.

Ash Patel: Deb, what are the biggest struggles for people in that $2 and $5 billion range?

Deborah Smith: Well, the way the real estate industry has developed over the past 10 years particularly is there has been a growth or a flight to quality. And quality has been interpreted to mean big. So there is an assumption that if you're big, you must be better. We can debate whether that is true or not, but as a result, the top 10 managers control an enormous amount of the capital raise within the industry, and I think it has become harder, and you have to be more nuanced, and you have to be more specialized, particularly if you're in the middle market range, in order to distinguish yourself, and to be able to compete and raise capital from those same institutional investors.

So what we have seen is a gravitation, rightly or wrongly, towards vertical integration and specialist-type managers, so that in that range they tend to have a type - multifamily, industrial, self-storage - and they tend to manage or have heavy asset management on their properties, and that is how they're able to distinguish themselves. Because the larger players have some of those less nuanced, very close relationships, a very hands-on approach to investing.

Ash Patel: And Deb, we are in early April of 2023, lots going on with the markets, the economy... What are your thoughts on real estate going forward, and challenges for existing syndicators?

Deborah Smith: That's an excellent question. I'll take it on the way that we view our business, and how we look to source clients, because we only take on opportunities we take comfort or believe that we can get executed. So what we have found particularly over the past year is that we've leaned more into the niche, specialty-type products. So if it's going to be apartments, then it could be more on the senior housing side, or it could be more on the affordable housing side, or on the workforce housing side. And each products that are distinguished would serve the diversity in demand as we've come out of COVID and the world has evolved, and patterns have shifted both for migration as well as for where people live, where they shop, as well as where they go to work.

So beyond multifamily and industrial, we really like outdoor storage, for example, is a product, and we like cold storage. Because again, there's another nuanced product that has really taken off, primarily (and facilitated) by COVID, which led to a shifting socio-economic climate than what we had before. So as you go through, we can go product by product, but that tends to be we look at a sector and we say "Well, okay, well, where's the nuance? Where is the piece of it that we think will attract the most institutional demand?"

Ash Patel: Does that mean your appetite for multifamily is lessening?

Deborah Smith: No. There is a shortage of housing, no question, and I think there's a lot of different ways to play that. And I think what's happened over the space of 15 years - the multifamily sector has evolved, and what we used to just call apartments 15 years ago is now "Apartments, but." And that "but" tends to be "Well, what kind of apartments are you doing? Are you doing micro apartments? Are you doing highly amenitized apartments? Are you doing apartments focused on an age, a demographic that's evolved a lot over the course of time?" So it's really understanding where it falls within the multifamily space that you now have to look at. Because once upon a time where you thought a 1,500 square foot apartment would make sense in a market, it may not anymore. So you have to go beyond just multifamily apartments, and figure out "What is it exactly you're doing, and where are you doing it, and who are you doing it for?"

Ash Patel: Interesting. You're still looking for those niches... Does traditional, older multifamily still appeal to your investment criteria? Or do you look for those cutting-edge products?

Deborah Smith: That's a good question, and it's a complex answer. The older-style apartments [unintelligible 00:06:54.21] had fallen out of favor, and going into COVID, and in part that's because of where they're located, too. Is it a B property in a B market? Or is it an A property in a B market? And going through that little dance where you figure out where it fits in the space.

I think what has happened is a couple of trends. One, there's been a shift in demand away from just top 10, top 15 markets. And where we used to define MSA on top 25 or top 50 - there's been some shuffling in the ranks, because COVID had people migrating out of big cities into more regional locations, either for the chase of affordability, or because they wanted the space, instead of being cooped up in an apartment, for example, in New York City. So that has changed some of the demand factors. At the same token though, that '70s apartment is a different product than post-2000 in terms of ceiling heights, types of amenities etc. So what's happened is is as you've had a new build, which has got a nicer, higher ceiling, more amenitized product to address where the multifamily sector has moved, at the same time, that product is suitable for workforce housing or affordable housing, where the price point on the rent is much lower. So what they've done is you recast your product, and said, "Well, okay, the product is here. What is the demand for it, and how can it still generate a return?" So it's a shift in product as the world has developed, but at the same time, there's still a demand for that, depending on where it is and the demographic you're trying to serve.

Ash Patel: I'm gonna play devil's advocate a little bit... Now, in my eyes, I see this as a pendulum. COVID accelerated the move that millennials were going to have to the suburbs; they were going to eventually leave their urban cores and have families and move out to the suburbs and buy houses. But because of the COVID and the lockdowns, it accelerated that. Do you think the pendulum will swing back the other way, and the urban city centers will get populated again?

Deborah Smith: Good question. I think we've had a shift in general; it's a generational shift, both in values system, philosophies towards work-life balance, desire of where you want to live in proximity to your work... And all of those things play into the demographic story. So if you think about it, with the shift in how millennials, the system that they value, particularly life/work balance, and how that has evolved, and emphasizing convenience, and emphasizing social aspects, and some of these things that have become common traits in driving people's decision-making - that impacts all aspects of society. And I think that's part of the driver between the shift towards online demand, for example, a shift or a preference for self-storage to have it close to where you live. It manifests itself in a lot of different ways. And sure, can there be a shift back to cities? Sure, on the basis of convenience, because people like convenience, and people like to live near their work. I think all of those things are absolutely possible, and then the part it'll play a little bit of the next generation who comes after the millennials, some of there, or for instance, some of their value systems will drive that conversation as well.

Ash Patel: And more devil's advocate... You mentioned the lack of supply for multifamily. There's an estimated 500,000 to 800,000 units coming online in 2023. Do you still think the market is going to be underserved?

Deborah Smith: As you know, real estate is a local market game. So you can go into any market, and the real question is if you go into any specific market, what do the demand and the supply drivers look like for that individual market? And I think what we've had coming out of COVID, with the pandemic, is as people have moved particularly to the Southern states, now to some of the northern states, then depending on where those folks are going, there is a lack of housing.

So in some markets, you could still envision there could be some oversupply, and in some markets there will be an undersupply. And it's just a question of really understanding the population in each particular sub market and what the demographics and socio-economic circumstances are in that market, to be able to make a proper assessment of that, I think.

Ash Patel: Got it. Why would somebody that has $2 to $5 billion of assets under management - why should they work with an investment bank?

Deborah Smith: A lot of firms that work with us - and keep in mind, we have a lot of different service offerings, so I'll take each piece at a time. So from a consulting basis, which is - we call ourselves lifecycle bankers, and I'll take you through to the cycle for one of those managers - is that you would retain us to figure out what type of growth strategy should you be pursuing, what kind of products did you be looking to raise capital for; what your organization needs to look like in order to facilitate that growth, and what does your story need to say, and how do you distinguish yourself from the thousands of other managers that are out there that are competing for the same capital? We also do roll-ups, we do valuation, so there's a whole gamut there on the consulting.

On the capital raising, we can work with folks to actually raise the capital. And whether it's through a program, or whether it's through raising a vehicle, or a more long-dated product, we can help design that product as well as to help raise capital for it.

The last piece to that is if you think about it, you can grow through a manager, through a product, distribution and geography. So we talked through some of the cap raising; the next element when you're continuing to grow through your lifecycle, you can either grow organically or inorganically. We've talked through those cases on the consulting and the cap raising or organic growth paths. You can also grow through transactions. And whether it's acquiring a product, geographical reach, or distribution capability, you can acquire it, or ultimately, you may want to sell yourself and monetize your company, merge into a larger company in order to get access to their distribution geography or product. So there's a lot of different ways we can work with clients across that spectrum. All of them have in common that we work very closely with management teams. We think we have a good pulse on the market, and the thematic trends of what we see guide our actions and our advice as to how we work with clients.

Break: [00:13:35.00]

Ash Patel: In terms of raising capital, how do you facilitate that? Because that's a real bottleneck for those companies in that space.

Deborah Smith: Capital raising, you can either do it - and depending on who the client is. So for folks that could be owner-operator-driven, we can help raise them institutional capital in order to partner with them, and they can provide the lion's share of capital to go and pursue a growth strategy. The alternative is we can help raise a more discretionary vehicle, or we can help rise a separate account. In all cases, what they have in common is you're leveraging third-party capital, as opposed to your own balance sheet in order to help you grow.

Ash Patel: So you're marrying deals to money.

Deborah Smith: That's what we do. Sit in the middle, with the hourglass. [unintelligible 00:16:16.08]

Ash Patel: And then the typical fees are 2 and 20 type agreements?

Deborah Smith: For how they would typically work with an institution?

Ash Patel: Yes, or for your part of the fees in raising capital.

Deborah Smith: The way our fee structure works - it depends on the type of assignment. It can be based as a fixed fee, it can be based on a percent of the capital that is raised. We've been known to take equity in our deals, particularly for a younger, earlier stage on the lower end of the AUM for management teams we really believe in. We've made a move, in particularly the last two or three years, where there'd be really amazing management teams, and really, really strong strategies and business plans. But we're a boutique bank, and it was difficult for them to afford our fees. So what we've begun doing is saying, "Look, we'll participate and work with you as a company, we'll own a piece of the company or a piece of the vehicle, and that'll bring down your cost of retaining us, and then we can work together on raising capital, or whatever your growth aspirations need to be."

So we can work in that structure, but the other part of your question - for a manager themselves, the fees that they would work within for an institution, it depends on the risk/return profile that the capital is being used for. There usually is an asset management fee; there could be property management fees, acquisition fees etc. Then it also tends to be waterfall-driven. So there's usually a pref, to which you have to exceed the pref on the performance for the deal, and then there's a profit sharing above that.

Ash Patel: Got it. And then we're talking about a very small niche of individuals, who are in the $2 to $5 billion range. What would you recommend for those people that are significantly under that, but on their way up? What resources should they reach out for?

Deborah Smith: Yeah, a nice example I was giving where we sometimes take an ownership percentage in the company - those companies are usually less than 2 billion of AUM. They are a lot smaller. The biggest challenge they have, in many cases, is they've built their business of high net worth capital, and they're trying to break into the institutional market, which is difficult; it's difficult to get access, it is difficult to create the product, and create the story, and the plan that is in terms or in the mindset or fits the institutional world... And that's usually where we can work with those kinds of players in order to get them and to take them to that next level.

I would say that we do tend to be selective. We work with institutions a lot, so we have a good handle on the types of opportunities they're looking for, the types of management teams they want to work with. And we usually can tell in relatively short order whether we think it's a client that we believe - and others can disagree - that we believe that we can sell it or we can market it into the institutional world.

Ash Patel: Interesting. The all-elusive institutional capital that everyone seems to strive for. What are the pros and cons? Obviously, one of the pros has got to be limitless capital. What are other pros and cons of taking on institutional capital? Because I think a lot of investors think that's the Holy Grail. Once you've achieved that level, you've made it, and it's easy sailing from there. But that's not the case. So if you can share some of the pros and cons of working with institutional capital. And when we say institutional capital, we mean Wall Street banks, large insurance companies; do you also include family offices in that?

Deborah Smith: Yeah, so the way we're looking at the institutional world - it's usually insurance companies, which we have a pretty good insurance channel marketing app. But it could be pension plans, corporates, it's sovereign wealth funds, it's those kinds of players on the institutional side. What they all have in common is they can write larger checks. So the way I look at working with the institutional world is you can leverage third-party capital as opposed to your own balance sheet, and you split profits. And in that sense, it's like taking the elevator as opposed to stairs on the approach to growth. Obviously, the downside is that they're very sophisticated, they understand how to underwrite. It'll likely be a tougher deal economically than you could get in a high net worth environment, that either had different metrics, or they're focused on different things. They're just two different types of constituents that don't always look at the world the same way. And it has to be some kind of product. So not all product - being real estate - makes it suitable for the institutional world. It has to be a suitable product, it's gotta be a team that can demonstrate the wherewithal to operate within the institutional world... And I mean that by reporting, accounting, underwriting standards, things like that; they'd also have to be suitable for that market.

And then a lot of them, particularly if you're working with fund managers on the institutional world, they have hold periods. So you may be moving into a piece of property, or even a fund, if you're raising institutional for a fund vehicle, they all have term; a lot of them have term. So of course, there is open, and other types of structures too, but there are usually limitations, and the operator tends to be beholden to what the institutional capital is willing to do.

The alternative on the high net worth - and I think you're right, in the sense that... I'll take a step back on this; I don't think every product and every client needs to go into the institutional world. In fact, I think there are some phenomenal strategies that are in the high net worth world. And I've talked to them, the client, and I'm like "Why do you feel you need to tap institutional capital?"

Ash Patel: It's the Holy Grail.

Deborah Smith: There are plenty of very successful owners, operators and fund managers that have operated at a high net worth channel, and have done very, very well. And there's enormous amounts of capital through that channel as well. It's a different kind of product than the institutional product. I look at the world -- there's an enormous amount of investors in this world, and the question is What are you good at? What is your product?" and then you find the capital that is suitable for your product. Don't take a product that's suitable for high net worth, and think you can push it into the institutional market, because that is a battle uphill.

Ash Patel: What is a product that is more suitable for high net worth individuals than institutions?

Deborah Smith: I'll take an easy one. So let's take it back to the multifamily space. If you're an allocator, you're doing smaller deals - and when I say allocator, meaning you work with operating partners and there's small deals, so the equity check is 1, 2, 3, 4, 5 million dollars. That belongs in the high net worth channel, because what you're able to do typically is generate higher yields; because the market's much more fragmented, you're able to capture alpha by chasing smaller deals in smaller markets. So there is that channel; if you're doing those kinds of deals, I would make the argument that is better suited for a high net worth lane, and particularly if you can generate really good annual cash yields off it, that's where it tends to belong in that line.

Ash Patel: So institutions are more concerned with deploying larger amounts of capital, and they're okay with marginally lower returns.

Deborah Smith: It depends on how you define what your returns are. So in the institutional world, your returns can go from core all the way up to optimistic in the 20s. So it just depends on what the investor is; it's not so much the return that I think drives the difference, it's how you qualify what you're saying the risk is, and marrying it to the return. It's the risk-reward profile that may be evaluated differently between the institution on the high net worth, what that is, and then coupling into it the size deal, where the market is, the types of things that you're chasing.

Ash Patel: Deb, when you have somebody in that $2 or $3 billion range of assets under management, and they are wanting to go up to the institutional capital level, do you have to do a lot of cultivating and grooming of their business model, of their entity structure? Or are they just ready to turn loose?

Deborah Smith: Most of the managers in the two to five billions already have institutional capital. So they're already working in the institutional world. A lot of them already have one vehicle, discretionary vehicle, or multiple discretionary vehicles. They have great compliance programs, great institutional practices. Those folks, if they've made it that far, where we're usually working with them is to expand beyond; because a lot of them, particularly at 2 billion have their one fund strategy. So it's to expand and explore growth options beyond that.

The folks that are smaller, they may have a vehicle, it maybe high net worth, they may have a host of separate accounts instead; they may have funds, but they're just smaller. So what they're battling with is trying to figure out how to take a smaller fund, which may be 150 million, 200 million - how do you take that up to the next level? Because if you think about it, the checks that have been written in those vehicles are smaller checks, and they could be from middle market institutions. If you continue to go below a billion dollars in AUM, that's where you really start to see parties that are really good at investing. They may have a great track record, but they could be diamonds in the rough, or they're the ones that we look at and say "Do we think if we work with this team we can get it to a place to take this into the institutional market?" And part of looking at that on your deep-dive is not just the management team, it's what are they investing in. Because if they're doing smaller deals, for smaller dollars, that's not institutional product. So any institution coming in will say, "Well, how do I know you have access to larger deals, access to the markets? And how are you going to accommodate the fact that we really want you to be vertically integrated, or we want you to have a greater connection to the asset than simply a basic asset management?"

So there is a lot of structural things that sit in the way of smaller owner-operators, or even smaller managers in order to take it and crack into that next bracket.

Ash Patel: Deb, what is your best real estate investing advice ever?

Deborah Smith: Don't make any investment that's based on emotion. They are always the worst decisions always.

Ash Patel: Deb, are you ready for the Best Ever lightning round?

Deborah Smith: I look forward to it. What have you got for me?

Ash Patel: Alright, what's the Best Ever book you've recently read?

Deborah Smith: House of Cards by William Cohan.

Ash Patel: What was your big takeaway from that?

Deborah Smith: I actually was at Lehman prior to the crash, when Lehman went out of business... But to read about it in a book was really extraordinary. But my takeaway is from that book, with Bear Stearns and with what happened with Lehman, is no risk, no reward.

Ash Patel: Deb, what's the Best Ever way you like to give back?

Deborah Smith: I do a lot of mentoring, and I also like to work particularly with females within younger females that are looking to go into banking, to go into finance, and to be a champion; that you can do it, you can have it all. So it's working with those, and being a role model to set the example.

Ash Patel: And Deb, what's the best way our Best Ever listeners can reach out to you?

Deborah Smith: You can reach me on LinkedIn if you type in Deborah Smith CenterCap; I'll pop right up. As well as our company is on LinkedIn as well under CenterCap Group, so you can find us there.

Ash Patel: Deb, thank you so much for your time today, demystifying a lot of what surrounds institutional capital, teaching our listeners about investment bankers and the value that they add. So thank you for your time today.

Deborah Smith: You're welcome. Thanks for having me on the program.

Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five star review, share this podcast with someone you think can benefit from it. Also, follow, subscribe and have a Best Ever day.

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