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Real Estate Investment Firms: Who they are and what they do

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If you've ever purchased a single family home, you are likely already familiar with the parties involved in real estate: You have the seller (usually just a private individual like yourself), the sales agents, and the mortgage lenders. To the extent there are professional investors in the real estate process, they'll be either "flippers" or developers who recently built or renovated a home and are now selling.

However, once you move up the ladder towards large scale multifamily projects or commercial developments, the buyers and sellers are not individuals, but are large institutional real estate investors and developers.

This guide was written to give you an understanding of the types and roles of real estate companies involved in real estate investing on the larger, institutional scale as you explore career options within real estate.

Real Estate Investment Firms: The Ecosystem

While many real estate firms don't fall neatly into the buckets described below, the following is a breakdown of the various types of real estate companies:

Types of Real Estate Firms Representative Firms
Real Estate Private Equity (REPE) Oaktree, Blackstone, BentallGreenOak, Starwood Capital Group
Real Estate Investment Management Brookfield Asset Management, PGIM, Nuveen/TH Real Estate, Clarion Partners
Real Estate Development Trammell Crow, Hines, Related
Real Estate Investment Trusts (REITs) Equity Residential, JBG Smith, Ventas, Prologis, Park Hotels & Resorts
Real Estate Operating Companies (REOCs) Crow Holdings, The Davis Companies, Grosvenor
Real Estate Brokerage Cushman & Wakefield, CBRE, JLL, Avison Young, Colliers, Transwestern, Marcus & Millichap

There's also Real Estate Lenders (just like you would see with small individual real estate).

Real Estate Private Equity

Starwood Capital Group Property

 

Real Estate Private Equity (known as "REPE") refers to firms that raise capital to acquire, develop, operate, improve, and sell buildings in order to generate returns for their investors. If you’re familiar with traditional private equity, REPE is the same, but with buildings.

As the "private" in "private equity" suggests, these firms raise capital from private investors and deploy that capital to make investments in real estate.

Like traditional private equity firms, REPEs raise money from Limited Partners ("LPs")  - these are private investors (usually pension funds, university endowments, insurance companies, etc...). As an important fine point, REPEs raise capital for specific "funds" (think individual investment vehicles all run by the same firm). These funds have their own "mandates" meaning they have specific types of real estate investments they look for.

Another important thing to understand is that REPE funds are "closed-end funds" meaning that investors expect to get their money back (ideally along with a hefty return on investment) within a specified time frame - usually within 5-7 years.

Learn all about Real Estate Private Equity

Real Estate Investment Management

Similar to REPEs, Real Estate Investment Management firms raise capital from LPs to acquire, develop, operate, improve, and sell buildings in order to generate returns for their investors. The same key activities (raising capital, screening investment opportunities, acquiring or developing properties, managing properties, and selling properties) still take place.

Real Estate Private Equity vs Investment Management

The key differentiator between REPE and Real Estate Investment Management is the dominant fund structure – Private Equity leans towards closed-end funds while Investment Management leans towards open-end funds.

Closed-end funds have an end date which requires the manager to deploy capital in a manner that fits within the fund life. Open-end funds have no end date and therefore offer more flexibility to the manager.

While this delineation generally holds, you will come across firms that manage both closed-end and open-ended funds – some will describe themselves as REPE while others will describe themselves as Real Estate Investment Management.

Real Estate Investment and Asset Management

Real Estate Investment and Asset Management firms are generally smaller, entrepreneurial firms, and often more more capital constrained than their larger counterparts – REPE and Real Estate Investment Management firms.

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While a REPE or Real Estate Investment Management firm might own and manage 50-100 (or much many more) properties at any given time, a Real Estate Investment and Asset Management firm may own and manage just 10-20.

Because they are smaller, Real Estate Investment and Asset Management firms often acquire and manage non-institutional quality properties or partner with larger real estate owners (REPE or Real Estate Investment Management firm) to purchase properties.

Because they bring less capital to the table, these firms bring value to a partnership by committing more time, energy, and local expertise to an investment.

Institutional grade vs non-institutional grade real estate 

Institutional grade real estate is generally larger (in size and price), professionally managed, has “brochure-like” appearances, faces little risk of obsolescence during a typical investment period, and is lower risk. Non-institutional grade real estate can be owned by anyone. These types of properties are typically smaller, not professionally managed, deteriorating, and riskier. Institutional grade is not necessarily permanent – markets can worsen, properties can deteriorate, and investor preferences can change.

Real Estate Development

Property Developed by Trammell Crow

Real Estate Development differs from Real Estate Investment Management and Real Estate Investment and Asset Management in that developers build properties from scratch while investors acquire existing properties.

The size, structure, and strategy can vary just as much on the development side as was discussed on the investment side. To be clear, Real Estate Development is still real estate investing, but in this context, we are delineating between firms that specialize in buying and managing existing properties versus those who specialize in building properties.

While some Real Estate Development firms pursue a strategy of partnering with larger capital providers to build and sell properties, others will have more permanent capital sources and pursue a strategy of building and then continuing to own properties. And of course, some Real Estate Development firms do both. Generally, the lifecycle of developments is much longer than that of acquisitions – it’s not uncommon for a Real Estate Development firm to pursue only a handful of projects over the span of a decade.

Real Estate Investment Trusts (REITs)

Prologis Property

Real Estate Investment Trusts, or REITs, are typically public companies that own and operate real estate. Rather than raising capital from private sources, REITs raise debt and equity in the public markets. Investing in a REIT is meant to parallel investing in real estate where an owner derives cash flow primarily from rents (current cash flow). As public entities, REITs are subject to much stricter requirements than private owners of real estate.

There are two REIT requirements worth keeping in mind:

  1. REITs must invest 75% of total assets in real estate and derive 75% of income from rents
  2. REITs must pay a minimum of 90% of taxable income to shareholders

Because REITs are publicly traded and report earnings quarterly (among other reasons), they tend to have a much lower risk tolerance than private investment firms which result in REITs’ portfolios consisting of primarily core assets, an aversion to redevelopment and development, and much less acquisition and disposition activity. Asset management roles are featured prevalently at most REITs.

This article is specifically discussing publicly traded REITs, but there are a number of other types of REITs:

  • Public Non-traded REITs are registered with the SEC like any other public company, but they are not traded on national securities exchanges. This results in less liquidity, but managers can focus on long-term objectives rather than responding to daily price fluctuations and quarterly earnings.
  • Private REITs are not registered with the SEC and not listed on a public exchange. Like Public Non-traded REITs they are less liquid and are not tied to the daily and quarterly demands of public companies. In addition, the regulator requirements are far lower. Private REITs are only available to accredited investors as a way to invest in real estate in a structure that is focused on income producing assets and current cash flow for investors.
  • Mortgage REITs, or mREITs, are REITs that lend directly to real estate owners or indirectly by purchasing mortgage-backed securities. mREITs earn income on the interest spread they collect on loans. They can be publicly traded, public non-traded, or private.
  • Hybrid REITs pursue both equity and debt strategies and can be structured similarly to the previously discussed types of REITs.
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Real Estate Operating Companies (REOCs)

Crow Holdings - Old Parkland Hospital

Real Estate Operating Companies, or REOCs, like REITs, are companies that own and operate real estate. Rather than raising capital from private sources, publicly traded REOCs raise debt and equity in the public markets. Unlike investing in a REIT, investing in a REOC is like investing in any other company in which the cash flow is derived from several different activities. In the case of Real Estate Operating Companies, cash flow is derived from rent, buying and/or developing properties and then selling them, and managing properties for others. Similar to REITs, REOCs can also be private companies.

Real Estate Brokerage

Real estate brokers are a key intermediary in the real estate ecosystem. Brokers serve as facilitators of real estate transactions on both the leasing and sales side – we’ll focus on real estate investment sales brokerage.

In simple terms, investment sales brokers connect buyers with sellers and collect a fee for doing so. At the heart of being an effect investment sales broker is being well networked, but at the junior level, it’s about market analysis and valuation. Larger brokerage companies are organized similar to investment banks in that the senior brokers focus on networking and interfacing with clients while junior brokers spend their time creating marketing materials and financial models.

Real Estate Lenders

Real Estate Lenders provide debt financing for real estate transactions. The universe of lenders varies widely from life insurance companies (most conservative) to debt funds (most aggressive). More aggressive lenders are sometimes structured in such a way that they have the in-house capability to own and operate properties in the scenario that a borrower defaults. Real Estate Lenders underwrite and analyze real estate transactions similar to owners, albeit with a slightly different perspective.

20+ Hours of Online Video Training

Master Real Estate Financial Modeling

This program breaks down everything you need to build and interpret real estate finance models. Used at the world's leading real estate private equity firms and academic institutions.

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