Return of the Operator: Real Estate Without the Easy Money

MSCI “analyzed 1,086 real-estate portfolios between Q1 1999 and Q1 2025 and found that asset selection accounted for an average of 67% of the performance differential between individual portfolios and corresponding country-level benchmark returns.” They also noted that, “starting around 2015…the surging outperformance of industrial assets versus the struggles of the retail and office sectors—reshaped the landscape.” You could pick a hot sector, like industrial, and look like a genius, but that doesn’t last forever. Since 2022, returns have been driven more by specific property performance again.

Macro Trends

The surge in industrial real estate corresponds with the move to e-commerce. Industrial real estate was fundamentally reshaped. If you owned a warehouse, even if you managed it poorly, you were still rewarded. The same thing happened with multifamily in the Sunbelt. There was already a demographic shift happening, and Covid accelerated it. If you bought there pre-Covid, your rents and valuation surged. You looked smart, even if your property was performing poorly.

Another macro trend has been the decades-long bull market in bonds. Interest rates have fallen since the 1980s, and cap rates followed. That meant you could sell your property at a lower cap rate than you bought it for. Assuming your NOI is constant (i.e., you didn’t add any value), the value increased. That’s been a long tailwind for real estate owners. Smart sponsors/owners try to manufacture this: buy at an above-market cap rate, stabilize at a higher cap rate, and sell at a lower cap rate. For many, just being in the game long enough has proven to be a worthy strategy.

Back to Basics

The days of a firm tailwind are over.
If long-term interest rates stay where they are (or go higher), owners will have to be good operators. I realize there’s significant pressure on the Fed to lower interest rates, and President Trump will install his own Fed Chair soon enough. However, lower short-term rates don’t automatically mean lower long-term rates. The distressed owners waiting for lower interest rates, and thus lower cap rates (higher values), will run out of time. In the absence of cap rate compression, the only way to grow value is to grow NOI.

This used to be standard operating procedure. It’s also why real estate has historically been a lower-yielding, steady, investment. The industry needs to go back to basics. I work with many different property managers and talk to even more. Some are significantly more efficient than others. The truth is, property management didn’t need to be all that good for the past decade. Rising values covered up a lot of mismanagement. This must change, too.

In this new environment, the winners will be the owners and property managers focused on efficiency. Those who can pay an above-market (higher) cap rate on a new acquisition, add value through efficient operations and targeted improvements, will be the most successful in this new real estate cycle.