Commercial Real Estate Investment Banking


How To Get Into Commercial Real Estate

Real Estate Investment Banking with Canaccord Genuity’s Dan Sheremeto | CRELIBRARY Episode #16

There are many paths that real estate professionals follow in order to break in. However, there tends to be some common threads:

  • Its often said that in real estate, its not what you know, its who you know. For this reason, coming from a school with a reputation for real estate and a large alumni network is an advantage .
  • Another typical path is to first get into real estate investment banking. Many of the top people at the biggest real estate firms and REITs started out this way.
  • If your school doesnt have a strong presence in real estate, another option is to get an MBA at a school with a strong real estate program.
  • Whatever you do, networking is even more important in real estate than other industries, so start pounding the pavement as soon as possible. For advanced methods, get your hands on the BIWS Networking Toolkit.

Real Estate Trends And Drivers

The trends and drivers depend heavily on the sector, even within a specific area such as REITs.

For example, a nursing-home REIT is influenced by different forces than a multifamily REIT or an industrial REIT, even though theyre all real estate investment trusts.

And once you go outside of that vertical, a high-end casino operator is even more different from, say, an affordable home builder.

Real estate is all about location, which means: How many people/businesses are moving into an area vs. moving out of it?

For example, companies like home builders and multifamily REITs are driven by demographics, average income levels, and rent vs. homeownership costs in specific areas.

If younger, higher-income people move into an area at a high rate, and new homes are relatively inexpensive next to renting, new home demand will be higher.

Sectors such as office REITs are driven by business activity in the region and whether companies are expanding, shrinking, or telling employees to work from home.

In the gaming and lodging verticals, consumer discretionary spending drives growth.

These areas are tightly linked to economic conditions and income levels, and they suffer disproportionately when theres a downturn.

Theyre also affected by factors like barriers to entry and the areas surrounding their key properties.

Finally, technological shifts play an increasingly important role in real estate.

For example, consider the impact of more white-collar professionals working from home:

What Is Commercial Real Estate Banking

A CRE loan means that it was based on collateralized funds attached to properties owned by a corporation. In addition to bank-backed, independent and insurance firms, pension funds, private investors, as well as lending institutions, CRE lends are offered by private investors and other financial institutions. Program for 504 loans available through the Small Business Administration.

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Project The Construction Period

In the next step, we project the Construction Costs over the year required to build this warehouse :

Initially, we draw on Equity to pay for the construction, but we switch to the Construction Loan once the maximum amount of Equity has been drawn :

The Debt balance must include both capitalized interest and capitalized loan fees but we base the interest on the beginning balance each month to avoid circular references.

After setting this up, we extend these projections until the end of the Construction Period to get the ending Debt and Equity balances.

They do not represent an exact 50/50 split due to the capitalized loan fees and interest.

In more complex real estate financial modeling exercises, we fix this issue by making the entire calculation circular, but its not worth the time/hassle/headache in a quick model like this one.

Commercial Real Estate Opportunities

Commercial Real Estate Loans

Increased affordable and workforce housing: Mixed-income housing developmentswhich combine market-, workforce- and affordable-rate units in one locationare an important part of increasing the affordable housing supply. Public-private partnerships also play a critical role in growing the number of affordable and workforce housing units, as does increasing housing density.

An initiative to create and update infrastructure could enhance roads and bridges, which would help shorten commutes, enable quicker e-commerce last-mile deliveries and improve the economy. Infrastructure investments tend to directly benefit commercial properties located in the area via increased access, higher quality amenities and services, and enhanced desirability for employers and households, Calanog said.

Technology upgrades: MRI Softwares Multifamily Industry Trends Report, Summer 2021 found that electronic payment adoption has grown consistently since 2019. Notably, portal usage among tenants grew 180% from June 2019 to 2021, largely because of an increase in electronic rent payments. Resident demand for electronic payment and communication options is only growing. Its time for owner/operators to embrace digital rent collection solutions .

Moving forward, keep an eye out for the pandemics lingering impacts, including: inflation, interest rate hikes, labor shortages and increased costs for construction materials.

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High Quality Commercial Real Estate Financing

Rely on our commercial real estate experts for financing tailored to your specific projects: retail, office, industrial, multifamily properties and other income-producing real estate. Your relationship manager will work with you to develop proposed terms as efficiently as possible for the project size and complexity. It is our best practice to honor those terms through detailed underwriting, approval and closing.

Learn more about our solutions below or contact a Commercial Real Estate relationship manager for more details.

Real Estate Accounting Valuation And Financial Modeling

Except for REITs, standard modeling practices, valuations, and transaction models apply to most verticals.

This explains why we have an entire course on REITs and property modeling, but no such courses on casino companies or home builders:

Real Estate Modeling

Master financial modeling for real estate development and private equity and REITs with 8 short case studies and 9 in-depth ones based on real properties as well as companies like AvalonBay.

Weve touched on some of the differences for REITs above, and we even have a crash-course video on REIT valuation.

My short summary would be:

1) Model Drivers and Flow You start by projecting the companys same-store properties and then build in acquisitions, developments, and asset sales and forecast the associated revenue and expenses.

2) Key Metrics As a result of the high Gains and Losses for all REITs and the high Depreciation for U.S.-based REITs, you use alternative financial metrics, such as Funds from Operations , Adjusted Funds from Operations , and EPRA Earnings.

3) Valuation You also use multiples based on these metrics, which are all linked to Equity Value. For U.S.-based REITs, the Net Asset Value Model is a useful way to value the company based on its Balance Sheet:

Its less useful for IFRS-based REITs because they mark their properties to market value periodically and do not record Depreciation on them.

One final note: we are considering only entire companies in this section.

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Essentials Of A Career In Private Equity

Private equity funds do not generally operate in an advisory capacity, but investment. Private equity sources investment capital from high-income individuals, philanthropists, pension funds, and endowments, and then invests in the development and acquisition of commercial real estate assets, on behalf of clients. Such entities are called private for the simple reason that the funds investments are not made public and are not traded in the stock market.

Private equity associates are active in four different fields: fundraising, managing investments and portfolio companies, screening for investments, and finally investing with an exit strategy. Compensation is based on investment performance, so how the investment goes influences the remuneration of a private equity professional. The competition in this industry tends to be tighter than in investment banking. While both professions generally yield higher income, private equity tends to result in better pay, because when investment prices grow, the commission percentage grows too.

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What Is Real Estate Private Equity

The Basics of Underwriting Your First Commercial Real Estate Investment

Real Estate Private Equity Definition: Real estate private equity firms raise capital from outside investors, called Limited Partners , and then use this capital to acquire and develop properties, operate and improve them, and then sell them to realize a return on their investment.

The outside investors or Limited Partners might include pension funds, endowments, insurance firms, family offices, funds of funds, and high-net-worth individuals.

REPE firms usually focus on commercial real estate offices, industrial, retail, multifamily, and specialized properties like hotels rather than residential real estate.

If they do operate in residential real estate, the strategy is usually to buy, hold, and rent out homes to individuals .

For more, see our private equity overview.

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Common Pathways To Get Into Investment Banking

Classification: Investment Banking Division as Tier 1, Sales & Trading , Equity Research as Tier 2

The step-by-step guide created with 6 steps gives you the best shot possible at landing one of the most lucrative careers in finance. However, in this article, the pathway to get into Investment Banking is summarized with 4 main steps as follows:

  • Resume / Cover letter
  • Internship / Relevant Banking Experience
  • Interview
  • If you want to learn about your specific chance of breaking into investment banks, you can check our Wall Street Career Planning Tool. The tool examines the chances of getting into Wall Street for different backgrounds. It provides the big picture of Wall Streets job market and acts as a career guideline for you to land your dream job.

    For undergraduates:

    For freshman and sophomore:
    • Tier 1 summer analyst internships at Bulge Bracket banks are getting more and more competitive. If you have little to zero relatable professional work experience, applying for an Bulge Bracket internship in your freshman and sophomore year is infeasible.However, freshman and sophomore year are golden times to secure a summer analyst in junior year. You should start early and apply for an internship / part-time position at wealth management firms , or ideally boutique investment banks & small private equity funds this takes a lot of smart networking and some relevant finance course / experience though.
    For junior and senior:

    For graduates:

    Top 20 MBA programs:


    Top Real Estate Private Equity Firms

    The top real estate private equity firms vary from year to year you should look at the PERE rankings for an updated view.

    However, Blackstone, Starwood, and Brookfield are almost always in the top few positions.

    Blackstone and Brookfield are gigantic firms that do much more than real estate, while Starwood is the biggest dedicated real estate investment firm.

    Of the generalist private equity firms, Carlyle tends to have the second-biggest presence in real estate after Blackstone.

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    Whats The Point Of Real Estate Financial Modeling

    First, some definitions: we define real estate as land and buildings that generate revenue or have the potential to do so.

    We focus on commercial real estate that is purchased and then rented out to individuals or businesses, as opposed to residential real estate, such as single-family homes, that is owner-occupied and not rented out to others.

    In CRE, individuals or businesses, i.e., tenants, pay rent to property owners to use their space.

    The owners earn income from this rent, and they use part of it to pay for expenses such as utilities, property taxes, and insurance in some cases, tenants are responsible for portions of these expenses as well.

    All of this allows us to come up with the following definition of Real Estate Financial Modeling :

    In real estate financial modeling , you analyze a property from the perspective of an Equity Investor or Debt Investor in the property and determine whether or not the Equity or Debt Investor should invest, based on the risks and potential returns.

    For example, if you acquire a multifamily property for $50 million and hold it for 5 years, could you earn a 12% annualized return on your investment?

    Or, if you develop a new office building by spending $100 million on the land and construction, and then you find tenants, lease out the property, and sell it, could you earn a 20% annualized return?

    All investing is probabilistic, so a simple model cannot tell you if a property will generate an 11.2% or 13.5% annualized return.

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    Question Category #: Real Estate Valuation

    How do you value a property? What are the trade-offs of these methodologies?

    Cap Rates, DCF Analysis, and the Replacement Cost methodology.

    Cap Rates are simple to apply, but they dont work as well in smaller regions with more limited data people also disagree about how to calculate NOI.

    The DCF model is the most theoretically correct methodology, but its based on far-in-the-future assumptions and is less useful for stabilized properties that dont change much.

    Replacement Cost estimates the cost of reconstructing the entire building from scratch today and compares it to the propertys asking price.

    It can be more grounded in reality than the DCF or Cap Rates, but different developers will give wildly different cost estimates, so its often used as more of a sanity check.

    You are analyzing two office buildings on the same street in Chicago. The buildings have the same rentable square feet, are the same age, and are both Class A. Why might one building sell for a lower Cap Rate than the other?

    The more valuable building, i.e., the one selling for a lower Cap Rate, might have higher-quality tenants, more favorable lease terms, a higher occupancy rate, or lower ongoing capital costs.

    How do you calculate the Discount Rate in a property DCF?

    Real Estate Investment Banking League Tables: The Top Firms

    Banks with large Balance Sheets tend to perform well because so many real estate deals are financing-related.

    So, youll see firms like Bank of America Merrill Lynch, Citi, JP Morgan, and Deutsche Bank at or near the top of the league tables.

    Goldman Sachs and Morgan Stanley are also among the top performers, and you can add RBC, Wells Fargo, and Barclays to the top 10-15 list.

    MS and GS tend to be comparatively stronger in M& A and advisory work, and the others are stronger in equity and debt.

    Among the elite boutiques, both Evercore and Lazard perform well, focusing on M& A advisory work.

    In terms of other boutiques in the sector, everyone likes to mention Eastdil Secured.

    Wells Fargo used to own the entire firm, but they sold the private division while retaining the public market real estate investment bankers.

    As a result, the current iteration of Eastdil Secured, while a top real estate firm, is not a true real estate investment bank that advises entire corporate entities.

    On that note, there arent many true boutique banks that specialize in real estate many firms that call themselves real estate investment banks are more like debt and equity brokers for property deals.

    A few legitimate names include CS Capital Advisors , Ziegler , and Browns Gibbons Lang & Company .

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    Real Estate Investment Trusts

    Representative Large-Cap, Global, Public Companies: Weyerhaeuser Company , American Tower Corporation , Equinix , Prologis , Simon Property , Welltower , Ventas , Public Storage, Boston Properties , Equity Residential , and AvalonBay .

    There are thousands of REITs worldwide, but fewer than 100 are public companies with over $1 billion USD in revenue.

    The largest REITs are based in the U.S., but countries like Australia, the U.K., France, and Canada also have a good number.

    REITs allow normal people to invest in the property sector without buying entire properties.

    So, if someone wants exposure to hotels, apartment buildings, or healthcare facilities, they can just buy a few shares in REITs that invest in them.

    REITs tend to specialize in certain geographies and property types, and some even focus on core, value-add, or opportunistic strategies.

    But their unique feature is that they pay little to nothing in corporate income taxes if they comply with certain requirements:

  • Dividend Distributions A high percentage of Net Income must be distributed as Dividends. The percentage varies, ranging from 90% in the U.S. to 75% in South Africa to 100% in some countries.
  • Revenue or Net Income High percentages of these must come from real estate sources. Its 75% of Revenue in countries such as Canada and Germany and 75% of Net Income in the U.S. and U.K.
  • Since REITs are always buying, selling, and developing properties and issuing Dividends, there are several consequences:

    Advantages Of Commercial Real Estate

    The 5 Best Commercial Real Estate Investment Strategies

    One of the biggest advantages of commercial real estate is attractive leasing rates. In areas where the amount of new construction is either limited by land or law, commercial real estate can have impressive returns and considerable monthly cash flows. Industrial buildings generally rent at a lower rate, though they also have lower overhead costs compared to an office tower.

    Commercial real estate also benefits from comparably longer lease contracts with tenants than residential real estate. This long lease length gives the commercial real estate holder a considerable amount of cash flow stability, as long as long-term tenants occupy the building.

    In addition to offering a stable, rich source of income, commercial real estate offers the potential for capital appreciation, as long as the property is well-maintained and kept up to date. And, like all forms of real estate, it is a distinct asset class that can provide an effective diversification option to a balanced portfolio.

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