On February 26th, Peter Schaff spoke to a group of Kellogg students and faculty at the Allen Center about his career, the investment management business, and thoughts on investing in the current market. Mr. Schaff retired in December after a 29-year career at LaSalle Investment Management, where he most recently served the role of Chief Executive Officer for North America. In that role, he oversaw the firm’s private equity real estate business in the United States, Canada, and Mexico. Mr. Schaff now spends time personally investing in real estate with capital raised from friends and family. His experiences within the real estate industry made him uniquely qualified to share with Kellogg Real Estate students his insight and expertise on real estate investment and investment management.
Mr. Schaff shared his circuitous route to the real estate business. Following his graduation from Stanford in 1980, Mr. Schaff worked at Continental Illinois Bank and Trust as a commercial banker until the bank failed in 1984. With a deep-seated interest in investing in private markets, he began to consider a career in real estate upon the advice of contacts who pointed out the large flows of pension money pouring into commercial real estate investments. Despite turning down LaSalle’s initial job offer because he never saw himself as a “real estate person,” he reconsidered the opportunity and joined the firm a few weeks later. Mr. Schaff used the story as an opportunity to urge students to “keep an open mind” about career paths, noting that his initial aversion to opportunities in real estate proved to be unfounded.
After touching on his background, Mr. Schaff delved into trends in the investment management industry. He described the rigorous vetting process for funds that is undertaken by today’s institutional investors, who, along with their consultants, are meticulous about the details of the fund and its managers. Every aspect of performance is reviewed. Past deals and decisions are questioned, performance across funds and across economic cycles is inspected (with a particular focus on performance during the downturn), personnel are reviewed to ensure organizational stability, and meaningful principal investment by fund managers is sought. When later questioned about good vs. bad fund structures, Mr. Schaff reiterated the importance of fund managers co-investing with its limited partners in order to align incentives and objectives. He also mentioned a positive trend of limited partners being able to remove general partners, which he thinks has a “salutary effect” on managers’ behavior.
Mr. Schaff also touched on capital flow trends in investment management. Investors are taking a more “global view” of real estate, with investors seeking global diversity. Large foreign investors across the globe are entering the global real estate investment market and making large, impactful investment plays. Locally, US individual investors are a fast-growing prominent investor type, as baby-boomers needing income will have more of their money placed in commercial real estate. Big financial advisors are looking to move some of the trillions they have under management to alternative asset classes. Core, income-focused real estate is very attractive as an alternative asset class, with its potential as an inflation-hedge and its moderate risk profile.
In terms of investment markets themselves, Mr. Schaff sees prices in the best markets – specifically, New York, Washington, Boston, San Francisco, and Seattle, to name a few – back to pre-crisis peaks. Though he pointed out with consternation very low IRR’s (around 6%, including cash return and appreciation) for investors as a trend, he thought money would continue to pool in these few very large markets. The pricing is not a bubble, Schaff noted, because the pricing is “not irrational” given interest rates. Secondary markets, though seemingly cheaper by comparison, may continue to have a harder time with demand fundamentals, leading to a “two-tiered market” in which core product in major cities is expensive and everything else is approached cautiously.
In wrapping up the session with questions from students, Mr. Schaff fielded a query about crowd-funding real estate. Though somewhat skeptical about its long-term viability because there could be some bad fall-outs, Schaff mentioned that the expense-laden nature of the real estate private capital raising market leaves room for disintermediation, especially since the current structure makes access difficult for individual investors. Finally, when asked what he would look for in a fund to invest his own money, he reiterated management experience, performance across different economic cycles, organizational stability, and personal investment from managers.
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