Repositioning a Multifamily Asset

Multifamily investments, particularly value-added strategies, have been of keen interest to real estate investors for years now. Successful execution of a multifamily investment offers excellent risk-adjusted returns when compared to other classes of real estate such as industrial, retail, and office. From a volatility standpoint, multifamily enjoys relatively stable long-term cash flows with less downside risk during periods of recession due to stable tenancy in most major markets. The stability during downturns is also supported by the fact that recessions tend to make renters out of owners, increasing demand for apartments.

Asset Management and Investment Banking

We find evidence that conflicts of interest are pervasive in the asset management business owned by investment banks. Using data from 1990 to 2008, we compare the alphas of mutual funds, hedge funds, and institutional funds operated by investment banks and non-bank conglomerates. We find that, while no difference exists in performance by fund type, being owned by an investment bank reduces alphas by 46 basis points per year in our baseline model. Making lead loans increases alphas, but the dispersion of fees across portfolios decreases alphas. The economic loss is $4.9 billion per year.