As the real estate landscape continues to evolve rapidly, underwriting practices and investment strategies are being fundamentally rewritten. William Pattison, Head of Real Estate Research & Strategy at MetLife Investment Management, offers invaluable perspectives on the shifting dynamics shaping the industry today and in the near future. His insights shed light on where legacy assumptions no longer hold, emerging trends to watch, and critical structural reforms needed in the GP/LP relationship.

Rethinking Underwriting Assumptions: Replacement Cost and Vacancy Realities

Underwriting models and approaches must be dynamic, and many investors are still using assumptions and methodologies from prior decades. One of the most significant shifts is the renewed importance of replacement cost as a valuation anchor. According to Pattison, any core or core+ investor who ignores replacement cost is likely overpaying for real estate in today’s market.

This recalibration is driven largely by unusually high vacancy rates across most property types, which have undermined the reliability of discounted cash flow (DCF) approaches, typically the backbone of underwriting. Elevated vacancies distort cash flow projections, making DCF less predictive and pushing investors to incorporate broader market realities into their underwriting frameworks. In this context, focusing on replacement cost offers a more resilient and grounded valuation perspective.

The Medical Office Opportunity: Misclassified and Misunderstood

One surprising trend Pattison highlights is the persistent misclassification of medical office buildings as a subcategory of “office.” This misclassification causes many investors to overlook a sector fundamentally different from traditional office.

Medical office properties behave more like healthcare infrastructure, characterized by sticky tenancy and stable cash flows, which differentiates them sharply from standard office assets. Yet, core allocators are sidelining these assets as they aggressively reduce office exposure, missing an attractive segment with compelling fundamentals and pricing.

This sector divergence offers a unique opportunity for investors ready to challenge conventional categorizations and capitalize on undervalued assets that are resilient amid shifting office market dynamics.

Industry-Wide Recalibration: Underwriting and Relative Value Across Sectors and Geographies

As market dynamics shift, investors must recalibrate underwriting standards and reassess relative value with greater sophistication. Pattison points to the importance of understanding sector and geographic nuances—no one-size-fits-all approach applies in today’s complex environment.

This recalibration will dominate conversations at the upcoming Global Leaders in Real Estate Summit, where industry peers will share their approaches to navigating these changes. Understanding how underwriting models adapt to evolving fundamentals and regional market trends will be key to making informed decisions and identifying new opportunities.

Evolving GP/LP Agreements: From 1990s Models to Benchmark-Driven Incentives

Beyond underwriting and market trends, Pattison underscores a critical and often overlooked area: the need for structural evolution in GP/LP agreements.

Current agreements are stuck in a 1990s mindset, emphasizing absolute return hurdles rather than relative performance benchmarks. This misalignment creates friction in today’s volatile market conditions.

Pattison advocates for a new paradigm where:

• LPs become more willing to pay incentive fees during down markets (like 2023–2024), supporting GPs through tougher periods.
• GPs adjust expectations around promote payments, recognizing that exceptional returns in strong years (e.g., 2021) are unlikely to be rewarded with outsized promote fees since many core funds outperformed those thresholds.

This shift toward a benchmark-driven incentive structure is essential to align interests, incentivize long-term value creation, and sustain strong GP/LP partnerships in a changing market.

Looking Ahead: What to Expect at the Global Leaders in Real Estate Summit

William Pattison’s participation in the upcoming Global Leaders in Real Estate Summit on October 16 in New York promises a deep dive into these pressing issues. Attendees can expect:

• Thought-provoking discussions on how underwriting assumptions must evolve.
• Insightful analysis on sector-specific opportunities, particularly in medical office.
• A candid exploration of the structural challenges and necessary reforms in GP/LP relationships.

For institutional investors and senior executives aiming to stay ahead of market shifts, Pattison’s perspectives provide both a roadmap and a challenge to rethink traditional approaches.

Don’t miss the chance to hear these insights firsthand and join the conversation shaping the future of real estate investing. Join us.