Michael S. Young

Over the years, my basic and applied research has produced useful and, in some cases, unique results that challenge conventional wisdom. Wherever and whenever possible I try to show how research findings, whether my own or the work of others, can be applied in business, how they can improve investment decisions, and how they can improve our understanding of real estate as an investable asset class.

To refine and promote ideas, I write articles for both academic and professional journals. That some of these have influenced opinions, dialogue, and understanding about real estate is evidenced by the frequency with which they are cited, by the topics that are discussed in academic and professional meetings, and by the awards that eight of these efforts have received from the American Real Estate Society.

The linked list of articles shows the scope of the work I've done over the past 30 years. Some articles have been reprinted in the Netherlands, Australia, South Africa, and Singapore, which demonstrates the reach of the work.

Research and experience shows that superior real estate investment performance requires active management of each individual asset (as if it was all that you own) is far more important than 1) sophisticated asset allocation modeling, 2) asset attribution analysis, and 3) invocations of so-called Modern Portfolio Theory (MPT). This is the exact opposite of the prevailing view.

My work on this subject is described most rigorously in articles available on this site. Quoting from one of them, Why Diversification Doesn't Work: "Willie Sutton robbed banks because that was where the money was; pension funds and their managers should concentrate on properties because, if they are not careful, that is where the money can be lost. In short, more money is made or lost at the property level through good or bad management than is made or lost by reliance on seemingly sophisticated portfolio construction or inadequately tested optimization techniques."

Nonnormality of real estate return distributions of individual properties demonstrated in studies in the U.S., Australia, and most recently in the U.K. means that efficient diversification--diversification with a big "D"-- is, as a practical matter, unattainable with privately-held portfolios of real estate assets. It simply takes too many properties to achieve a level of risk reduction readily achievable in securitized assets like stocks and bonds or potentially in publicly-traded real estate securites markets with sufficient history, transparency, and trading volume. So, little "d" diversification makes good sense; satisficing works better than attempts to optimize.

Should investors avoid real estate? No, not unless there is a conscious intent to ignore one of the largest classes of the investable universe. Instead, what investors should do is reconsider where best to spend time, energy, and money. Specifically, in both strategic and tactical decisions, investors should pay close attention to asset-specific risk, rather than expect large portfolios to eliminate these risks.

In the 1970s, a few of us, including Jeff Fisher, Charles Nash, Howard Hoffman, and the two Herbs at Decisionex, created lease-by-lease discounted cash flow programs. At the time, the appraisal profession considered these approaches inappropriate. Fast forward 30 years. The pioneering approach we took years ago has gone from "doghouse to dogma." Now, income-producing real estate is seldom valued in any other manner and, unfortunately, without an appreciation of the details that underlie the models.

Inadvertently, we took some shortcuts that have persisted. For example, DCF models use a constant discount rate for cash flows irrespective of when they might be received. Similarly, the "curse of narrow paper" lead to the belief that a ten-year cash flow is the only acceptable investment horizon for valuation purposes. Also, the nearly 3% spread between the going-in cap rate and the IRR is too often accepted without a second thought.

I could go on, but I'm sure you see that there is much to understand and consider when valuing income-producing real estate. Before relying upon these models for decision-making, practitioners should consider performing due diligence on valuation models and practices as well as on their results.

Without effective application of technology, we risk falling behind competitors and may jeopardize profitability. For real estate investment managers, the key to success is adopting appropriate technology. As CIO of RREEF, I conceived iRREEF, an integrated asset management information system that turned formerly historical property management data into a general-purpose query system accessible to anyone in the company and customizable to individual needs. In fact, users of iRREEF can store their own views of data, access information never before available at their fingertips, and answer in minutes questions that used to take days or hours. That's the power of a system that doesn't just automate past practices, but that provides insight into questions people have yet to ask.

If organized and deployed properly to support business needs, information technology resources should respond to challenges that an uncertain and unknowable future will bring. In a rapidly changing technology environment, we must be aware of tools that help us work smarter and more efficiently. Current examples include wireless communication, integrated applications, Blogs, RSS feeds, and Wikis.

Teaching at the college and graduate school level as well as participating in industry lectures, seminars, and workshops has been a rewarding part of my career. I welcome the opportunity to share ideas, knowledge, and experience with others, especially with younger analysts and researchers.

Through active involvement in professional and academic real estate organizations, I have developed a practical understanding across the breadth and depth of the institutional real estate investment management business, both public and private. Additionally, I have worked with collegues at other firms across the U.S. and overseas in the U.K., Australia, and elsewhere.