In a recent episode of The Distribution by Juniper Square, Brandon Sedloff spoke with Mark Gabbay, Global CEO of LaSalle Investment Management, a real estate investment operation with over $89 billion in assets under management (AUM). With 30+ years of experience across the entire capital stack and an extraordinary track record for fund performance, Gabbay offered rich insights and perspectives on:
How understanding risk is critical for alignment between GPs and LPs–and how LaSalle’s extensive opportunity for employees to co-invest in the GP portion of the fund has aligned the firm with LPs even more
How culture has helped LaSalle move quickly from a region-by-region orientation to a globally unified powerhouse
How Gabbay sees the current market as a prime opportunity for recalibrating to find great deals and fine-tune one’s investment approach towards the future.
A shared understanding of culture & risk promotes alignment
One way Gabbay has transformed the entire LaSalle organization since he was appointed Global CEO in January 2021 was via expanded employee co-investment. The co-investment strategy undergirds Gabbay’s three pillars of culture—transparency, alignment with collaboration, and ethics.
Unlike many real estate investment firms, which limit co-investment to executive leadership, LaSalle now extends this opportunity to any of its 850+ employees who qualify as an “accredited investor” or equivalent in their country. Extending the co-investment option was arduous; however, over half of LaSalle’s employees are now qualified to invest, and around 400 have done so.
Employee co-investment also helps LaSalle send a clear message of alignment. Gabbay explained: “The GP equity in all our funds, core to opportunistic, comes almost exclusively from the employee co-invest. So we have our own money in all of our strategies. But to do that responsibly, we have had to teach everyone to look at risk and the level of risk they’re comfortable with in their own portfolios. That’s no different from what our LPs are doing as they think about what to put in core, credit, equity, and the like.”
One of the benefits of this strategy, according to Gabbay, is that it “democratizes the GP. It’s voluntary. When someone in client accounting in the Chicago office invests in our Asia Fund VI, they become aligned not just with the LPs but also with the rest of the company. Suddenly, you have a more connected organization because everyone knows and cares about what everyone else is doing.” The co-investment strategy also fosters a culture of collaboration. “In the past,” Gabbay explains, “if I was running Asia, how much did I really care about what was going on in Europe? I had my own P&L. But now we all look at decisions from a more collaborative basis. We talk about what’s best for the business.“
LaSalle’s powerful culture, in Gabbay’s view, directly contributes to its bottom-line results and has made the company’s orientation from a set of regional businesses to a single global structure quick and smooth.
Two big lessons
Gabbay is also focused on infusing LaSalle with two major lessons from his decades in the fast-growing Asian real estate market. First, he said, is paying attention to the market intangibles, which drive more of a deal’s outcome than the numbers. Since becoming global CEO, he has become immersed in learning as much as he can about LaSalle’s other markets. He now spends almost 60% of his time on the road, staying up to two months in a single office. “That gives me a feel for how things work. Even in the U.S., there are cultural differences in a lot of the markets.”
His second major lesson was “Don’t wait for all the data.” The quick-moving Asian growth market made Gabbay comfortable taking reasonable risks, operating in complex environments, and making decisions with imperfect data. “You don’t have all the information in this situation, and you need to take a bit more risk to get the outcomes you want,” he offered. Comfort with decision-making under uncertainty is part of the pivot he’s trying to bring to LaSalle.
Will real estate return in 2024?
Gabbay’s 30+ year history in the real estate investment market gives him a unique perspective on the current cycle. The change in interest rates was anticipated, he said. Still, unlike the GFC, which was relatively straightforward, recent factors like COVID, skyrocketing inflation, geopolitical flux, and climate change all make forecasting the current cycle’s timing and duration extremely difficult. “The current state,” he commented, “seems like you’ll have a wider range of outcomes between the winners and the losers,” which is particularly challenging for the cohort of people who have not experienced a down cycle over the past 12 years. Gabbay noted, “We make it clear that this is a long-term cyclical business. This may be an employee’s first downturn, but they shouldn’t be surprised. If you’re uncomfortable with that, you should think hard about whether this is the right industry for you—you have to have a long-term view.”
Gabbay believes that the normalization process for the broader real estate market will start in 2024. However, unwinding the complex factors involved in the current downturn will take more time despite the industry’s supply constraints. He said “This will be tougher for longer [than a year], and you must prepare for it. I think the valuation cycle will take more time to recover on the private side than we’ve seen in the public markets. In short, this isn’t a liquidity issue. There is capital available, but it’s not flowing to certain types of real estate.”
The burning question today is: when will deals start happening again? In Gabbay’s view, it’s not a matter of capital availability, of which he sees plenty currently, but of finding truly good deals. “It’s on us as the managers to generate a pipeline of deals that the investors don’t need to overthink,” he said. Gabbay sees this happening as debt comes due and needs to be refinanced, creating more flexibility in the pricing for compelling opportunities.
Taking the long view
Many real estate private equity investors are keen to do transactions and find the current lull disconcerting. Yet Gabbay emphasized the importance of a long-term view: “If you have a short-term opportunistic perspective, you want to jump to where the action is. I’m not saying that’s the wrong strategy, but it’s completely different from what a long-term private equity shop like ours is trying to build over time.
“It’s time to start thinking about new ways of doing things, looking and underwriting and testing different pricing metrics. Ask big questions like, do we start looking at areas we haven’t historically examined? This pause in the market gives younger teammates a chance to explore new areas and think creatively.”
Gabbay sees this interim slow period as a prime learning opportunity. “We need to look back at some of the deals we did and what worked and didn’t work. How do we apply that knowledge to today’s market?”