Being a David in a Goliath-Funded Market
While everything in the market seems to be trending big, what are you going to do if you're not a behemoth player?
- Dec 07, 2011
By Marcelo Bermúdez,
President, Figueroa Capital Group, a subsidiary of Charles Dunn Co.
Have you seen the television marketing campaign for the Smart Car recently? The boardroom executive points to a chart saying, “Big, Big, Big, Big, Big!” Cut to the pop singer Tiffany, in a shiny dress with bright lights and pyrotechnics blowing up to accent a giant illuminated sign with the letters “BIG” behind her and she soulfully sings the lyrics, “Big, Big, Big, Big, Big.” After several more similar vignettes, the final scene is an employee in a conference room meeting looking out the window. He sees the brand new convertible Smart Car rolling out of an office park driveway, and says, “Small,” turning everything you have just seen on its head. This ad resonated with me as I felt it was an accurate depiction of the commercial real estate private-equity market. There are weekly news and press releases of behemoth equity funds going after distressed properties, debt, REOs, and sophisticated securities with enough acronyms to make you dizzy. Blackstone, Morgan Stanley, Tishman Speyer, Goldman, Colony, Lone Star, Fortress … the list is long and impressive with the top 30 private equity firms having raised over $200 billion in 2010.
With the word “distressed” becoming somewhat passé, the reality is more and more banks have come to terms with pretend and extend, are cleaning up their portfolios, and readying to lend, if they aren’t already. CRE debt maturities of $1.7 trillion are coming due between 2011 and 2015 and investors are going hand-in-hand with borrowers to find solutions. Overleveraged properties with weak or no fundamentals in the $50 million-plus range will be acquired by cash-rich mega funds even though fundraising has been overcoming challenges. With money so cheap, property valuations have increased, but these fund giants tend to stay focused on larger core and core-plus assets (i.e., trophy properties). These look wonderful on a magazine cover and are a great conversation piece for wine and cheese mixers, but in reality they’re betting on efficiencies in operations and hoping a rebranding will help increase rents. What about the rest of the investor pool and the remaining properties?
I recently helped close the acquisition of a high-rise office building in downtown Los Angeles. It was impressive to see so many cash offers from local and foreign investors. It was a solid and safe investment for a well-known and respected family that has long-term experience owning and operating commercial real estate. They did it with their own money, which speaks greatly to their investment discipline since flipping in and out of properties has become a historic thesis to generate returns. It also speaks to the fact that you don’t have to be a giant to pick-up quality properties in a challenging market. I am also beginning to work more with individuals who are partnering in smaller funds of $50 million or less to acquire only a handful of assets and generate respectable returns. Historically, investments made at the end of a recessionary period do very well. While the economy has been weak, the commercial real estate market seems to have stabilized. Smaller funds or partnerships can still find opportunities by partnering with proven operators at a regional or local level and benefit from each other’s strengths. It will also help to infuse fresh capital and calm the volatility in the market.