Kolter Group is Latest Commercial RE Player to Embrace Residential

It isn’t necessarily a trend, but it’s likely more than coincidence that the Kolter Group, West Palm Beach, Fla., is the second largely commercial real estate company in the past couple of weeks to announce a big financial commitment to the distressed residential market. Kolter and Och-Ziff Capital Management Group L.L.C., New York, announced the formation of a $1 billion joint venture that will target residential properties in the Southeast that are at any stage of development. Och-Ziff is a leading global institutional alternative asset management firm, with about $30 billion of assets under management as of late 2007. This month CPN online featured an interview with Thomas Trkla, CEO of Brookwood Financial Partners L.P., Beverly, Mass., which had recently announced that one of its affiliates had made the first purchase under a new strategy of acquiring finished residential lots. The acquisition covered 214 finished lots in a development in Lehigh Acres, Fla. It came after a period in which Brookwood had been a net seller of commercial properties, divesting itself of more than 4.75 million square feet of office, flex and retail space and generating total proceeds of about $650 million. In a recent interview with Howard Erbstein, Kolter’s chief investment officer, CPN zeroed in a bit on Kolter’s approach. Bear in mind that among Kolter’s existing affiliates is Kolter Homes, which has since 1993 completed nearly $3 billion in high-rise, low-rise and master-planned communities, so the parent company is well versed in residential. Its Kolter Commercial affiliate focuses on office, multi-family and hotel properties and currently has more than 4 million square feet of office space in Toronto, nearly 2 million square feet of office space in Dallas, more than 1,800 multifamily units in Florida, and more than 350 hotel keys in Florida. “Our strategy encompasses the full range of residential property: raw land, entitled lots, partially developed communities, complete single family/condo inventory, etc.,” Erbstein told CPN. “We’ve decided on a broad investment strategy for two reasons: 1) Kolter has cradle-to-grave experience with all aspects of residential development and construction; and 2) the firm has and a broad strategy offers us the greatest range of opportunity by enabling us to acquire the most promising deals, irrespective of where they stand in the development cycle.” “Kolter’s exit strategy will not be limited to ‘flipping,’” he added, “but will often include repositioning/redesigning projects, completing development, and constructing and selling residences,” as well as potential bulk condo conversions of former multi-family properties. Though Erbstein doesn’t claim to be completely familiar with Brookwood’s strategy, he commented, “It seems we both believe that the current downturn is providing an opportunity to acquire residential property at discounted and ultimately profit-generating prices.” “The demand picture is more troubling on the residential side than on the commercial side,” Erbstein conceded. “New home sales were down 33 percent from June ’07 to June ’08, while commercial vacancy rates (office, industrial, retail, multi-family) rose by only 1 percent or so over the same period.” Nonetheless, he pointed out, the commercial sector doesn’t necessarily offer more opportunity, since discounting “is currently heavier on the residential side, largely because of the drop-off in demand, than it is on the commercial side.”