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Freddie Mac’s David Brickman on GSEs’ Special Role and the Outlook for Multifamily

A financier with a public-service outlook. It almost sounds like a contradiction in terms. Nevertheless, that’s the tightrope that David Brickman, the executive vice president who leads Freddie Mac’s multifamily business, must walk every day. The University of Pennsylvania and Harvard University graduate, a year shy of his 20th anniversary with the agency lender, answers to an intricate pair of overlapping mandates: earn a sensible economic return from loan activities while assertively promoting liquidity and affordable housing even during economic crises.

If those responsibilities wear on Brickman, it doesn’t show. At the Commercial Finance Real Estate Council’s annual conference in Miami last week, the energetic mortgage executive walked Commercial Observer through his thoughts on the business with enthusiasm borne from a flourishing multifamily sector in the United States.

Commercial Observer: How does Freddie Mac understand its mission?
David Brickman: We have liquidity, stability and affordability tattooed on our forehead. Those are our three mandates. But our business model resembles that of a direct lender. We make all economic decisions relating to loans and all credit decisions. We think that that model makes us that much more “real estate people.”

How is your group organized?
We have a regional model, different than people’s typical view of government-sponsored entities. In New York, our staff is very much made up of New Yorkers, real estate people. When it comes to providing liquidity, we compete like a lender. The other lenders perhaps wish we would compete a little less. But we take very seriously the view that we’re supposed to act like a private lender.

To what extent does the affordability mandate limit what kinds of deals you’ll get involved in?
We will do deals that aren’t, per se, affordable. But we will proportionately lean in and be more aggressive and do more, if it’s got higher affordability. It’s a more nuanced model than just yes or no, but it’s absolutely there in the sense that the more affordable a project is, the more important it is to get involved.

So is that the primary driver of your decision-making?
As a business matter, I want to earn a reasonable rate of return on what we do. We view ourselves as a fiduciary, and I think we’ve been a good fiduciary for our shareholders—mainly the U.S. taxpayer.

What level of risk can you tolerate on your balance sheet?
We want to distribute the significant majority of risk, given that we are owned by the taxpayer. We look to support affordability. For any business activity we do, I like to ring all three bells to some extent: If there’s no affordability, I should earn a little bit more money on it. If it’s affordable, maybe I can earn a little bit less return. When it comes to liquidity, the good news is that we were able to do that while achieving the other objectives [during the financial crisis]. We were able to earn a reasonable return during that period of time. Our market share grew during the crisis, and then it shrank again after.

How would the market be different if the government-sponsored entities disappeared?
We actually did an extensive analysis of this in 2012 or 2013. We concluded that if you were to get rid of Fannie Mae and Freddie Mac, mortgage rates would go up by about 50 to 100 basis points, cap rates would go up by a similar amount, construction activity would decrease significantly in the short term, and there would be a diminishing supply of multifamily for some time. As a result, multifamily rents would be higher, all else being equal.

So the data vindicates your job.
It’s certainly a reasonable thing to ask: Do we need Fannie or Freddie? Some have suggested that there’s no economic consequence to [our presence], and I think we’d probably say, no, that’s not accurate. If you get rid of us, that would hurt the multifamily market.

With such high student-debt levels and stagnant wages, are young Americans less interested in homeownership than their parents were?
Those factors certainly contribute, as does the shift to information-based employment, which lends itself to a little bit more urbanization. I think there is a trend toward delayed marriage and delayed childbirth, which aligns with renting longer. I’m not sure that any fewer Americans will own a home today than in the past, but maybe they will own a home for a lower percentage of their lives. The idea of millennials renting more, I think that’s true, but what’s really happening is that people are just a little older when they transition into owned housing.

What’s Freddie Mac’s role in the commercial mortgage-backed securities realm?
We have our own type of securitization called K-deals. Those are exclusively multifamily. Other than that, we don’t participate in regular conventional CMBS. Over 90 percent of what we’re doing these days will turn up in some type of securitization. And we will never commingle our collateral with anyone else’s.

Why the 90 percent level?
We aspire for it to be 100 percent. I’d like to distribute risk on everything we do. In the past, we used our balance sheet, our retained portfolio, to buy and hold loans. Our retained portfolio has been shrinking because it’s been mandated to shrink by the Treasury Department and the Federal Housing Finance Agency. We haven’t had the ability to hold much on the balance sheet. What we don’t securitize tends to be loans that are difficult to securitize.

Source: commercial

CREFC 2018: Faisal Ashraf Weighs in on Lotus Capital’s New Platform

Lotus Capital Partners has been off to the races since it launched in 2016. In addition to arranging $315 million in financing from Mack Real Estate Credit Strategies for the construction and recapitalization of Penn-Florida Companies Via Mizner—a 2-million-square-foot mixed use project in Boca Raton, Fla., last year, the firm just expanded its offerings in launching a loan sale and distribution platform.

The business will serve lenders and investors looking to de-risk and leverage their positions in whole loans, A-notes and mezzanine debt. Lotus has already closed $150 million in private placements, including three ten-year mezzanine tranches on pharmaceutical company Allergan’s new headquarters in Madison, N.J., structuring and separately placed $70 million with Hyundai Asset ManagementMorrison Street Capital and Blackrock. The initiative will be led by Tim Taylor, the former head of special situations at Ten-X.

Commercial Observer caught up with Faisal Ashraf, Lotus Capital’s founder and managing partner, at the CREFC conference in Miami to learn more about the launch.

How has the conference been for you?

I’ve never seen so many happy people in my life. I found bullish sentiments all around. The only bit of frustration I found, which is a little ironic, is that people can’t get their money out fast enough.

Lotus Capital just launched a loan sale and distribution business. Talk us through why it’s the right time to launch a platform such as this. 

There’s a myth that loan sale advisory is a only a countercyclical business that is needed in a downturn. We believe that there’s abundant opportunity to address the capital needs of investors generally in the whole loan format or within their current capital structures. Additionally, we characterize ourselves as the only outsourced capital markets desk in the business, which means that existing lenders can outsource, for example, the A-note distribution of their portfolios to us so that they can leverage yield. As you know, a big part of debt funds’ strategies is to sell off their A-notes.

So, this is a business that has little to do with a downturn but rather the existing need that investors have today and it just so happens that there’s nobody else providing it.  As an example of capital structure distribution and just to test the thesis, I sold $150 million in mezz on behalf of a CMBS dealer recently.  This is a very technical process, it involves negotiating inter-creditor agreements and we have to leave a certain amount of spread so that someone can still have a solid CMBS execution.

What’s the primary benefit in outsourcing the distribution?

While the biggest firms will likely continue to do things internally, not every firm has large or dedicated capital markets capability. I think that, generally speaking, a firm may use our services because they believe we carry different/deeper relationships in the capital markets, or because we have creative methods of structuring that will save them time and money.  For example, we may have 5 new ideas on how to get that paper sold in the Middle East or Far East. In that regard we become an outsourced capital markets private-placement desk.

The proof point in the Allergan deal [Lotus arranged a $115 million 10-year, fixed-rate CMBS financing from a CMBS dealer for Lincoln Equities Group for the new Allergan U.S. headquarters in Madison, N.J.] was that we sourced $70 million of mezzanine of which $50 million was from an investor who had never invested in the U.S. We have a series of relationships that are off-market and allow us to present some interesting solutions. We’re not the silver bullet by any means, but we can give you capital markets expertise, strong distribution and potentially attract the off-market bids from years spent running distribution desks on Wall Street. The upside to this is it allows lenders to focus on their day jobs instead of spending time doing what we do.

Where do you see Lotus Capital going from here?

My goal is for Lotus to be seen as a preeminent real estate investment banking firm—that doesn’t mean that we’ll be the biggest firm in the world, it means that people think about our firm as offering high-touch solutions with regarding to intermediating capital and over time we’ll add other dimensions to the business. For now I’m pleased we are the fasting growing firm of our kind in the country –zero to $1billion in our first full year.  The deals we’ve done and pace we have kept aren’t for the faint of heart.  

What do you expect to see in the industry in 2018?

I see more bullishness. Like every year I expect some hiccups, but the market did a good job of shaking those hiccups off in 2017. With regard to sector-specific expectations, I do believe this will be the year that the retail sector is dealt with a little more thoroughly. I think certain investors will say, “Ok, we understand now what the have and have-nots are, and we will scale down part of our retail portfolio.” And that’s a great opportunity for Lotus to help them address that need and distribute some of that paper. 

Source: commercial

CREFC 2018: Columbia Pacific’s Billy Meyer Talks Competition and Customer Service

Seattle, Wash.-based Columbia Pacific Advisors has had a busy start to the year. It recently closed a $55 million refi/acquisition/ bridge-to-sale financing package in South Boston and a $35 million loan on a stabilized office building in East Hollywood. So far the debt fund has deployed $500 million across 40 loans, and it’s hungry for more. Commercial Observer caught up with Billy Meyer, a managing director at the firm, at CREFC’s annual conference in Miami to learn more about his personal conference agenda.

Commercial Observer: What do you think the general sentiment is here at the CREFC conference?

Billy Meyer: I think the majority of folks in the lending space believe there’s still plenty of deals to be had and opportunities exist for each and every lender, whatever their space is. The volumes for each individual production might be down, simply due to new competition. There’s a lot of money out there and new competitors are trying to find yield in different capacities. So, people are varying their strategies and maybe opening up new funds in order to target different markets. From what I see and from what my peers are saying, there are opportunities and heads are up chasing them down.

What is your competitive edge as a bridge lender, would you say?

In our specific space, communication is a big part of it. You’re partnering with a borrower and that means communicating effectively up front and then throughout the documentation process. The moment we’re first introduced to a new opportunity through to closing on that transaction might take three weeks or five weeks depending on how effective our communication is. We’re a short term bridge lender and we’re able to move very fast, so we need to communicate effectively if we’re going to talk through everything effectively in a short period of time. What separates us is, too, is that our money remains on our balance sheet the entire term of the loan and its fully discretionary based on what we want to do internally—we don’t have to go outside our walls to get approvals from anyone else and we don’t have multiple levels of credit committees. Also, everyone on our team can talk through a deal’s intimate details with the broker or the direct borrower, understand the execution strategy of what a borrower is trying to do and understand what makes sense and what doesn’t.  We pride ourselves with a high level of customer service and we understand that quick responses are what brokers and borrowers are looking for.

What’s a typical deal for Columbia Pacific Advisors?

We’re a lender in every region in the country and on all property types. We are most effective with Borrowers who need money fast, need a high level of confidence in closing, need the money for a short period of time or have a situation that is not quite bankable yet.  We don’t do new construction loans and we don’t do suburban land loans. But we’re very good at senior housing, affordable housing, multifamily, retail, office and self storage. Any type of cash-flowing, commercial real estate is where we excel and can close really fast. Our average loan is about $16 million, but we’re working hard towards increasing it to be $20 to $25 million. We’re hungry to get out there but at the same time we are all investors in the fund so we really care about making good decisions and getting our money back.

So you have skin in the game.

Yes. I have a piece of my own net worth in the fund as well as some of my parents’ retirement money. So with every transaction I think about whether I’m comfortable investing in this deal—I don’t want to lose on a deal and have my parents move in with my wife and kids [laughs]. the fund is entirely made up of private investors. There’s no institutional capital in the fund and nobody dictating what we can or can’t do. We do what we feel is right from a business sense.

What are some of your recent deals?

We did a roughly a $55 million loan in South Boston. It was a debt consolidation of a couple of different loans plus additional funds to acquire an adjacent property. The neighborhood was up-zoned recently so the borrower got a golden ticket. His property per square foot is now worth considerably more. We gave him a refi loan, an acquisition loan and a bridge-to-sale loan at 60 percent loan to value. We also did a loan in East Hollywood that was roughly $35 million.  It was on two adjacent parcels and one stabilized office building that just experienced a major tenant leaving—so it was around 60 percent occupied. The borrower had two loans and one loan matured, so again it was a debt consolidation and bridge-through-stabilization. We refinanced two loans and included proceeds for tenant improvements and leasing commissions.

What was your main purpose in attending the conference?

We’re focused on lead generation. We look to meet with brokers and also other private lenders who do almost exactly what we do but not quite, so lenders who aren’t comfortable lending on affordable housing or senior housing whereas we’re fluent in that space. We’re in the customer service business ultimately and brokers call us and the deal is not a good fit for us, we’ll refer them to who we think could be a good fit. It’s a small world in our lending space and we’re willing to share opportunities within the lending community. I believe there are plenty of opportunities around and greed is pretty low right now, it’s actually a really friendly space.

Source: commercial

How Steven Levy Reinvented Kamber Management’s Decades-Old Real Estate Legacy

Kamber Management is a 77-year-old company that, with a Manhattan collection of four properties, sought a larger play.

So Steven Levy, the president and CEO of the Manhattan-based, third-generation family firm, acquired Tower 45, a 40-story, 458,000-square-foot office building at 120 West 45th Street, for $365 million from SL Green Realty Trust in September 2015. The building is currently in the midst of a years-long redesign that will make it the jewel in the Kamber crown.

At the time, Kamber held a 95-year leasehold on the 1.1-million-square-foot 1407 Broadway that the firm’s founder, Abraham Kamber (Levy’s grandfather) had originally acquired from developer William Zeckendorf. As the leasehold passed its 65-year mark, Levy felt the time frame had become too short to maintain its value and sought to sell the asset, hoping to instead find a property that would allow the company to hold a fee position.

“At some point [in the leasehold], the owner has less incentive to invest capital, and tenants find the lease term too short for their sense of stability,” Levy said. “Once you’re below 25 years, you can’t borrow money on it. If there’s a big capital investment to be made, you’re kind of scratching your head, thinking, do I really want to do this.”

Kamber sold the leasehold to Shorenstein Realty Services for $330 million in 2015 and used the proceeds to help finance the acquisition of Tower 45. (Also helping: the company’s September 2015 sale of 18 and 20 West 33rd Street to a partnership of the Carlyle Group and 60 Guilders for $111 million.)

Once the purchase was done, Kamber had its work cut out for it, as the building needed significant renovations, which Levy put in the $10 million range. The building’s atrium and lobby are being completely redesigned by the architectural firm Pei Cobb Freed & Partners, and all of the building’s mechanicals are being updated with several innovative systems being installed. These include destination dispatch, a system that routes passengers into the building’s elevators more efficiently, and an atmosphere air filtration system that gives the building some of the cleanest indoor air in New York.

“Destination dispatch is the new computer algorithm you find in new buildings,” he said. “It makes elevator usage much more efficient and quicker for the passenger. The elevators won’t be completed until the end of 2018, but we’ll be turning that on at the beginning of the year.”

As for the air filtration system, Kamber was the first developer in New York to install it, giving Tower 45 arguably the cleanest air in New York. This designation only lasted several weeks, though, as over 10 other buildings have installed the system since.

“It scrubs the air in the building according to three measurements—small particulate, large particulate and one for anything you can smell,” Levy said. “Small particulate tends to be bacteria or viruses—organic matter. Large particles tend to be dust and dirt. The filtration system cuts down the presence of those three by about 50 percent.”

Every floor of the building has sensors to measure air quality, which Levy can monitor in real time on a smartphone app. He said the system has been found to save $2,300 a year per employee in terms of sick days avoided and increased productivity.

With floor plates between 10,000 and 13,000 square feet, Levy sees Tower 45 as filling an essential niche in the New York office market.

“We are a small boutique building,” he said. “If tenants like the neighborhood and aren’t large enough to command the presence of a full floor in [larger buildings on Avenue of the Americas], they can be in a state-of-the-art, beautiful building with tenant amenities and a location that can’t be beat. We think we distinguish ourselves on that level.”

Richard Baxter, a vice chairman of New York capital markets and investment sales for Colliers, represented SL Green in the Tower 45 sale while still at JLL and has known Levy for 20 years.

“Steve’s decisive. When he wants to acquire something, he goes for it very aggressively,” Baxter said. “The Tower 45 deal was a very competitive transaction. There was competitive bidding to buy the building, and he was able to pre-empt the bid process. He’s a gentleman and a man of his word, and when he says he’s going to do something, he does it. You could do business with him on a handshake.”

The publicity around Tower 45 since the purchase has brought increased and much-desired attention to Kamber and Levy, who said he’s being brought more deals to consider as a result. While Levy is a broker, he’s spent most of his time in real estate as more of a steward of the family office, handling Kamber’s investments.

Levy, 62, grew up on the Upper East Side. His grandfather, Abraham Kamber, founded the company that bears his name in 1940, but Levy said that he and his grandfather never discussed business. Rather, his father Stanley, an attorney who didn’t work in the business, told him all about it instead.

Levy attended Connecticut College in New London, Conn., where he was allowed to design his own major, and graduated in 1977 with a bachelor’s in the American founding and the enlightenment. He scored his first job in real estate as a leasing broker at Julien J. Studley (now Savills Studley). 

“It was highly unusual then to be able to design your own interdisciplinary major. I’m still an amateur historian,” he said.

“A couple of years into working at Julian Studley, I went out to lunch with my boss, Mike Soloman. He said, ‘Steve, do you know why we hired you?’ I said, ‘Actually, Mike, I have no idea.’ He said, ‘Because you had that crazy major on your résumé. I figured if you could be that creative, you might be able to do something.’”

Levy, who said that seeking a job in real estate after graduation was more of a natural inclination, given his grandfather’s position, than a marked decision about his future, didn’t find success as a leasing broker, finding a more natural fit in sales.

He later worked at Wm. A. White & Sons, managing the firm’s Manhattan properties, and realized that his future would include a broader range of duties than simply sales. As he was looking over some of his company’s proposed sales, he inadvertently caught the development bug.

“We had these incredible deals for sale,” he said. “I went to my boss, and I said, ‘You know, let’s not sell this one, [referring to a building at 40 Worth Street]. Let’s raise some money and buy it.’ He looked at me and said, ‘Steve, we don’t do that here. We’re brokers.’ So I realized I was not long for that office. I realized the point was to own.”

Kamber, meanwhile, had been somewhat dormant at the time. While the middle of the 20th century found the firm owning a slew of prestigious properties throughout Manhattan, including One and Two Park Avenue, the Astor and Manhattan Hotels, and the Hearst Building, many of these were sold in the upmarket of the mid-1960s. By the time the elder Kamber died in 1977, the company, while still a fee-collecting entity with assets of its own, had basically stopped any new deal activity.

After the stint at White & Sons, Levy joined Kamber in 1986. (His brother, Peter, joined the firm three years later and remains today as a principal in charge of the daily operations of Kamber’s properties.)

His father had much of the paperwork related to the family business, and Levy poured through the documents, learning all he could. 

“I studied everything and thought, ‘This can’t be that difficult. How do you improve the building’s operations? How do you make it more attractive to tenants?’ ” he said.

Levy said Kamber’s status as a family firm made his duties a bit different than the head of your average real estate firm. While still a broker and actively seeking deals, Levy described his top priority as managing the “family office,” by which he means serving as the steward of the family’s many long-standing investments.

“We have an investment imperative,” he said. “We have everything organized into different types of investments. So I’m not just in real estate. I run a ‘family office’ now. That’s a term that refers to the disparate interests of families that have holdings of various kinds. Real estate is most of what we do but not all. We also have alternative investments. We do quite a bit with energy, rail cars, all kinds of things.”

At first, Levy built the company back to the point where it could manage family properties that had been run by outside firms. This included writing all the operational software for the company, which would remain in use for almost the next two decades. He also sold off shopping centers the company owned around the country, because, he said, “I wasn’t crazy about the asset class.”

For much of his time since then as Kamber’s president, his priority has been increasing the desirability of his family-owned properties and determining the best ways to maximize asset value. Selling off an expiring leasehold, as he did at 1407 Broadway, is one example of this. Another was his handling of a Section 8 housing project the family owned in Groton, Conn., the 446-unit Branford Manor Apartments. While the property had become “tremendously valuable,” Levy said, its effective management over the long run was beyond the company’s expertise, and Levy sold it.

He perceived a better opportunity in the purchase last month of three parking garage condominiums at 80, 100-120 and 220-240 Riverside Boulevard in Manhattan. Kamber purchased the properties, which total 916 parking spots over 248,000 square feet that Levy believes will be “a great long-term asset,” from the U.S. arm of a foreign-based for $50 million. He’s also continuing to manage a 16-story, 143,000-square-foot office building Kamber owns at 15 West 37th Street, a job that includes installing new dual burning boilers and the destination dispatch elevator system.

For later in 2018, Levy aims to see Kamber add another building—as yet undecided—to its portfolio.

“We prefer office, but we’ll look at anything,” he said. “One idea is more of an industrial logistics kind of use somewhere in the metropolitan area, and we’ll be looking to place about $55 million at that time.”

In addition to working on maintaining the business, Kamber, who lives in Greenwich, Conn., with his wife of 33 years, Leora, Levy is a third-generation contributor to the United Jewish Appeal/Federation of Jewish Philanthropies. The couple has three sons, twins David and Michael, 28, and Benjamin, 24.

“The UJA was started around 1938 to rescue Jews in Europe,” Levy said. “The federation is just finishing its 100th anniversary year, and they merged in 1986. Grandpa had always been very involved with that and other institutions, and we continue to contribute a major gift there. Now my boys will be fourth generation, as they’re getting involved in UJA.”

For all the different aspects of his responsibilities at Kamber, Levy said he still sees himself as a broker first and foremost and believes this grounding has played a large part in driving his success—and now, Kamber’s— and will continue to do so in the years ahead.

“I would argue the basis of my success in my business has been my brokerage training, the focus on closing a deal,” he said. “That training has focused me on mastering everything that needs to be done, not relying on others to get a deal closed, following up, and dealing with people in a way that keeps them engaged.”


Source: commercial

NKF’s Regional Mall Guru Thomas Dobrowski Is Taking Retail Doom and Gloom in Stride

Thomas Dobrowski might be one of the reasons why malls are not actually dying. And it’s not just because he sells regional malls, but because he arguably has been to more malls than anyone else (60 in 2017 alone), and whenever he visits one, he shops (that’s 60 purchases last year).

No, he’s not buying anything big—“just a couple small items I can throw in the bag,” the executive managing director at Newmark Knight Frank, said—but he’s still shopping at malls. And just that fact alone, he said, “inherently speaks to—when you get people in the mall they’re going to spend money.”

Dobrowski, who handles regional mall investment sales nationally, sold 13 regional malls last year. (Whenever he gets an assignment, not only does he tour the property he’s selling; he check out the mall’s competition.)

While there’s no doubting that malls, and retail in general, face headwinds—only five malls have either opened or are under development since 2007, while about 200 have closed in that time Dobrowski said—the broker remains optimistic about the future of the industry. “The news does not help pricing. However, it does help bring attention and interest to mall properties for sale,” Dobrowski said, “because savvy investors recognize that this could be a once-in-a-lifetime opportunity to pick up malls at good prices.”

Dobrowski didn’t start his career in the mall business. After graduating with a bachelor’s degree in finance from Villanova University he worked in Morgan Stanley’s real estate investment banking group. He got into the mall business at the now-defunct Rockwood Real Estate Advisors, where he worked from 2002 through 2014, before NKF came calling. The brokerage was looking to “grow a capital markets platform and grow a national brokerage business,” Dobrowski said.

Since then, Dobrowski has been NKF’s lone regional mall investment sales broker. With the help of a support staff of three who handle underwriting, analytics, materials preparation and research, he sold 13 out of the 30 brokered mall deals last year, making the sellers’ representative’s market share nearly 50 percent.

Being in a business that is not territory based, Dobrowski can be based anywhere in the country, but prefers New York City, his home for the last 18 years or so. (He, his wife and their 3-and-a-half year old son live in the East Village.)

As people continue to speculate about the future of malls, CO sat down with the 39-year-old broker at NKF’s digs at 125 Park Avenue last week to make sense of it all.

Commercial Observer: What’s your take on the doom-and-gloom mall headlines?

Dobrowski: My opinion is, it’s very overblown—the “death of the mall” headline.

Do you only deal with noncore assets?

Look, all the REITs want to hold onto their good assets obviously, or assets that they feel they can add value to so our business today is really split 50-50—50 percent of our sales come from the REITs that are shedding their non-core assets and then the other 50, plus or minus, come from [commercial mortgage-backed securities] special servicers and lenders that have taken back a lot of these malls over the last decade that were overleveraged and now are in many cases distressed. I grew this business out of the distressed mall market [back] in 2011, 2012 when malls started to sell again. A lot of the mall REITS, when these loans came due, and even today, when they come due, if they can’t refinance out of them, they’ll just give the keys back to the lender and that obviously is the beauty of CMBS financing. One of the best sources of lending for regional malls is CMBS debt.

Why is that?

I think because that’s where there is the biggest appetite for that type of loan. A lot of the insurance companies and a lot of the balance-sheet lenders typically have shied away from regional malls, just given the complexities behind them. They’re relatively illiquid in markets. And CMBS historically was the go-to source of financing [for regional malls]. That’s started to change now because obviously the headlines about malls are pretty tough. So that’s really why you see, [with] a lot of the sales today, the valuations are much lower than people ever really anticipated, even though we’re obviously in a really great economic cycle and there’s growth and retailers are doing well in many cases. But buyers are just underwriting out all of the risk associated with most malls. The proof is in the pudding. The reality is a lot of these malls are suffering around the country.

Have the mall owners found financing materially more difficult?

Yes. In the last 24 months, in particular, I would say financing has become one of the major hot points or constraints with respect to really selling bigger malls that require real financing. Because the equity check gets bigger, the number of players gets smaller who can stroke a big check to take down a $50-plus-million-dollar mall, which is a big deal today. Ten, 15 years ago, we were selling malls at $100 [million] and $200 million valuations. If you look at 2017, most malls were, call it between $20 million and $60 million, plus or minus, that sold.

How would you characterize lenders’ level of caution?

Well, much like buyers—but even more. They’re much more cautious where they are really concentrated on two or three main aspects. One is who the sponsor is: Do they have a track record? Do they have an expertise in the space? Because there are a lot of new owners and new buyers starting to enter the mall field today. Next, it’s starting to get into the property: Who are the anchors? What’s my anchor risk? Do I have a Sears, Bon-Ton, JCPenney, a Macy’s, kind of a lot of the anchors that are worrisome today for a lot of folks, and what does that risk look like in relation to really the rest of the mall and what are the options of re-tenanting those spaces? The third one is really then, Who’s the competition for that mall in that given market?

What are the most essential differentiating factors between malls with a positive outlook and those with more cause for concern?

I always give the comparison: It’s like a custom suit. From 50 feet away, your navy blue suit that you buy off the rack at Macy’s could look the same as the one you buy at Brioni, right? So when you look at a mall from an aerial, it could have Macy’s, Dillard’s and JCPenney and Sears and have very similar tenants on the inside, and that mall could be 10 miles outside Manhattan, and it’s killing it. But then you could take that same mall and put it in the middle of Ohio with the same tenant makeup: Once you get closer into it, [it’s floundering]. So what do we look at? I would say the big driver…is what are the options for that consumer in that market and what’s going to continue to drive them to continue to go to that mall into the future. If that mall is in a market that has two or three other malls but the market really only needs one…it’s going to be hard to make a case that [all three] need to exist. They may keep going for a while. Malls don’t die of heart attacks. They don’t die overnight. It takes a very long time for a mall to go away. It could take five years, it could take 10, it could take 15. Once you’re comfortable knowing that that mall can survive in that market, it’s then, What can I do to improve upon the tenant mix that is there today?

There’s enough there you don’t need to sell open-air shopping centers?

Correct. I can comfortably say we’re the only team probably in the country that can say we focuws 100 percent of our time and efforts on covering the regional mall market, which is why we have, arguably, the biggest market share, because we’re just ingrained in this sector. 

What would you say is impacting malls besides e-commerce?

It’s changes in shoppers’ habits I would say and changes in the shopper demographic. I can give the example of, when I was growing up [in Holmdel, N.J.], it was always the mall where you bought everything, from soup to nuts. Right? Malls were woven into the social fabric. You hung out there. It was always where you sort of went shopping for back to school and holidays and everything in between. You first date at the movie theater was at the mall [and] you maybe ate at the food court.

screen shot 2018 01 09 at 12 10 56 pm NKF’s Regional Mall Guru Thomas Dobrowski Is Taking Retail Doom and Gloom in Stride
MALL FOR ONE: Dobrowski has had his hand in selling dozens of malls in his career, including Foothills Mall, at top, Mesa Mall, in the middle and College Square Mall, at the bottom.

What’s the biggest deal you’ve ever done?

The largest mall sale I ever worked on was a mall out in California called Stonestown Galleria, right outside San Francisco. We sold it for $312 million at the peak of the market [in August 2004]. It’s still a great asset. It’s still owned by [General Growth Properties].

What’s the last mall you sold?

Moreno Valley Mall in Moreno Valley, Calif. The all-in purchase price was $63 million. It was one of the bigger sales of 2017. It’s one of the best malls I’ve sold in the last five years.

Why?

It’s a complete contrarian story. This mall was foreclosed and taken over by CWCapital, a special servicer, in 2011. It’s one of the few malls, since they took ownership, it has only steadily improved year over year. And, it’s just a great case study in execution in terms of they brought in Round1 [entertainment company], they brought in Crunch Fitness, they brought in cool retailers that weren’t in that market before, and a lot of it has to do with Inland Empire California, which got hit really hard in the recession but has since emerged and exceeded expectations you can say in terms of population growth. And the mall stood to benefit from that. And we sold it to a private owner outside of Beverly Hills, [International Growth Properties]. This closed on Nov. 28, [2017].

How long does a mall typically take to sell?

Three to six months I would say is average. The time to sell them is not necessarily the part of selling malls that is most challenging.

What is?

It’s just the sheer complexity of the properties and the amount of time and effort that has to go into preparing offering materials and underwriting the asset that I think a lot of brokers would shy away from that, plus it’s a national product type and most brokers focus on regions, and that’s how most brokerage offices are set up. So we don’t sell anything in the immediate New York metro because there’s not really a mall market there.

Are you worried, with the death of mall stuff, about your future with this slice of the market?

I get that question a lot. A lot of people are like, Why do you put all of your chips in this basket, focus on this one product type? The answer is no. If you look at the peak of the market, there were 1,300 malls in the U.S., a well-established fact in 2007. Today, there are around 1,100. We’ve only lost 200 malls in 10 years’ time. If it took 10 years to get rid of 200 malls, is it another 10 or 20 of sales, trades, transactions to get these malls into the right hands of people that will really redevelop them, close them down and have them developed into something else? So, I think there’s a lot of runway left in terms of the number of sales that will happen over the next, call five to 10 years, and candidly, I think it’s only going to ramp up and increase. I think there’s going to be more transactions in 2018 than there were in 2017.


Source: commercial

ACORE’s De Haan and Fellows Talk Market Drivers and Their Busiest Quarter So Far

ACORE Capital just had the busiest quarter of its three-year history. The nonbank national lender has been closing deals from coast to coast and multiple places in between. In December 2017, those deals included an $80 million refinance of the tallest residential tower in Nashville, Tenn.; a $132 million construction loan for AMCAL Swenson’s The Graduate student housing property in San Jose, Calif.; and a $110 million refinance of Candlebrook Properties’ 251 DEKALB multifamily complex in King of Prussia, Pa. Two of ACORE’s four managing partners, Warren de Haan and Boyd Fellows, took a breather between deal-making to visit Commercial Observer’s offices and give their perspectives on what drove business in 2017 and what lies ahead in 2018.

Commercial Observer: How was 2017 for ACORE from a transaction volume perspective?

Boyd Fellows: One interesting thing about 2017 was the lack of transaction activity in the first quarter, which, in retrospect, there was good reason for. In my mind, it was a combination of two factors: the uncertainty post-election as people tried to assess what the real implications of [President Donald] Trump’s election would be and the bid-offer gap, which began in late 2016, where sellers were still expecting ever-higher prices for their properties and buyers were taking a pause to decide whether they were comfortable with those higher prices. As the election was digested, that gap closed, and the uncertainty around the election and around price then went away. In the fourth quarter of 2017, there was a lot of activity.

Warren de Haan: The broader investment sales market slowed down in the first two quarters. If new acquisitions are down then, by virtue of that, [financing] transaction volume is going to be low. Coming into the fourth quarter, we saw our pipeline volume start to increase as transaction volume picked up, especially with our core clients. That was coupled with our perception that we were getting very good risk-adjusted returns at different parts of the capital stack—we’re very active in deploying money in transactions that are high-quality deals. So the combination of [available] capital and increased transaction activity resulted in the best quarter so far in the life of ACORE.

Fellows: During the fourth quarter we signed up approximately 30 loans for over $2 billion. While it’s a lot of work, it’s also exciting as all of these loans are deepening our relationships with a broader array of clients.

Do you think the fears around the economy have dissipated?

De Haan: We’re in an interesting spot where we’ve seen the stock market increase—it’s been on a tear, an upward trajectory. A few things are driving that. Obviously, there’s an anticipation that tax reform is done in a positive way for the economy. Second, there’s an anticipation that there will be an infrastructure spend, and third, there are not a lot of places to put your money. So, I would have thought that would mean another push of optimism in commercial real estate. I would have thought transaction volumes would have gone up significantly and values would have followed. However, the vast majority of our clients who are asset allocators and investors in commercial real estate have a very measured view. They are being conservative and very thoughtful, and they’re not expecting big spikes like we see in the public equity markets.

Fellows: I think underlying that caution is rates. If rates rise, that will have a direct impact on the value of commercial real estate, as the cost of debt associated with real estate will  go up. It also theoretically means that cap rates widen, and you have that element combined with a pretty broad consensus that real estate is very fully valued. It wouldn’t take a big increase in rates to do some damage in the real estate space.

How much would rates have to rise to have an impact?

Fellows: If they rise 10 to 20 basis points, it won’t matter much. If they rise 100 basis points, it will matter quite a bit. So the real answer is somewhere in the middle—somewhere around 50 basis points we’re going to start to feel it. It’s late in the cycle, and nobody thinks rates are going down; they’re going up—it’s just a question of how much. As a result, a lot of real estate capital is going into the value-add space where you can create value in assets. And that is the space [ACORE is] entirely focused on. So, part of the story of why the value-add space is so active right now is that it’s hard for real estate capital to achieve return targets in other categories of real estate.

De Haan: One of the benefits of what is happening right now also is, if you take floating-rate financing, LIBOR is up fairly significantly but spreads have compressed. So the cost of borrowing is still very attractive. One thing we all have to look out for in 2018 is that a number of sellers have looked at the investment sales market to trade their assets but they aren’t getting the prices they want, so they’re looking to the debt markets to get as much leverage as they can to finance themselves out of their position.

So you’re expecting a lot of refis in 2018?

De Haan: I’d say there is a healthy debate among lenders about the refinancing wave that we expect to see in 2018, but there are going to be a number of higher-leverage requests where borrowers or sponsors who were going to sell have now said, “You know what, the debt markets are hot. I should recapitalize and take as much money out as I possibly can.”

Was there such a thing as a typical transaction for ACORE in 2017?

De Haan: In 2017 we broadened the spectrum of ACORE’s lending capability. In the fourth quarter we were extremely effective at financing assets that had more cash flow and less transition but where the borrowers required a lower interest rate. We can lend on everything from strong cash-flowing, light-transitional assets all the way through to empty office buildings and ground-up construction. So our ability to service a client base—everywhere from the low-leverage stuff all the way through highly complex construction projects—is the take away for 2017.

During a recent CO panel, ACORE Managing Director Tony Fineman estimated that construction loans make up around 20 to 25 percent of your lending book. Do you expect that amount to increase or decrease in 2018?

De Haan: That’s on the higher side of what we do, but we think that construction lending for the right sponsor in the right location, and the right business plan represents incredibly good risk-adjusted returns. So we’re willing to do it, and we like to do it, but we’re very focused on what [a loan] means for our entire portfolio. We turn down a lot of loans, but when we find one that we believe in 100 percent and we can get paid for the risk, that’s when we step in.

With the increased competition for deals, how are you keeping your competitive edge?

De Haan: I think competition is healthy, and we have the highest degree of respect for all of our competitors. We know them very well, we’ve worked together over the past 25 years, and it’s very uncommon to see one of our competitors take abnormal risk from a credit perspective. From time to time, we see competitors—and they may see us—doing a deal that we really want to do that’s tighter than we would want to do it from a pricing perspective. But that doesn’t represent a lot of risk to the system. The risk to the system is lenders who are pushing the credit curve, but none of our competitors are right now, and borrowers are still borrowing conservatively.

So borrowers are playing a role in the market discipline?

Fellows: Our average loan-to-value is in the high 60s, and it’s not necessarily because we decide that—it’s the borrowers who decide how much leverage they want. So when we target high-quality business plans with well-capitalized opportunity funds they happen to not want much more leverage than that. It’s partially driven by the fact that it’s difficult to raise money for strategies that require more leverage because investors have said, “Hey, we’re not going to give you money to go borrow 80-plus percent and run the risk that it all blows up.” This is a fantastic fundamental environment for us.

The other side of this equation that I find fascinating—and it’s a stark contrast to the CMBS business—is that when we and most of our competitors make a loan we have to get our money back from that building and that borrower. We’re not selling the loan to get out of a problem; it’s our risk, our reputation, our track record, and it has to come back from that property. In the CMBS business, someone is making a CMBS loan and they know that 90 days later that loan is gone. However in the transitional CRE debt space most of our competitors are in the same position, so the way we compete is typically not with credit. There are other debt shops who focus on higher-leverage loans and there are borrowers who want higher leverage. It’s just not our focus.  

In terms of the capital stack, where do you prefer to play?

De Haan: The best way to describe it is that we are the ideal lender for someone who wants a one-stop-shop solution that may or may not include a mezzanine tranche in the stack. Our average LTV is in the high 60s, but we do some 75s, 76s, 65s, 60s, and there may be some mezzanine embedded in that. We’re a one-stop-shop solution where a borrower says, “It’s a complicated business plan. I need to know that they will keep the loan and asset manage the loan as opposed to selling a bunch of pieces of the loan.” In certain circumstances we will sell a senior participation in the loan, but we still retain control of the loan.

Fellows: There is an oligopoly of five to 10 nonbank lenders. Now that Mesa West was acquired by Morgan Stanley, we are the only independent debt fund with a pure play in transitional real estate lending, and there are two dimensions to that. First, we’re not part of a giant organization, and that allows us to focus. Second, every other player in the market is aligned with, or part of, an equity shop. We’re just a lender, and that’s an advantage. Roughly 10 to 15 percent of our business comes from borrowers who say they’re not showing that deal to anyone who is part of an equity shop.

Anything you’re keeping a close eye on as we begin 2018?

De Haan: We are keeping our eyes on the hotel industry at this late part of the cycle. We are a big lender in hospitality, but we pick our spots. New supply is the thing that can really hurt you. There are markets that are oversupplied, and we’ll stay away from them in every asset class. We take a rifle-shot approach to the different markets and to the different assets. And while we may not love a particular market, that doesn’t mean that that we won’t finance the best building in that market, or a building at the right basis.

Are there any markets on your radar that you’d like to lend more in?

De Haan: I’d like to do more in Seattle and Portland. Portland demographically is one of the strongest markets in the country; it’s supply constrained, it has a good downtown, a low cost of living and a high level of in-migration of population between the ages of 25 and 35.


Source: commercial

Why Developer Daren Hornig Is Taking a Chance on Outer Borough Office Projects

Daren Hornig has taken some big bets on up-and-coming office markets in Brooklyn and the Bronx. Despite some major financial hurdles, office tenants are starting to flock to what used to be sleepy industrial zones in the outer boroughs, and Hornig’s bets are paying off.

At the former Schlitz Brewery at 95 Evergreen Avenue in Bushwick, Brooklyn, his four-and-a-half-year-old Great Neck, N.Y.-based firm Hornig Capital Partners successfully leased the entire 165,000-square-foot office conversion to the city’s Human Resources Administration last September. He teamed up with Savanna to purchase the building in January 2015 for $33.7 million and shelled out another $30 million revamping it in 2016.

Then Hornig, a former office broker with a nose for what tenants want, decided to take a gamble on investing three stops farther east along the L train. With the help of its development partner, the Brickman Group, Hornig Capital Partners purchased a former packaging plant at 1519 Decatur Street, along the Bushwick-Ridgewood border, in May 2016 for $10.2 million. After a $10 million renovation that included new windows, mechanicals and bathrooms, the 63,000-square-foot “Box Factory” is ready for creative, Brooklyn-dwelling tenants.

But Brooklyn isn’t Hornig’s only focus. He’s taken the plunge in the South Bronx, too. In March 2015, Savanna and HCP partnered to purchase a hulking, eight-story warehouse at 2417 Third Avenue in the South Bronx for $30.6 million. Since being revamped as the “Bruckner Building” in honor of its location by the bustling Bruckner Boulevard, the once-abandoned 172,000-square-foot loft building is slowly filling up with a mix of industrial businesses, tech companies and artists.

The 50-year-old Bellmore, N.Y., native and married father of 17-year-old twins recently sat down with Commercial Observer to talk about his residential and commercial projects, his seven-year stint as an office leasing broker at Newmark, now Newmark Knight Frank, and his ties to Entourage creator Doug Ellin.

Commercial Observer: Tell us about your newest project, the Box Factory.

Daren Hornig: It’s literally on the corner of Irving and Decatur. That block divides Ridgewood and Bushwick. So we tried to rename the area “Ridgewick,” and it didn’t go as well as Tribeca, Nolita and every other neighborhood. It’s a high-end conversion of a warehouse for office and retail. So we’re talking to a bunch of tenants from that area, and it’s a block and a half from the Halsey [Street] L [station].

What sort of tenants are you looking to bring in there?

TAMI [or technology, advertising, media and information] tenants. Tech, arts, media, a bunch of makers. Two breweries have taken a look recently, and a coworking firm has expressed interest for the property.

We’re taking a contrarian approach on the L train that not everything is doom and gloom. There are millions of people who live in Brooklyn and Queens that will commute west to east and take the L train to neighborhoods [where they work]…We’ve seen a tremendous amount of tenant interest from people who live in Williamsburg and Bushwick that don’t want to have to go into Manhattan, and they’re actually turning around. They’ll use the L train because it’s still going to operate in Brooklyn.

How’s everything going at the Bruckner Building?

We’re really renovating the entire property from top to bottom. Put a new roof on, new windows, repainted the entire building, renovated all the floors. So it’s in lease-up mode. It was 100 percent leased when we bought it, and now we’ve taken it down to 40 percent because a lot of people were illegally living in there. But the Bronx is hot. There’s a tremendous amount of activity going on. There’s a lot of new development—Keith Rubenstein and [his] Somerset [Partners] are developing a tremendous amount of residential around us. The old History [Channel] building supposedly has a lease signed for the entire building. The Clock Tower building that exists presently on Bruckner—[the owner, Carnegie Management] built two [residential] additions there, and they’re in lease-up mode. The rents are going to be in the high $40s, low $50s per foot, which is a very strong rent for that market.

You said the Bruckner Building is 40 percent leased. What sort of tenants do you have in there right now?

There’s a nice array of different tenants from artists to makers to manufacturers, a few tech companies. There are sound studios in there. A company called Duro just moved in recently that does drones. Bronx Edible is moving in. Keith from Somerset is moving his office from glorious Park Avenue uptown [into the Bruckner Building].

There are some sculptors, paint canvas artists, a furniture manufacturer and a fabricator in there. So there’s a good eclectic mix of tenants, with spaces as small as 1,000 feet and a full floor of 22,000 square feet.

What made you decide to invest in the commercial markets in Bushwick and the South Bronx?

It was a combination of things. [With] Manhattan being very expensive and very competitive, I started looking at alternative markets. When I started my company four and a half years ago, the first thing I actually bought was in an extensively alternative market—Cleveland, Ohio—I bought a shopping center there. But being a New York guy and having strong relationships and knowing Brooklyn and knowing the Bronx, it’s a lot easier to get around here, and there’s a lot more demand. I was looking for that unique type of building that had high ceilings, felt lofty, the à-la-Midtown South genre of buildings. And Bushwick was getting very hot. I was on a few deals in Williamsburg, and then the market tanked in ‘08, ‘09. And then the market started to move and shift toward Bushwick. Similarly we were looking at what else was happening and made a similar purchase in the Bronx [with] the Bruckner Building.

I think today [for] tenants and people individually, it almost doesn’t matter where you work. But they want to be in a creative and dynamic environment that enables them to really focus on their creativity and lets them be who they are.

What was it like getting financing for these projects?

Challenging. The debt markets are strong on cash-flowing assets and properties that you can easily comp out [find comparable properties]. So it’s easy to go up and down Park Avenue and Fifth Avenue and show thousands of leases that were done in the last few years and pricing. When you go to these emerging markets, it’s a lot more challenging to find significant comps of what tenants have paid in rent. It’s a lot more handholding, a lot more of an education and getting [the lenders] comfortable with the pricing and the vision. It wasn’t easy with either property, but at the end of the day, we proved what the value was. And obviously now at [95] Evergreen [Avenue in Bushwick], the lender is extremely happy to have the city with AA credit taking over the lease for 20 years.

I’ve heard the Bruckner Building was in pretty rough shape when you bought it. Tell us more about the condition when you first purchased it.

The previous owner had owned it for 30 years. And I don’t think he put more than $10,000 into the building. And it was a complete mess. It only had one elevator operational at the time. The other one was completely decommissioned.

We had to open up the lobby, we installed an ADA ramp and ADA access to the lobby, put a new storefront on, replaced over 100 windows throughout the property and really cleaned it up significantly. The roof was completely saturated and had some asbestos in it. So we abated it and put a brand new roof on.

I’m a big believer, as is the Savanna team, that you have to make the investment and show your tenants that you’re willing to make the investment to attract them. A lot of people will buy buildings and then wait for the tenant.

It may be a more conservative approach, but it’s very difficult to attract the tenants. Especially when you see what’s going on in Williamsburg and Bushwick, [landlords] don’t do any work to their buildings. They’ll get a lease, and there’s no tenancy because they don’t fulfill the work letter or what’s expected of them.

Are you talking about landlords doing office conversions?

Anything—office, retail. You drive through Bushwick, it’s still very, very industrial. There have been a lot of purchase and a lot of hype, but nothing has gotten over that second gear yet.

There were a couple of those office conversions near the Morgan and Jefferson L stops, but none of it really seems to be happening yet.

There’s [Rabsky Group’s portion of the] Rheingold [Brewery] development, which is almost done. I think they’re going to start tenancy early next year.

But that’s mostly residential.

It’s a combination. Real estate, and real estate development, is really a chicken-and-egg game. If you build commercial, people don’t necessarily want to go there because they don’t live nearby. But if you have residential and people live there, they will then say, “You know what, I don’t need to go to Manhattan to work. I’ll work in Bushwick.” I think the residential and having thousands of people move in there will help foster the commercial over time. You get 2,000 people living there, you get people visiting. That creates more traffic, and the retail environment heats up because people need to eat drink and shop.

What do you feel like is the next up-and-coming office market in the five boroughs? And where are you looking to invest next?

I think along the waterfront, five-borough-wise, or four-borough, still [excluding Staten Island]. I think the South Bronx is hot, and it’s going to stay hot. Especially once Somerset breaks ground and starts building out their location. L+M [Development Partners] just did a large deal in the South Bronx where they’re putting the Hip-Hop Museum. So I think the South Bronx is going to continue to stay strong because of its proximity and transportation and relative transportation to the rest of New York City.

And I’ve been saying Long Island City [Queens] for 20 years. It’s definitely achieved the critical mass of residential. It’s rumored that there are almost 20,000 units coming online in rental. Is there too much supply coming online in that market? There will be interesting supply and demand dynamics that will play themselves out.

But office there is a great market. [Office tenants] are renting in Long Island City, and large deals are getting done there. People want to pay $40, maybe $50 a foot in the Long Island City market [to rent office space].

What’s going on with your 48-unit condo project at 211 Schermerhorn Street in Boerum Hill, Brooklyn?

It’s in development. We’ve finished foundations, and we’re coming out of the ground. The sales center is open at 333 Atlantic Avenue. That’s a partnership we have with GPB Capital [Holdings] and Oestreicher Properties. And sales are going nicely. Looks great, and we’ve gotten good press on it.

What about your big affordable residential development at St. Barnabas Hospital in the Belmont area of the Bronx?

St. Barnabas is under construction. We’re about halfway done. The facade was just put on the south building. Looks great. That’s a deal we have in partnership with L+M. And that’s one of those deals that feels good, and obviously we make a living, but obviously it’s nice that we’re giving back to the community. It’s by and large an affordable housing project that we took a special element of consideration and made it one of the first, if not only, health care-integrated affordable housing projects. So it’s going to have a 50,000-square-foot ambulatory care facility in the base. Everything we’re doing there is geared toward health and the wellbeing of the community and the citizens. We’re putting bacteria-free paint on and putting special equipment in to try and deflect the asthma that’s prevalent in the Bronx.

The nicest component we’re doing is that we’re putting a rooftop farm on the building where the community can grow fresh vegetables. And in conjunction with St. Barnabas Hospital, we’re creating a teaching kitchen within the retail space of the building where we’re going to teach the parents of the community how to cook and prepare healthy meals.

You got your start doing office leasing, right? And you worked with a lot of internet companies?

So I started out as an office-leasing broker with Newmark. I was lucky to have great mentorship there with Barry Gosin and Billy Cohen. At that point I was representing a lot of technology companies. The internet was like a foreign object back then, and no one really knew what it was.

I did a lot of research and found that 99 percent of the buildings in New York City did not have the right fiber optic infrastructure to support broadband communications for the future. So [in 1997], I started a company, Onsite Access. And Scott Rechler from RXR [Realty] backed me on that company. And we created one of the largest broadband communications companies in the United States. We had agreements and contracts with 750 buildings and about 350 million square feet to expand throughout the country. Unfortunately, the dot-com bubble burst, and it obviously affected us and everyone else. But the vision was right, and I was unfortunately years before my time. But I think that’s one of the challenges and one of the things you learn in this business.

And from there you transitioned out of being a broker. You went into the construction industry, and then you sort of made your way into development that way?

Yes. So I joined a group [VVA] where I did some project management. So I understood the construction side. Then I bought a [residential brokerage] company called Dwelling Quest. I sold Dwelling Quest to Century 21 in 2006. And then I was on my way to being a developer. That was about 15 years ago. [From then until founding his own firm, Hornig was a partner and ran the northeast division for a Scottsdale, Ariz.-based development firm called Saxa. He was also briefly a partner at Metropolitan Realty.]

If I remember correctly, you grew up with the creator of Entourage?

Yes, I grew up with the creator, Doug Ellin. But truth be told, he was better friends with my wife; they were both a year younger than me in high school. And he name-dropped me in an episode. Even though I’ve done hundreds of millions of dollars in deals across this great country, my claim to fame is being mentioned on Entourage.


Source: commercial

Gibson Dunn’s Joanne Franzel Is Making Serious Deals in Meatpacking and Hudson Yards

Joanne Franzel is a partner in global law firm Gibson, Dunn & Crutcher’s New York office, doing deals with Related Companies on Hudson Yards and scooping up properties for Jamestown in Manhattan and beyond.

Not bad for a part-timer.

Gibson Dunn had a policy requiring attorneys work full time for 18 months prior to becoming partner, and Franzel—a member of the firm’s real estate practice—wasn’t interested in going full time. But the policy was eliminated, and after about 35 years at the firm, Franzel was promoted to partner two years ago.

After she had her older son David, now 30, in 1988, Franzel started working flextime, and she hasn’t looked back.

“During all those years raising my kids, I would never have gone back to a full-time schedule,” Franzel said. “By the time they were out of college, I was in a groove, working on a flex basis and able to work on interesting and challenging deals, while keeping a semblance of work-life balance. I increased my overall hours somewhat, but I just wasn’t willing to change my life in a big way.”

Eric Feuerstein, a partner at the firm and a co-head of the real estate practice group, said Gibson Dunn is committed to accommodating “these priorities so stars like Joanne can thrive here.”

Franzel, 62, paved the way for a few other part-timers to obtain partner status this year.

“She was certainly the trailblazer,” said Danielle Katzir, of counsel at Gibson Dunn in the Los Angeles office, who became one of those part-time partners, the only two in the real estate practice. “She…was an incredible role model for us and the face of the firm’s commitment to a flextime policy.”

Trailblazer does indeed feel like the right word but not just in the area of getting a better deal for women at her law firm but also for the work she’s actually doing.

Franzel lobbed a huge grenade last month when she led Jamestown’s first foray into the Bronx. The landlord picked up a 10-story, 280,000-square-foot office building with retail at the base at 260 East 161st Street a few blocks from Yankee Stadium from Acadia Realty Trust for $115 million. (She declined to say anything about the deal.)

Franzel has helped Jamestown nab some notable properties like the Falchi Building in Long Island City, Queens (which she also sold for Jamestown).

She represented the company in its $310 million 2008 purchase of 1250 Broadway (along with MHP Properties) at the corner of West 32nd Street, and then she worked on Jamestown’s behalf last summer in the property’s sale for $565 million.

chelsea market Gibson Dunns Joanne Franzel Is Making Serious Deals in Meatpacking and Hudson Yards
LAW AND ORDER: Franzel has tied up a slew of small deals for tenants at Chelsea Market.

But it is at Jamestown’s 1.2-million-square-foot office and retail property at 75 Ninth Avenue between West 15th and West 16th Streets, Chelsea Market, where Franzel focuses a considerable amount of her attention on retail leases.

You know, these are little deals, and you know you could sort of look down your nose and say, eh, it’s only a few hundred feet but the whole is greater than the sum of its parts,” Franzel said. “And for me it’s just been really exciting to be part of what Jamestown has done creatively in making this one of the top tourist destinations in town.”

Michael Phillips, a principal and president of Jamestown, said of Franzel, “She’s insightful, collaborative, knowledgeable, understands uniquely the types and breadth and width of the tenants we deal with from small license agreements to multinational long-term leases.”

And in addition to heavyweights like Jamestown, Franzel worked with a joint venture of Related Cos. and Oxford Properties Group at Hudson Yards on the Far West Side.

With Hudson Yards, not only does Franzel get to work on the largest private real estate development in U.S. history, but from her office at 200 Park Avenue, she has a direct view of the site (at least until One Vanderbilt is erected), which runs from West 30th to West 34th Streets between 10th and 12th Avenues.

When talking with Commercial Observer, Franzel proudly pointed to the new buildings rising from what will become an 18-million-square-foot commercial and residential city within a city, talking about the deals her firm has done there.

Her personal transactions have included Time Warner’s 1.5-million-square-foot office space acquisition at 30 Hudson Yards, the lease and development and construction agreement for Blackrock to relocate its headquarters to 847,000 square feet in 50 Hudson Yards and Milbank, Tweed, Hadley & McCloy’s lease in more than 250,000 square feet at 55 Hudson Yards (at that site, she also handled the land acquisition for the office tower).

Franzel said Hudson Yards “is one of the most exciting projects I’ve worked on in my entire career.”

She explained, “Related and Oxford are essentially building a small city along the Hudson River, which is development on a massive scale and incredibly complex and requires the input and cooperation of many parties, both public and private, profit and not-for-profit. Seeing how all of these forces interact to create a new environment for people to live, work and play, and having a small role in this visionary project, has been a major thrill.”

Franzel’s 26-year-old son Jonathan Franzel, an associate at Newmark Knight Frank, has been able to take advantage of his mother’s acumen in his own real estate deals.

“When I was a year into the business and running around with tenants and drafting contracts or reading leases, she taught me a lot of the technical skills and things to look for in reviewing a lease and how to find what’s important to your client, whether it be a landlord or a tenant,” Jonathan said. These days he consults her on how to handle “people issues and relying on her judgment with the best way to solve [them] without offending anyone.”

Heather Mutterperl, a principal of Invest-corp, said Franzel has been Investcorp’s attorney in probably 15 property sales across the country since 2000. The deals have ranged in size from $25 million to over $100 million with the last one being a hotel that traded for $37 million in October 2015 in the Midwest.

Mutterperl said she appreciates that Franzel doesn’t get worked up when things go awry.

“She’s steady, attentive, and she doesn’t get rattled,” Mutterperl said. “She maintains her cool when things are not going right. She works extremely well when opposing counsel is difficult, neutralizing some tough situations.”

20171127 joanne franzel 041 Gibson Dunns Joanne Franzel Is Making Serious Deals in Meatpacking and Hudson Yards
PLAYING THE GAME: Franzel has been a part-timer at Gibson Dunn for 30 years, and while she has enjoyed her work-life balance, she recognizes that had she worked more hours, she could have become “a playa” and “one of those high-share partners.” Photo: Sasha Maslov

In addition, Mutterperl said of Franzel, “Joanne has an ability to synthesize a ton of information, distill it down to layman’s terms. She’s a problem-solver dealmaker.” (Like the attorneys cited in this story, Mutterperl was wary of providing specific examples.)

Last month Franzel represented the West Side Montessori School on a pro-bono basis. The school is launching a new preschool program in cellar-level space at the Annunciation Greek Orthodox Church at 302 West 91st Street. The deal logistics, Franzel said, included handling “interesting facilities issues, trying to find ways to accommodate the day-to-day needs of two not-for-profit entities with unique uses and with any not-for-profit there are always unique compliance issues relating to rules of the New York attorney general and other governmental requirements for these types of users.”

The Long Island native acquired her bachelor’s from Brown University and law degree from the University of Pennsylvania. After graduating, Franzel commenced working for Gibson Dunn in the Los Angeles office. (It was during her interviews for a job that she met the person who ended up introducing her to her future husband.)

“I fled to L.A. because I didn’t want to work on Wall Street,” Franzel said.

It was there that she got to work on a real estate deal—a French-speaking investor buying Beverly Hills houses—and realized she liked it. One of her big first deals in New York City was selling a 29-property Bing & Bing portfolio to real estate entrepreneur Martin J. Raynes in 1985. The sale price exceeded $250 million, according to Brick Underground.

Before the sale, Franzel and her husband moved into one of the buildings, at 235 West End Avenue between West 70th and West 71st Streets. In 1990, the couple moved two blocks north into a co-op, where the Franzels still reside.

Even while always handling a serious work load, it was important to the transactional attorney to be home on Fridays and weekends with her musician husband, Jeff, and their sons Jonathan and David—the latter works in cybersecurity.

To facilitate that, Franzel avoided clients that would require night and weekend hours.

50hudsonyards costar Gibson Dunns Joanne Franzel Is Making Serious Deals in Meatpacking and Hudson Yards
LAW AND ORDER: Franzel has tied up large deals like an agreement for Blackrock to relocate its headquarters to 847,000 square feet at 50 Hudson Yards (building on left). Image: CoStar Group

She acknowledged that, had she taken a more aggressive approach to her career, she could have been a bigger shot.

“If I worked more hours, I’d make more money,” Franzel said. “If I had made that decision years ago to run for partner, I would have been further along. I’d like to think I could have been one of those high-share partners if I had chosen that route. And there certainly are other women at the firm, and at other firms, that have chosen that route, to develop a big book of business and be the big shot, be ‘the playa.’ It’s not for everybody, and it wasn’t for me. It was too important for me to be able to leave here at 6 o’clock and go home, and Jeff would pick up the food at Fairway, and I would cook dinner, and I’m sitting down at that table with my kids.”

While her kids are grown up, Franzel still enjoys working part time—fielding calls in the morning and drafting documents late into the night with The Late Show With Stephen Colbert playing in the background.

In her free time, Franzel enjoys Gyrotonic training sessions and classes. “It is my addiction,” she said. “Whenever I’m on vacation I find a gyro studio and I go workout for an hour. I found one in Valencia, when I was there.” And she hangs out with friends and watches her husband perform. On summer weekends (and less frequently during other parts of the year), the couple can be found at their Westport, Conn., home. After renting what Franzel calls “my shitty little house” for a number of summers, the Franzels purchased it this August.

Whether she’s on vacation, at her country house or enjoying personal time, Franzel pulls her weight at work. “I always kind of joked because part time for her is really full time for any other profession,” Jonathan said.

“Joanne,” Feuerstein said, “is truly a standout example of how someone can work on a self-tailored schedule and always provide outstanding service to our most demanding real estate institutions on their most sophisticated deals.”


Source: commercial

VC Firm Fifth Wall’s Brendan Wallace Talks About What’s Next for Real Estate Tech

Brendan Wallace is the co-founder and managing partner of Fifth Wall Ventures, a venture capital fund dedicated to investing in start-up tech solutions for the real estate industry. The fund’s name alludes to the fifth “disruptive” wall the firm provides in addition to the four physical walls of a building. Founded just a year-and-a-half-ago in Los Angeles with Brad Greiwe, 35, the fund has raised $212 million to date, mostly from nine of the country’s largest real estate companies, including CBRE, Equity Residential, Macerich Co. and Lennar Corp.

Fifth Wall has injected money into real estate tech newcomers like short-term retail rental platform Appear Here, OpenDoor, which lets people instantly buy and sell homes, and States Title, which is seeking to revamp the title and underwriting process, as Commercial Observer previously reported. The fund led an investment group with Bessemer Venture Partners that acquired a majority share of WiredScore, a company that uses a rating system for tech capacity in commercial buildings and was founded by Arie Barendrecht and Jared Kushner in 2013. Kushner sold his stake in the company to the group in October. (Purchasers included Kushner’s brother, Joshua Kushner among other angel investors.) Fifth Wall declined to comment on the acquisition.

High-caliber partnership and buy-in from industry leaders is key to the fund’s success, Wallace told CO during an interview over lunch at Café Hill in Downtown L.A. in the middle of the month. Wallace, 36, was in the area to partake in “RETHINK: Emerging Macro Trends in Real Estate,” the eighth annual SoCal commercial real estate conference, trekking from his company locale on the West Side in Venice.

Commercial Obsever: How did your partnership with Brad and the founding of Fifth Wall come about?

Brendan Wallace: We got to know each other as we were doing a lot of individual angel investing and saw this opportunity.

Real estate is the largest industry in the United States, representing 14 percent of the gross national product and the largest asset class, the largest lending category, the largest store of consumer wealth. Yet it is clearly one of the least technologized. It’s slow to adopt technology. That’s true empirically; it spends a small percentage of industry revenue on [information technology]. Even impressionistically, when you walk into that building [South Park Center where “Rethink” was held] nothing about that experience has changed in the last 20 years. It’s a very outdated industry. We saw all that changing. [Real estate investment trusts, or] REITs, large REITs were, for the first time, hiring chief information officers, digital strategists. You’re starting to see real budget open up to adopt technology across the real estate world.

When did you see that start to happen?

We probably started seeing that as far back as five years ago, but in the last two years it’s rapidly accelerated. The reason it’s suddenly accelerated is the maturity of companies that can meet those needs.

Say something like [customer relationship management] software. Yardi was the only game in town for a while, but now there are three or four companies that also serve that need.

When you look at real estate tech and who is producing big outcomes, you think about two or three of the unicorns today like WeWork and Airbnb, Zillow and Priceline and Expedia. Hundreds and billions of dollars have been created in hospitality tech, yet we couldn’t find a dedicated venture fund, which we thought was odd because you have venture funds for transportation tech, cannabis tech, whatever it is, small categories when it comes to the total U.S. economy.

Why is that?

There are couple of reasons for that. One is there’s not a lot of people who come from the real estate industry who are in tech. There is just not a wide overlap of people who have those two skill sets.

The second reason is that real estate tech has a peculiar risk profile [compared to] other types of venture capital. It tends to have very low technical risk because the baseline of technology in the industry is so low, what constitutes real innovation is usually quite simple. It could be something simple like we take your vendor management logs and we put them in the cloud. We don’t typically face the big technical risks, like can you build it, does it work, is it better than the status quo? Most ideas in real estate tech are good ideas.

All the risk hinges around distribution. If you can’t sell your product to two or three players, you have no one else to sell to, right? The entire success or failure of the business hinges on a very small number of contracts. So, the way we try to solve that is raising venture capital that’s independent but that access to capital comes from the largest buyers in real estate technology. The kingmakers, the deciders of who wins and who loses—let’s raise capital from them.

So, we went to the biggest real estate groups and we systematically raised $15 million from CBRE, the largest commercial broker, Prologis, the largest industrial REIT and Lennar Corp., the largest home builder, Hines, the largest office developer, Host Hotels & Resorts, the largest luxury hotel owner, Macerich, the largest mall owner, and then Lowe’s home improvement, came in as well.

Did you invest your own funds?

Yes, all funds have a general partner commitment, which I can’t disclose—funny thing those [Securities and Exchange Commission] rules (laughs). [In the most recent SEC filings from May 2017 for the fund, they declined to share the issuer size, but the total offering amount and total sold was $210,000,000 with zero remaining to sold.]

After graduating with a bachelor’s in political science and economics from Princeton University in 2006 you came out west to get an MBA from Stanford University and you’ve been in California ever since?

Yes, I’ve been out in California since then. Born and raised in New York City and Brad is from Cincinnati. I moved to Los Angeles San Francisco three years ago.

Are you the largest VC in the industry?

Yeah.

What’s the next largest?

Navitas [Capital] at $60 million, which they announced just a couple of days ago, based in Beverly Hills.

We’re not a company that raises money for ourselves. We’re not buying hard assets; we’re investing in fast-growing technology companies. What is distinct about us is that we have a general capital fund and all the companies we invest in are real estate-related or have a real estate dimension to them.

We conceptualized investing in real-world technology…where technology is touching and impacting businesses that have to do with real estate. The approach we take is we really collaborate with these anchor [limited partnerships], we try to identify situations where they’re going to adopt the technology or somehow accelerate their growth and the edge that gives you is threefold.

One, you have an informational edge, right? You know about a partnership or you know about a big adoption decision or big distribution deal before it happens. Two, we take a very different approach to investing. We take a very top-down approach to investing. We’re looking for a technology solution that solves this particular pain point in the market and then we’ll invest in one.

And then the last component, we’re structuring partnerships alongside our deals. So, as you can imagine, for an early-stage company, being able to deliver revenue alongside equity capital is quite profound. That could be game-changing for them.

How many employees do you have?

We have 12 employees and we’re hiring three more as we speak, so 15. Primarily the team is investors, that’s obviously our core competency.

What’s the state of real estate tech today?

We’re early in the innovation cycle, but it depends on what dimension of real estate tech we’re talking about.

You just think about VTS for example. It’s grown incredibly fast. What they really do is leasing and asset management platform, so it’s a software layer that permits an owner of a portfolio to communicate with individual owners of an asset, and, in turn, interact with brokers that are representing tenants

It’s a platform layer that lets you see that in real time and then allows you to manipulate it and show the impact on the performance of an entire portfolio. Software for portfolios is less than 10 percent penetrated and the company is doing —we can’t say exactly what their revenue is —but it’s in the tens of millions of dollars right now. (According to Crunchbase, VTS has raised a total of $110,360,000 to date.)

It just goes to show how much runway there is in real estate tech.

What’s changed?

Real estate owners are seeing that there’s a market for operating businesses.

Real estate is an industry that has self-identified as great wheeler-dealers, right? You’re great a buyer or seller of a property. You make your money on the buy or the sell and I think what has certainly happened since the great recession is that you tend to end up owning an asset for a lot longer than you might be able to predict.

So, people that have traditionally thought of themselves as making money by buying or selling are thinking of making their money in operations. That is exactly where technology can add value, by driving incremental revenue through creative real estate concepts like co-working or cutting costs through imaging software, driving transparency for solutions like VTS.

What’s also happening is we are seeing institutionalization of the real estate asset class. So, the fewer the players and the larger your footprint, the more the incentive is to adopt technology across a large footprint.

Have you invested in VTS?

We have invested in VTS. [Wallace declined to specify how much he invested.]

Who else?

States Title, B8ta, which is an interesting retail concept, Appear Here, a platform for pop-up shops.

We don’t say what we put in any company, but we can say in aggregate we’ve invested in just over $70 million in all 14 portfolios.

What is the next big thing in real estate technology for 2018 and beyond?

It’s hard to say what the next big single thing is, but I’ll give you three themes.

One is greater depth and breadth in suite enterprise software solutions for the building. There have been a lot of point solutions—for instance, turning air-conditioners off when people are no longer in the building now. What you’re seeing is like what happened in corporate enterprise software. [Enterprise software refers to large-scale software geared toward supporting an entire organization. This large-scale software allows for several different user roles, and the roles define the actions a specific user can perform.]

Different platforms are becoming enmeshed with each other and integrated. You’re starting to see the ability to operate a building with what looks and feels like the ability to operate a company. What companies have in corporate enterprise software is happening in commercial real estate enterprise software. It’s a huge opportunity obviously.

The second big theme is you’re seeing a big growth in real estate concepts that are asset-like. So, like co-working or co-living, but they are platforms and really operating businesses that look and feel like a real estate business and are providing a service like providing an office or whatever it is without holding an asset. It’s this intermediary asset-like layer. WeWork is just part of a broader changing workplace of space on demand.

What you’re seeing is that the nature of being a real estate company is changing and the service of being a real estate owner and operator is becoming bifurcated from asset ownership. There is this increased level of tenant focus.

It’s far easier to do that when you also don’t have to deal with a building and say, keeping the lights on. It’s just an interesting dynamic that’s playing out in the industry.

You’re starting to see a lot of innovation in real estate fintech [or financial technology]. Real estate capital markets are larger than the U.S. stock market, so it’s just vast. The amount of mortgage debt outstanding in the United States is enormous and is bigger or at least the equivalent to the U.S. stock market. Yet, when you think about how easy it is to buy and sell a stock versus how painful it is to get a mortgage, it’s just unnecessarily archaic and inefficient. We’re starting to see a lot of point solutions emerge in real estate from title insurance, to home insurance, to getting documents notarized to getting your first mortgage, second mortgage.

There are all sorts of direct to the consumer solutions that don’t warrant going into the bank anymore. So again, it’s nothing groundbreaking, it’s just taking a mortgage property and distributing it online, for instance.

What about Blockchain?

We’re obviously in the very early days. At its essential level Blockchain is a derivative of the first land registries. The first property people owned was land. And one of the hardest things to track for land is who actually owns it.

The whole title insurance industry is based on the fact that we don’t have Blockchain. What Blockchain does very eloquently is it conveys ownership and ownership history, so you can trace its lineage—who owned it during a period of time, who traded it to whom and when. It’s verified by the network, who owns that property in the public.

In some aspects, we might have that in the land registry, but it’s semi-private because the counties control some of it and the states, and the title agencies, which are really the ones verifying it are for the most part private. So, it’s a weird disconnect when it would be so much more eloquent to convey ownership through blockchain.

The other thing is that it largely facilitates fractionalization of ownership of real estate. So today the only way to fractionalize ownership are private [limited liability companies], which only credited investors can buy, private REITs which tend to be kind of a dark underworld to the REIT industry where no one really trusts the price of a security because they’re somewhat liquid and then REITs, which are publicly traded, fractionalized ownership positions and real estate equities. And REITs are still only a small portion of the U.S. real estate market.

The promise of Blockchain is you could effectively fractionalize ownership of this building [at 632 S. Hill Street], create a series of points to securitize by a position in the equity of this building and start to free and trade them. And for real estate—it’s an industry that it’s so hard to get in and out of—really the fastest you could sell a place like this is three to six months if you’re lucky and it’s a painful process. But if you could quickly react to say, rising real estate prices, that’s one of the promising things about Blockchain.


Source: commercial

LaSalle’s Jason Kern Talks Investor Appetite and Why ‘Suburban’ is Still a Dirty Word

Jason Kern is CEO of the Americas for LaSalle Investment Management, overseeing all investment activity in the Americas and a whopping $18 billion in assets under management. Prior to LaSalle, he founded and led HSBC Asia-Pac RE where he oversaw private equity raises and asset acquisitions and dispositions with more than $50 billion in transaction volume. An international jet-setter, Kern has spent more than half of his professional career overseas. He spoke with CO from LaSalle’s headquarters in Downtown Chicago and described what’s keeping him busy and what’s attracting foreign investors to the U.S. as we head into 2018.

Where did you grow up?

That’s a complicated question. When you hear all the places that I’ve lived my joke is often that I was in the witness protection program as a child. Many people assume I was in a military family but I wasn’t. My folks met at Vanderbilt University, got married after their junior year and had me right after graduation.

So, I was born in Bethlehem, Pennsylvania, moved to St. Louis for a couple of years, then Charlottesville, Virginia. My formative years were spent in Alabama before my dad was transferred to Connecticut: I started my freshman year in a public high school with a deep Southern drawl but lost it by my second weekI didn’t want to get beat up by the kids.

I went to school in upstate New York then got my first job in New York City and spent ten years on and off there. In the middle of it I spent three years in Europe and eventually was sent to Asia, where I spent seven years. I’ve spent roughly half of my professional career abroad as an expat, but now I love ChicagoI’ve been here for four years and have no intentions of leaving.

How did you get your taste for real estate?

There are two classes [of people] in our industry. Some have a proclivity for real estate because their family was in the business and others fall into it: I fell into it. I was a liberal arts major undergrad and was recruited into a program at J.P. Morgan that was specifically targeted toward liberal arts majors like me who didn’t know what they wanted to do with their lives. The idea was that we didn’t have a lot of formal business training, so they put us through a two-year program where we rotated around the [bank’s various groups] but also took business classes at night at NYU Stern School of Business.

I always thought I wanted to do M&A work but I also had a love of Europe and, lo and behold, they found a ‘special project’ for mea phrase everyone should fear and run from in their careerand I went to Europe for a three-year assignment. I came back to New York and into the real estate investment banking group at J.P. Morgan at the time because it was a very successful franchise and I loved the people in the group. I learned very quickly to love real estate and have ever since.

What was your first big transaction?

We got hired to advise on what was at the time the largest REIT M&A deal in history. Equity Office Properties [EOP]Sam Zell’s company, bought Cornerstone Properties [in 2000]. At a little over $3 billion in enterprise value, it was a big deal at the time. EOP at the time was cutting edge in terms of institutional, publicly-traded real estate investment trusts. That was a fun and high profile deal. I also got the chance to work with Jon Zehner, who is the reason I joined LaSalle. He was J.P. Morgan’s global head of real estate global banking at the time, out of London.

How did your time in Asia come about, and the move to HSBC?

I spent 17 years at one firm. No millennial would be able to stomach such loyalty and longevity! In 2006, around 14 years into my stint, the Asia investment banking business for J.P. Morgan  was growing like gangbusters. There was a lot of emerging capital markets activity with REITS going public, and big state-owned enterprises in mainland China doing big high yield bond deals, and so they needed more Western capital markets expertise to help run that business. I’d never been to Asia in my life when I got the call asking if I’d like to move my wife and my two-year-old daughter to Hong Kong. Both my wife and I said ‘there’s no way that’s ever happening,’ but we went there for a week to try it and and my wife went from being a hurdle to the move to encouraging me to cut a deal.

It was the time that the global financial crisis hit and Asia was the best place to be geographically, because it was still active. We had layoffs like everyone else but it wasn’t nearly as moribund as the U.S. market.

As loyal as I was to J.P. Morgan, in the Asia context HSBC is really the gold standard in terms of long-term relationships with all the big institutions. I’d looked at HSBC as being a bit of a sleeping giantspecifically in the real estate spacebut they didn’t have a team to advise on capital markets or M&A so I convinced them to hire me as employee number one to found that business. Within a year or two we were the busiest real estate investment banking franchise in all of Asia Pacific.

What were the biggest challenges in growing that business from scratch?

Asia is challenging from both the language and cultural barrier perspectives. It was difficult for me to simply rock up and have a one-on-one dialogue with a mainland Chinese [state-owned enterprise] chairman. That requires a team of interpreters and relationship bankers. At the time there was less sophistication in terms of capital markets which made it fun as you really could bring a lot to the tablein terms of how things were done in mature western markets.

Why did the LaSalle role appeal to you?

I had daydreamed, as many do on the investment banking side, about finding a way over to the private equity side of things. I’d never found the perfect fit. But Jon Zehner had been newly hired as the global head of capital raising at LaSalle and he was able to give me the inside scoop that there was a position opening up as CEO of the Americas. I certainly wasn’t an obvious choicegiven that I had been out of the U.S. market for a number of years and had never been on the private equity side but he saw an international perspective and that’s almost essential in our business these days seeing as we’re raising the majority of our capital across borders.

What are you most proud of?

I think I’ve been a change agentnot in the sense of changing the culture because that’s the fundamental strength of our business, but giving the next generation of talent here platforms to be able to influence the direction of the business.

In my four years here we’ve gone from a little under $12 billion of assets under management to over $18 billion today. That’s really from upping our stroke-rate in terms of acquisitionsand we’ve done that without increasing our headcount.

Has foreign investment in the U.S reached its peak?

No, not at all. If you look at the growth trajectory for domestic pension funds, they’ve been doing direct private real estate investing for many years and many of them are at 8 to 10 percent allocation. Many of the foreign capital we talk to are coming to the U.S. for the very first time or are significantly underweight here, so there’s a ton of growth potential. If you think of some of the largest sovereign wealth funds around the world, some of which have never invested in the U.S. and you run the math on a 5 to 10 percent allocation you’re talking tens of billions if not hundreds of billions of dollars that could come into our market. That could be a long-term secular impact.

How about the foreign interest in debt on U.S. properties?

Debt has been the golden child of the real estate space over the last couple of years. The allocation to nonbank debt and private equity real estate funds has grown leaps and bounds and I think it’s partly due to the paucity of bank lending, given the capital controls and regulations. CMBS is not as big as it once was so there has been a bit of a void that has been filled by the nonbank lenders. It’s a huge market with what has been a strong level of acquisition activity, and a large portion of that needs debt financing and refinancing of existing debt. I think there are a lot of foreign investors seeing that we are relatively long in the tooth in terms of the bull marketwe passed 100 months now—and I think investors are seeing the U.S. debt market as a good place to be.

What’s LaSalle’s largest exposure in terms of property types?

Office has always been our largest exposure. Foreign investors tend to enter the U.S. market via office type assets in gateway cities and we’ve helped them do that. The reality is, frankly, that office has had undeniably the worst risk return of performance of the four major property types because it’s so capital-intensive. So we invest in office very heavily but we do it carefully and hopefully try to be smart about it. Retail is second to office. We have been perpetually underweight to retailnot strategically, but a large portion of retail investing is in the regional and super-regional malls and those have been very closely controlled by the public REITS and some of the largest open-end core funds. So, it’s been very difficult to get your hands on a mall and we don’t own any regional malls at the moment.

Is that a good thing, given all the scary retail headlines?

I think we’re feeling good about not being exposed to malls at the moment. As everyone will tell you, the top quartile of regional malls will continue to perform it’s the lowest three quarters that everyone is wringing their hands about.

Are there any property types that you’re actively avoiding?

The dirtiest word in commercial real estate for years has been ‘suburban’. As someone who lives in the suburbs, I take offense to that [laughs]. But we, to a certain extent, are in line with that sentiment. Chicago is a great example of a market where overall population growth is negligible however you’d never know it here in the Downtown Chicago area. The urbanization that has been happening over the past few years, with of major corporations decamping from suburban office parks and coming Downtown, makes it a very vibrant Downtown scene.  That’s driving huge demand for apartments and office and retail and it doesn’t bode well for owning suburban office properties. Of course, there are some opportunities for buying suburban office because it is such a red-headed stepchild in our business these days. We’ve done a few deals where we’ve found a unique opportunity where the risk return was compelling, but for the most part we’re avoiding suburban office.

Have you completed more dispositions or acquisitions this year?

I’m happy to say that we have kept acquisitions ahead of dispositions, certainly in my time here. There is some volatility from year to year but I’d say in the Americas we’ve been averaging $3 billion of acquisitions on a year to year basis and averaging $2 billion in dispositions. The dispositions take place because we have closed-end funds that come to a natural end of their term and we have to liquidate assets. This year we’ve probably done the lowest volume of dispositions that we’ve done in past years and it’s partly because there is a bit of additional turbulence out there in the market and that’s caused a bit more of a bid-ask spread.

What’s on the agenda for 2018?

Boring answer, but i’d say more of the same. I think we still have a lot of low hanging fruit in our businessin terms of getting on planes and meeting with international investors and helping them access this market.

Any personal resolutions?

I wasn’t able to run the Chicago marathon this year due to a stress fracture so I hope to do it next year instead. My other is to cook more. Nobody cooks at home any more, and my daughter [13] and I like to cook.

 


Source: commercial