Today, real estate companies fall more or less into two categories: ones crippled with distressed assets and those trying to purchase those assets at steep discounts. We are fortunate to be in the latter.
Every day we hear of a new company forming a distressed real estate fund. Just last week Sam Zell announced the latest of these ventures. We are also in the process of raising our own commercial real estate investment fund. However, while we plan on having a distressed allocation, our acquisition strategy will primarily focus on performing assets in the core plus and value add category.
At the Adler Group, we have a saying about this market: “we don’t want to buy distressed assets. We want to buy high quality assets, from distressed sellers”. Today at the Adler Group, we are focused on performing assets for a number of reasons. Our primary rationale for adopting this investment strategy is our experience. We have been successful in developing, acquiring, managing and leasing multi-tenant, management intensive commercial real estate for generations. Distress in the market place isn’t a reason to depart from our core competency.
Our other reason is risk. The investment management business is primarily about diversity and asset allocation. We believe that all the money raised targeting “opportunistic” returns will compete for many of the same deals. The competition for distressed deals may lead some to overpay for properties, thus over estimating the potential “risk adjusted return”.
On the other hand, with many focused on distressed properties and other historic buyers having left the market, few are focused on performing assets. We project the targeted return on core plus and value add acquisitions to be 400 to 600 basis points higher than these same categories in 2007. These higher targeted returns are theoretically intended for the same corresponding risk category. However, there is no question that with less leverage and more conservative underwriting there is actually less risk. So in this cycle, we hope to make acquisitions taking less risk than years ago while targeting a significantly higher return.
Our company culture has always been to focus on singles and doubles rather than the home run. We believe that the potential return on the acquisition of performing assets in the coming years will be attractive, particularly when compared to other investment alternatives. We would be very happy to make relatively conservative acquisitions and achieve a return above sixteen percent. If that turns out to be a single, I’m happy to be Ichiro and hit for average and leave the home runs (and the strike outs that inevitably accompany them) to others.
Click to Subscribe
