Real estate entrepreneur Gerald Marshall recently sat down with us to discuss the state of the property market and how his firm, Amerimar Enterprises, is uniquely positioned to capitalize on the opportunities created by these tough economic times. This is what he had to say…
Q: What do you see happening in the commercial real estate market today?
A: Well, the real estate capital markets are almost completely frozen, and the economy is in a relatively dismal state, making debt financing almost impossible to obtain and future real estate cash flows extremely difficult to forecast. As a result, it is estimated that transaction volume is down about 85 percent. All this is happening as we enter a three-year period when approximately $500 billion of commercial debt will be maturing and about 1/5 of that will not be fully secured by the underlying collateral, likely resulting in forced sales.
What does this mean? For properties to clear the market, prices will need to drop significantly. We believe the next three years will present the best opportunity to acquire U.S. commercial real estate since the early 1990’s.
Q: Which product type or asset class will present the greatest opportunity?
A: We think the earliest opportunities in this cycle will be on the debt side buying loans at a discount, either whole loans or junior notes that are in the money. We don’t feel there is a need to inject further equity into the system, as long as we can generate equity-type returns with debt-type risk.
After a plan is secured for the trillion dollars or so of the toxic debt on the balance sheets of commercial lenders, we believe the first attractive property targets will be in the office sector where you can buy properties with term on the leases to help get through an extended economic downturn. Later in the cycle as the economy rebounds, we will begin to pursue hotels and as job creation begins, multi-family properties.
Q: Are you waiting for the market to hit a bottom before you begin buying?
A: In the real estate business, bottoms can only be called in hindsight. So if you’re waiting for the bottom, then you will certainly miss it. You need to go into every deal prepared for a protracted downturn and adequately capitalized to ride it out.
We generally believe if you are buying at a time when there is very little acquisition debt available and many players sidelined dealing with presumed asset and liquidity issues, you will look back a few years later and be very glad you bought.
Q: How big is this opportunity, quantitatively speaking? And how will you take advantage of attractive pricing if there is no debt available to finance your acquisitions?
A: Between 1993 and 1995, we experienced similar market events and opportunities to what we anticipate over the next three years. In that time, Amerimar projected average IRRs of 18-20 percent. But what actually happened? We achieved IRRs in excess of 40 percent on properties purchased in that period, more than doubling our projections. Effectively, we earned 20 percent from executing on our value-add business plans, and we gained another 20 percent or more from improved property and capital markets, as tenants expanded, rents corrected, and debt became available to buyers.
To answer the second part of your question, these returns were achieved using very low leverage, as it simply was not available. In fact, of the nine properties we purchased between 1993 and 1995, five of them were acquired all equity.
Q: Tell me a little more about Amerimar, and why the company is poised to take advantage of the current market weakness.
A: Let me take this one in two parts. First, Amerimar is a privately held, owner-operator of U.S. commercial real estate, headquartered in New York and Philadelphia, with satellite offices in Denver and San Francisco. We are very hands on as both asset and property managers on our deals. As a result, issues and trends are reported up from the properties and down from senior management on a real-time basis. The insights we gain by being on the ground enable us to make nimble, informed decisions across markets and business disciplines, not only improving our performance as operators but also as buyers and sellers, thereby providing our investors with better results and less risk.
What do we look for in an acquisition target? We look to opportunistically purchase an underperforming property and add value by repositioning it, with the conservative use of leverage. That said, our core business competency is the creation of value through enhanced real estate operations, which I think is an important distinction in an economy tattered by overleveraging. I’m proud to say that Amerimar’s weighted average loan-to-cost at acquisition is approximately 56 percent on the 44 properties we acquired since 1993, and we have never been in default on a loan that we took since I started with the company in 1989.
As for the second part of your question, our portfolio currently consists of approximately $700 million of office, hotel, multi-family, retail and mixed-use properties. Since 2006, we have been net sellers of real estate, paring back our portfolio from 23 properties in 2005 to just 14 today. Yet, we have the same executive team and same size staff that we had in 2005. So, when we fully deploy the fund we are raising, we will not be overextending our team as our portfolio will be returning to about the same size it was 2005.