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Behringer Harvard’s Real Estate Forecast

Robert Behringer of Behringer Harvard Holdings says he feels good about the U.S. economy, and he’s putting his money where his mouth is.
By Trey Garrison |
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photography by Kevin Hunter Marple

The risk of sounding optimistic when everyone else is preaching economic doom is being labeled a Pollyanna. So, as with every other risk Robert Behringer takes, he hedges his economic forecasts just a little, acknowledging the problems.

Buoyantly confident, with stylish silver-white hair and an earnest, engaging grin, Behringer makes a listener want to believe. The man could have been a motivational speaker if he weren’t already the founder and CEO of Behringer Harvard Holdings LLC, a real estate investment firm with more than $2.4 billion in acquisitions in 2007 alone. 

This year Addison-based Behringer Harvard is being just as aggressive, putting the company’s money where the founder’s mouth is when it comes to the economy.

“Right now we don’t perceive the economy to be as bad as the pundits perceive it,” Behringer says. “Yes, there is a credit crunch going on. It’s difficult for high-leverage buyers to acquire real estate. But the real estate fundamentals are strong. Occupancy levels are high, and the performance of hotels is still good. This is the kind of climate that creates opportunities.”

Behringer doesn’t deny the economy has difficulties. He just thinks they’re amplified by a combination of the usual media focus on bad news and the spin dynamics of a presidential election year. Candidates from both parties, after all, have to stress all the problems so that they can position themselves as indispensable problem-solvers. “I read and watch the news all the time. They’re talking about how bad it is: gas prices, recession, consumer spending. But I think there’s a lot of negativity out there not based on reality,” he says. “Certainly there are troubling circumstances—high oil prices and the subprime debacle, for instance. But they will not affect the broad economy for the long term.”

The news on the ground, Behringer believes, is different. “This year we’ve seen more leasing activity in most of our markets than last year,” he says, pointing to one example. “We haven’t seen any slowdown in leasing.”

There has been a slowdown in project acquisitions, however, across all categories of commercial real estate. That’s where the credit crunch is hurting some real estate investment firms—the smaller ones, at least.

Most of the institutional buyers—pension and insurance funds—are still actively buying properties because they have a stronger debt position.

A majority of institutional buyers are leveraged at 50-55 percent these days. Behringer Harvard, while not as large as many institutional investors or the bigger real estate investment trusts, is similarly structured, which is one reason it hasn’t slowed its acquisitions pace.

“The slowdown in transaction activity we’ve seen is simply because there’s not the availability of debt there once was,” Behringer says. “That’s actually an opportunity for us. There are fewer competitors for the same properties. This leaves us in a good position compared to last year. Sometimes there are too many competitors in a normalized market. To the extent you have capital available, now is a very good time to acquire real estate.”

Another positive sign, Behringer believes, is the attitude of sellers. Despite all the talk of doom and gloom, sellers of institutional assets are not reducing their prices by any significant amount—at least, those with deeper pockets, plenty of equity, and a lack of mezzanine debt aren’t. This is evidence, Behringer says, that they too believe the markets will right themselves within 12-18 months, and thus are holding firm rather than conducting fire sales.

 “Institutional investors are still buying,” he says. “That’s why I believe there’s a light at the end of the tunnel, and sooner rather than later.”

Then there’s the heartening pace of new construction. While new construction is down from highs in 2006 and 2007, commercial building is still strong in markets like Dallas, the Dallas office of the Federal Reserve said in its April Hot Stats report.

Locally, a key indicator of construction activity is 16 percent growth in construction employment despite a slowdown in new housing starts. Reports of a slowdown in the architectural pipeline here are evident, but not alarming.

Still, with high-profile projects like the second phase of One Arts Plaza on hold, it can all come down to the viewer’s perception of conflicting data.

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Conservative Approach
Of course, it’s easier to see the glass half-full when you’re sitting in the catbird seat.

Behringer has been in commercial real estate for more than three decades—that’s six or seven cycles, depending on how you define them. So he designed Behringer Harvard to be more immune to the sometimes mercurial, always changing fortunes of the real estate world.

Behringer Harvard is the product of the merger of two Dallas companies that date back to the 1980s, Behringer Partners and Harvard Property Trust. The firm focuses on a broad range of product types in its acquisitions, and it both invests and raises capital domestically and internationally.

The firm takes a conservative approach in just about everything it does. For starters, Behringer approaches acquisitions with a financial structure more akin to the aforementioned institutional approach—debt of 50 percent or less—than what you see from similar-sized investment firms.

The company also keeps its funds well-capitalized, never overextending into any one sector so that when opportunities come along, equity or equity capital is always available to be raised or rerouted.

“Being experienced with several cycles, we wanted to be insulated,” Behringer says. “We are very adaptable to ever-changing markets.”

Behringer Harvard takes a similar tack in raising capital. “We’ve never wanted to rely on any one capital source,” Behringer says. The firm raises domestic and foreign funds tailored to specific property classes. “We have seven funds now, and two more in registration,” he adds. “We buy core office, for example, and then other funds can buy retail or hospitality [or] multifamily. We can ramp up if multifamily looks attractive.”

Of course, there are opportunity costs associated with any strategy. While diversification means the firm can’t pour as much into a sector that’s running hot, Behringer prefers to temper his potential reward by moderating his risk.

“We know what happens when you put all the eggs in one basket,” he says. “If you time it right, you can do great. But if you don’t time it right in the cycle, you could really get burned. Others have been hurt when timing was off. We just don’t want that. For instance, we could have increased our focus on our multifamily strategy. We could have levered up and taken on more risk and gotten more returns. But if we missed the window, we could have lost money for [our] investors.”

Behringer also is pleased that, in this cycle, he hasn’t seen some of the factors that were present in previous downturns. “I think we’re in a unique place right now,” he says. “Real estate fundamentals look sound. We haven’t seen an impact in the real estate markets we’ve seen before. Unlike previous cycles, when there’s a downturn in [commercial] real estate, we see more defaults, bankruptcies, etc. We haven’t seen that in our own properties, and we haven’t seen any increase in delinquent accounts receivables.”

Things may turn for the rest of the industry soon. “I think we’ll see things clearing by the middle of next year,” he says. “Until then, those without equity or debt availability won’t be players. But the debt markets will open up mid- to late next year.”

The bottom line? “We feel good around here,” Behringer says.

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