Cliff Booth: Getting ‘A’ Returns on ‘B’ Properties

Cliff Booth
Cliff Booth

It’s not unusual in Dallas for one day of commercial real estate news to tout a corporate relocation with 1,000 new jobs, a multimillion dollar office building renovation, and signing of a 50,000-square-foot lease at top-of-market rates. Looking through such a positive Dallas CRE lens, it’s hard to figure out national headlines warning of the risk of office building defaults and other deteriorating conditions that can stress real estate.

Earlier this month, The Wall Street Journal reported on “… a growing view that the best days are in the past for this property cycle.” Do you agree with this? My view is that it’s quite possible that some U.S. markets are near their likely peaks and some CRE sectors are fully valued, if not frothy. But to me, such conditions only mean that the easy and obvious deals are probably gone. From the perspective of a value-add investor for 25 years, I think there are still opportunities out there to be found.

Unseasoned CRE investors who have only known up-cycles may be wringing their hands. But those of us who have been time-tested by multiple up and down cycles, believe there are still plenty of attractive assets to be found if you just know where to look and what to do with properties that “need some love.” In fact, down cycles have yielded many of the best buying opportunities we have landed over several decades.

Allow me to share some of the lessons I have learned about successful CRE investing through all cycles.

1. You should get over your thinking that only A assets can deliver the upside you want. Just because a property is a B, doesn’t mean it is bad or dysfunctional. If you take the time to analyze B properties, you may find some gems that can be reasonably converted to B+ and meet your required appreciation in valuation.

2. Learn that great assets can be uncovered in non-core markets. It may be hard to believe, but many of the largest, international investors are only interested in New York, Los Angeles, and San Francisco. Since Westmount frequently invests with global partners, we’ve been able to broaden their horizons by introducing them to industrial properties in Dallas, Atlanta, and Chicago that promise to yield desirable returns.

3. Exploring secondary or even tertiary markets such as Columbus, Ohio, and Minneapolis may be worthwhile. We’ve found such “off the radar” markets to be fruitful hunting grounds. Because most U. S. investors are relatively disinterested in these markets, competition is light and valuations can be compelling.

4. Consider the strategy of identifying motivated sellers as a gateway to off-market deals. We’ve been able to transact some nice properties from sellers who are facing end-of-fund issues or who need to exit certain markets. We’ve also been able to cherry pick some assets from sellers who own mixed property types within the industrial space and decide they want to jettison a few property types to improve uniformity in their portfolio. For instance, some industrial sellers may own a collection of properties such as high cube and small bay buildings, freezer/cooler buildings, single tenant or flex, but now want to have a more uniform portfolio. While these deals may be small for sellers, they’re perfect for us.

5. Doing a little sleuth work to sniff out rent rolls that are under-market is another way to find assets with the potential for value creation. And if these leases come with near term maturities, so much the better. In these cases, the opportunity to add value rests more in these leases than in the assets themselves.

In summary, these lessons learned through various real estate cycles illustrate why we believe good acquisitions can be made that lead to sound investments during any market conditions. Sure, it takes more perseverance and creativity to unearth value in CRE when facing fully-valued cycles or oversold segments, but overcoming the challenges and achieving investing success makes it all worthwhile!

Cliff Booth is president of Westmount Realty Capital LLC. Contact him at [email protected]

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