For This Experienced Group, Now Is Not a Bad Time to Invest in Real Estate

Talk about sailing against the prevailing winds!

Esko Korhonen and his partners at Federal Capital Partners recently raised $230 million in a real-estate private-equity fund that will invest in Washington region office, retail and residential properties.

When Korhonen called to tell me his Georgetown investment firm had closed the fund, I thought he was joking -- or nuts.

Didn't he know our financial system is in a once-in-a-century meltdown? Didn't he know that banks aren't lending money? What if we have a depression and there is no one to work, live or buy goods in the buildings that you want to buy?

Perhaps I overreacted.

Korhonen, who cut his teeth in real estate investing with the Carlyle Group, assured me that he and his team have been around the block. The other principals include another Carlyle alumnus, Lacy Rice; Tom Carr, former chairman of CarrAmerica, which was sold to Blackstone Group in 2006; and Alex Marshall, another real estate veteran. The partners have 80 years in real estate investing between them. Korhonen and Rice founded FCP in 1999.

"We have been through a number of cycles," Korhonen said. They navigated the savings-and-loan crisis in the early 1990s while at Carlyle. Carr has gone through several real estate market gyrations. And the bursting of the tech bubble also was no picnic.

"The toughest part for everyone is going to be the impact on the macro economy," Korhonen said, adding that this region's economy, anchored by the federal government, is probably better insulated against economic cycles than most.

"This potentially is the most healthy real estate market in the country," he said. "Jobs is one of the most important things. So far, D.C. has sustained positive job growth. If that turns negative, it will have a major impact. It's absolutely critical that we need to loosen the credit markets and have credit flowing through the system again. That will ultimately happen as people gain more confidence."

Korhonen said FCP is well-positioned to take advantage of real estate deals should the wheezing economy do to real estate what it has done to stocks in the past month. They already bought three properties this year with the fund, including The Monterey, a 432-unit high-end apartment building in Bethesda; Park Berkshire, a 598-unit multifamily project in Forestville; and Toledo Plaza, a 242-unit property in Hyattsville.

For most of the last decade, FCP has bought and sold $1.3 billion in mid-Atlantic properties. It currently holds around $700 million in real estate. Its philosophy: Look for broken or undervalued assets, improve them, get the rents and leases flowing from high-grade tenants, and then either hold them for the operating income or sell them as high-grade assets to big insurance companies, banks and real estate firms.

Korhonen's mantra: cash flow, cash flow, cash flow.