By Thomas Heath
Monday, November 10, 2008
My colleague Dana Hedgpeth and I recently spent an hour over coffee with Michael Glosserman, managing member of JBG Holding, which is one of Washington's most prominent private-equity real estate firms.
JBG's investors include the Yale University Endowment, which is sort of a badge of honor in the private-equity world because Yale has one of the best records for investment returns among, well, about anyone. If Yale likes you, that's a big deal.
Dana and I wanted to know about Washington real estate, and in particular whether anyone thought the financial crisis would ultimately create buying opportunities for quality real estate -- bottom fishing, if you will.
Glosserman and others have amassed hundreds of millions of dollars that they plan to use to troll the area's commercial and housing real estate market over the next year in search of bargains. Glosserman said JBG alone will have $750 million in dry powder that it can invest come January.
Prospectors include longtime big blue-chip players such as JBG and newer entrants such as Thomas Baltimore of R.L.J. Development (named for partner Robert L. Johnson, co-founder of BET). Esko Korhonen and Lacy Rice of Federal Capital Partners (both formerly with the Carlyle Group) are gearing up. So is Fred Malek, who is a longtime private-equity investor in the hotel sector.
Dana and I talked to them all. These dealmakers said the Washington market is likely to be less vulnerable to the economic cycle than most other parts of the country. That's mostly due to the presence of the federal workforce, which will surely expand under the administration of Democratic President-elect Barack Obama.
Some statistics: The unemployment rate for the Washington region is 4 percent, well under the national rate of 6.5 percent. Office building vacancies are lower here than in the rest of the country, with 11.5 percent vacancy here compared to 13.8 nationwide. Vacancy rates for all classes of apartments in the Washington area have increased, to 3.6 percent in the second quarter from 2.9 percent a year earlier, according to a mid-year 2008 report by Delta Associates, a research firm in Alexandria. Even so, the rate remains among the lowest in the country.
Our sources said lucrative deals may surface because the credit crisis has squeezed certain building owners. The result could be forced sales at prices not seen in two decades.
"Nobody has a perfect crystal ball. But if credit conditions continue to be soft, we will in the first or second quarter of the new year begin to see opportunities," said Glosserman, whose JBG has $4 billion under management.
I called up another prominent businessman who handles investments on behalf of a wealthy local family. He talked to me under the condition that I not print his name because the family patriarch doesn't want the attention. My friend said there is lots of money on the sidelines waiting for an attractive opening.
"The deep discounted values have not materialized," said the investor, whose client is listed in the Forbes 400 of richest Americans. "The wait continues. The play is that you want to pick something off at a bargain-basement price that will be worth a multiple of that value in several years, and what we haven't seen is the current owner who has come to the point where they are willing to dispose of that asset at the bargain-basement price."
In other words, they are shopping.
Would-be buyers were reluctant to name specific properties because they didn't want to put them in a negative light or, more likely, didn't want to reveal their hand. One prime area that everyone is talking about, however, is the properties near Nationals Park in Southeast Washington.
As another of my colleagues, staff writer David Nakamura, has documented, sleek new buildings with offices, condos, apartments and retail space have risen around the ballpark, but many remain empty.
Glosserman said prices for land near the baseball stadium could drop from $120 a square foot to as low as $30, making it too cheap to pass up.
Others are looking at the recently burgeoning condominium market north of Massachusetts Avenue in the District.
"There are some busted condo deals that are still lurking out there that could be opportunities in the District as well as outside," said Korhonen, who has $230 million in investor money that he is looking to put to work. Korhonen said not only would he invest directly in properties, but his firm would consider lending to other investors or even purchasing discounted debt from property holders in trouble.
Baltimore, who is looking to invest up to $1 billion in the hospitality sector, loves the District's K Street corridor, which is home to many of the big law firms and lobbyists.
"I don't think you will see as much distress there as you will see near the stadium," Baltimore said. "There will be attractively priced opportunities near the stadium, perhaps because of the Lehman collapse. They were the equity partner for a number of properties there."
Malek said the major hotel chains have reduced their projections for revenue per room and are predicting a decline in profits. If those projections are correct, there will likely be tighter financing standards that could lead to distressed selling, Malek said.
But don't expect fire sales throughout the region. Nearly every real estate maven we contacted said they don't expect the local market inside the Beltway to get a shellacking. The best values may lie in buying vacant land outside the Beltway and waiting for the economy to come back and the population to increase.
"If you have a trophy office building in a great location in downtown Washington, your pricing is probably not going to be adjusted dramatically," Glosserman said. "On the other hand, if you own land in Loudoun County, your pricing has been reduced dramatically."
Thomas Heath writes regularly about Washington's local business community on the WashBiz Blog athttp://www.washingtonpost.com/washbizblog.
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