CBRE Investors – Going global

Since 1998, CBRE Investors has revamped its private equity real estate business. Just as the company announced plans to reshuffle its executive suite, PERE sat down with the firm's leadership to discuss where the firm came from—and where it's going. By Aaron Lovell

CBRE Investors is a firm that is constantly evolving. In less than a decade, the Los Angeles-based private equity real estate firm has grown its assets under management from $3 billion (€2.3 billion) invested solely in a core strategy to more than $27 billion invested in real estate around the world and across the risk/return spectrum.

Even the management at the firm—which acts as an independent affiliate of international brokerage Richard Ellis—is evolving. At the beginning of next year, current president and chief executive officer Robert Zerbst will become the firm’s chairman with a focus on growing CBRE Investors’ burgeoning Asia business, while executive managing director Vance Maddocks and chief operating officer William Harris will move into the positions of chief executive officer and president, respectively.

“We believe people have specific roles in an organization—and do those things really well,” says Maddocks.

Harris says Zerbst’s experience building CBRE Investors’ business in Europe will be needed as the firm looks to move its investment platform into Asia. Maddocks, who has long headed the firm’s value-added strategies in the US, will continue to do so in his new role, in addition to focusing on the firm’s overall investment strategy. Harris will be responsible for the day-to-day operations at the firm, as well as the investment teams in Europe and the UK.

“The new changes here really take three individuals who have been involved in running the company since 1998 and put them in roles that are supported by their strengths,” Harris says.

Those three individuals will have a lot on their plate as the firm continues to move its flagship value-added platform, Strategic Partners, into new markets. CBRE has closed four Strategic Partners vehicles in the US, as well as two in the UK and two in continental Europe. The firm may even be closing an Asian vehicle by the end of this year. Its most recent US-focused fund, Richard Ellis Strategic Partners US IV, closed earlier this year with $1.2 billion in commitments.

All members of the triumvirate soon to head CBRE Investors have been with the firm in some capacity since at least the mid-1990s and, in the case of Maddocks, since the 1980s.

Maddocks has been interested in real estate going back to his college years. “Real estate has always been my passion since I was 20 years old,” he says. “I went to work for [accounting firm] KPMG at 23, but I did that basically to get into real estate.”

Maddocks began as an appraiser with Richard Ellis in 1984, largely working with investment management companies. He had a stroke-of-luck getting into acquisitions in the early 1990s, when the government launched the RTC program.

“I was fortunate that my career in acquisitions started in the early 1990s,” he says. “It was a great period of time with a lot of opportunities to make acquisitions and we parlayed that into the Strategic Partners fund series.”

Zerbst also got a relatively early start in real estate. He began working for his future father-in-law’s real estate company in Columbus, Ohio during his summers attending Miami University. The company encouraged employees to continue their education, so Zerbst attended the Center for Real Estate Education and Research at Ohio State University, earning a master’s degree in economics and a doctorate in finance and real estate economics.

After receiving his advanced degrees, Zerbst spent eight years teaching real estate and finance courses at a number of schools including the University of Vancouver in British Columbia and Southern Methodist University in Dallas. Settling in the Bay Area, he co-founded a pension consulting company, part of which later became his own investment and advisory firm, Piedmont Realty Advisors. In the early 1990s, Piedmont merged with the RREEF funds and he became a partner in San Francisco, where he remained until the mid-1990s.

After leaving, he worked as an independent consultant and did some developing. Eventually, Zerbst heard about the executive opening at CBRE Investors through his son, who was working in the company’s San Francisco leasing office.

“So the boss in the Bay Area asked him one day, ‘What’s your dad doing?’” Zerbst recalls. “And he said ‘He’s doing nothing.’ That’s how I ended up getting the job. I had reverse nepotism.”

Meanwhile, Harris took a decidedly different route into the world of private equity real estate. A graduate of the Air Force Academy in Colorado Springs, Colorado, Harris spent six years flying the FB-111 medium-range strategic bomber at a base in New Hampshire.

“The flying part was fun, but that was—interestingly enough— only a small part of it,” he says. “The rest of it was being ready to react to threats around the world. It was a lot of concentrating and waiting around for something to happen—which fortunately never did.”

Harris later went to law school and began working for investment firm Aetna Realty Investors, eventually heading up its West Coast operations.

In 1992, he went to work for the Koll Company as the regional president for Northern California. When Koll moved into the investment management business, he moved to Los Angeles to run that business line—which was acquired by CB Commercial Real Estate Advisors in August 1997.

By the time CB Commercial acquired Koll Investment Management—it had already acquired investment firm Westmark Realty Advisors in 1995—it was in the process of revamping its private equity real estate division.

As it acquired new business lines, the firm planned to expand its initial core-only focus to encompass a number of new strategies and geographic sectors. The firm also reorganized itself internally, creating special investment teams for each of its new strategies.

“Before that, asset management might be covering office buildings in the Northeast or industrial buildings in the Southwest and all their properties might be in different accounts,” Zerbst says. “And your acquisitions group might be buying properties for all of them.”

Under the new system, he adds, “you’re responsible for the whole thing from soup to nuts and you get paid at the end, as opposed to an acquisitions guy getting paid because of how many acquisitions he did.”

After acquiring Richard Ellis in 1998, the firm, which had primarily focused on the US market, wanted to capitalize on its new stature as a bona fide global presence.

“It was a watershed event that year with the acquisition of Richard Ellis, which really gave us the global platform,” Maddocks says. “That was really the start of going from a domestic pension fund advisor to a global investment manager.”

Since then, much of the firm’s focus has been on the development of its Strategic Partners fund series. The first Strategic Partners vehicle was a US fund that raised $325 million and closed in 2000. The second fund closed shortly after the terrorist attacks of September 11, 2001—forcing CBRE Investors to revise its strategy in response to geo-political events.

“The first fund was investing in a hypermarket,” Maddocks says. “It was definitely a bubble. We then had a collapse where rents declined by 25 percent in the US.”

Nevertheless, by holding onto the properties longer than expected, the first fund was able to produce a 17 percent return, a strong performance that became a calling card for the firm’s subsequent funds.

In its Strategic Partners series, CBRE focuses on repositioning assets, doing niche developments and accumulating assets in certain sectors in a particular region—such as industrial real estate in Southern California’s Inland Empire.

The fund also changes its sector weightings from vehicle to vehicle. Investing the second fund, the firm saw plenty of opportunity in the high-density urban residential play, something it has since backed away from in favor of playing the recovery in the office market.

The fund also pursues a number of opportunistic strategies under its Special Situations banner. These are usually focused on some combination of geography and sector, investing in technology-related buildings in the US or residential property in Japan, for example. More recently the firm has looked at condominium conversion projects in France—a play that Zerbst feels is now more profitable in Germany.

“We may not be in these strategies every year, but we are capitalizing on opportunities that become available,” Zerbst says. “A lot of the time these ideas percolate up from the CBRE brokers.”

One of these strategies started out as a joint venture with the California Public Employees’ Retirement System in 2001. The partnership looked at properties with a technological profile to them— telecom hotels, data centers, buildings with telecom- or tech-focused tenants. The portfolio went public as Digital Realty Trust in November 2004, raising $240 million in its IPO.

“We put a team together that had expertise in these areas and were able to underwrite the telecom companies and the biotech companies,” Zerbst says. ”We were able to get some very good buys at a time when telecoms were down and technology was down. Data centers had been totally overbuilt.”

In December 2004, CBRE also exited a portfolio of Japanese residential developments through a JREIT—the very first residential JREIT, in fact. At the time, Zerbst points out, it was more profitable to sell the properties to the public than selling them privately. The offering raised more than $400 million on the Tokyo Stock Exchange for the New City Residence Investment vehicle.

In addition to launching REITs, CBRE Investors recently launched a vehicle to invest in them. CBRE Real Estate Securities is investing in REITs around the world—around 40 or 45 percent of the fund is invested in US securities, with the remainder placed in the European and Asian markets.

“It has hedging capabilities in that we over- and under-weight various regions or countries around the world,” Zerbst says. “Recently we’ve been underweighting the US and Australia and overweighting Europe and Asia. It’s not like a straight-up portfolio; you’re making bets. This is one of the fastest growing parts of our business today.”

As CBRE continues to look abroad for opportunities, the 1998 merger with Richard Ellis continues to pay dividends, the firm says. Something that was once seen as a possible conflict of interest has been transformed into an asset.

“Real estate will always be a local business,” Maddocks says. “To have 19,000 people in every major city in the world is a huge competitive advantage.”

That advantage, CBRE says, has come in the form of deal flow, as well as lower fees from not using local partners.

“Maybe it’s a leasing broker,” Harris says. “That leasing broker will hear before anyone else that a particular building is going to trade. If we can just get that leasing broker to pick up the phone and call us and give us half-a-step over our competition, that, to me, is a huge advantage.”

Harris also talks of additional financial incentives.“We operate in all those markets without operating partners,” he says. “Whereas a lot of people operate around the world, they do it with people they have on the ground. Those people are expensive.”

He adds that CBRE is able to take slightly less risk, while producing the same return. “The bottom line is we’re able to invest in a little bit higher-quality properties that protect us on the downside.”

Zerbst says that 60 or 70 percent of the firm’s real estate services business goes through one of its CBRE affiliates. But CBRE Investors’ choice of a professional depends entirely on a particular market and the strengths, or lack thereof, of CBRE’s affiliates.

“We’re paid based on the performance of the fund, so if we were to hire CBRE and they weren’t the best in that market, or if we were to pay them more than what the minimum market is, we would reduce the performance of our fund—and take money right out of our pocket,” Zerbst says.

CBRE Investors’ quick growth has largely played out as expected, the new executive triumvirate says.

In fact, the recent hundredth anniversary for CBRE’s parent company provided a good measuring stick for the development of CBRE Investors, which initially started with a $17 million core vehicle that predecessor firm Caldwell Banker Asset Management Services launched in 1972.

“Bob was going through his files and pulled out the original notes and plans from 1997 and 1998 when we were focusing on where we wanted to go,” Harris says, adding that Zerbst took those documents to the division’s presentation at the company gathering.

“He had in his hand his business plan as to where he wanted to take the company,” Harris continues. “There have been some twists and turns along the way, but in general it went where we wanted to be.”