LA Forum: greater focus on value-add over distress

Although Shorenstein Properties and Lowe Enterprises have dipped their toes in the distressed waters since 2009, the firms are focusing more on value-added opportunities now that recovery is on the horizon.

Even though it was investing in the distressed space in 2009, the president of Shorenstein Properties told the audience at the PERE Investor Forum: Los Angeles on Tuesday that distressed may not be the best investment today, rather value-added investments may be the way to go. In addition, the co-chief executive officer of Lowe Enterprise Investors said that, although his firm is looking into distressed assets, his Los Angeles-based investment manager also is looking much more into value-added investments.

At a panel entitled “Real Estate and its Recovery-the Manager's Perspective,” Shorenstein's Glenn Shannon and Lowe's Bradford Howe shared with delegates that their respective firms recently have been focused on value-added, in part, because the market is seeing the first signs of recovery but also because the distress market may be oversaturated with investor interest.

“Today, I'm not as convinced that distressed is a great space to be,” said Shannon. “There's too much activity there, and the returns have gone down.”

That is a shift from Shorenstein's activities in 2009, when the market was markedly different and the San Francisco-based real estate investment firm couldn't find much to buy except distressed debt, which “turned out to be a good investment” at the time. Shorenstein has “recently been doing more value-added and more redevelopment.” Rather than looking to buy cheap land and build on a speculative basis, Shannon told delegates that Shorenstein has been “buying buildings to redevelop” on a stabilised basis well below what new development would cost.

Ultimately, this shift in investment focus is due to improved market conditions. Howe said the market “feels better today than it did in 2009. Confidence is a lot higher today. In 2009, there was a lot of panic.” He pointed out that a great deal of the confidence “is driven by the fact that financing is available again and the recovery is more visible.”

With the market showing a few clear signs of recovery, Howe said Lowe has “been selectively buying both value-added office and value-added hospitality.” He noted that, although his firm has been “looking into the distressed debt space,” it hasn't seen “a lot of activity there.”

“You're going to continue to see market-specific growth in the hotel sector,” Howe added. “Growth in the hotel sector will continue to be strong.”

Whereas Shannon and Howe noted their firms' appetite for value-added over distress, the third panelist, Blackstone Group managing director Christopher Chee, pointed out that the New York-based real estate and private equity giant is still targeting distressed debt. Although Chee declined to comment on current fundraising initiatives, sources have confirmed with PERE that the firm currently is targeting distressed assets on behalf of its latest global opportunistic fund, Blackstone Real Estate Partners VII.