Broadreach Capital Partners, the Palo Alto real estate investment company founded in 2002 by former executives of the hugely successful Spieker Properties Inc., intends to raise a new investment fund beginning next year. The fund could invest in property, debt or a combination of both, said Gene Payne, a director of acquisitions and dispositions for the company.
The fund, the company’s third, anticipates what Broadreach believes will be significant investment opportunity beginning next year and continuing into 2011 as banks are confronted with ever more troubled properties and are forced to off-load them en masse, Payne told the Peninsula Investment Forum on Tuesday.
So far, there have been few foreclosures in the Bay Area. According to data from commercial property research firm Real Capital Analytics, the nine-county region has seen fewer than 500 properties returned to lenders since mid-2007. Within that group, several high-profile properties and portfolios have accounted for much of the activity, including the Lembi Group apartment portfolio in San Francisco, the Page Mill Properties housing portfolio in East Palo Alto, Emeryville’s Watergate office complex and the Sunnyvale Town Center collapse.
That will change, Payne said, as more than a trillion dollars in commercial real estate loans come due from 2010 through 2014 and borrowers are unable to get new financing or are unwilling to put up the additional equity that banks will command.
Banks account for nearly 60 percent of commercial property lending.
Banks are going to abandon their current policies, which favor forbearance, he said, and are going to start to take property back. They will resist a “fire sale” of the assets at first, “and some banks will be able to do that for a while,” he said. But, “this stuff is going to get sold at some point, and the pricing is going to reset. There is a light at the end of the tunnel, but it is going to take some time to get there. Every step takes time, and property owners are going to put up a fight. Lawyers are going to make a lot of money.”
Broadreach raised $314 million in equity for its first fund from educational endowments, private foundations and other sources. With leverage, it invested nearly $970 million in office buildings, hotels, residential land and other assets, closing a total of 28 transactions from 2003 through 2006. From 2006 to 2008, they were “active sellers,” Payne said. Eighteen percent of the fund’s assets were in Northern California.
The company’s second fund has $700 million in equity commitments and anticipates investing nearly $2 billion with debt. Eighty percent of the fund has been committed, mostly in offices, lodging and some industrial. Its last acquisition was initiated 30 months ago. “I frankly wish we had stopped buying sooner,” Payne said. Northern California assets, including The Landmark at Shoreline in Mountain View adjacent to the Google Inc. campus and Stevenson Point Technology Center in Newark, represent 19 percent of the fund’s investments to date. The fund’s investment period ends in April.
Both funds are closed-end. Across the board, the portfolio is roughly 80 percent occupied, he said.
Broadreach focuses its investment activities in the Western United States, including the Bay Area, Southern California especially Los Angeles, Seattle, Portland and Denver. It is most interested in buying assets where it can add value through additional investment, repositioning or by sorting out a “broken capital structure,” he said.
Principals at Broadreach include Eli Khouri, a company co-founder and the former chief investment officer for Spieker Properties, and John A. Foster and Craig G. Vought, also company co-founders and former co-chief executive officers for Spieker.
Warren E. “Ned” Spieker, former chairman of the board for Menlo Park-based Spieker Properties, is a special advisor to the company, as is Lewis Wolff, a co-founder of Maritz, Wolff & Co. and lead owner of the Oakland Athletics Baseball Club.
Spieker Properties was acquired by Equity Office Properties Trust for more than $7 billion in cash and stock in 2001 shortly before the dot-com bust.