Business Management Executive Q&A
Sept 16, 2007
Senior editor Eugene Gilligan spoke with Robert Aisner, president & COO of Behringer Harvard—a Texas-based integrated commercial real estate company founded in 2001 that invests in both domestic and international assets—about the firm’s investment strategies and criteria, its new partnerships and its acquisition approach within this ultracompetitive market.
CPN: What has Behringer Harvard been up to?
Aisner: We’ve continued to expand and diversify our asset base. Looking back over the past 12 months, we’ve invested $1.5 billion in all our funds in all asset types. When you go back to the beginning of 2006, we’ve made $2 billion worth of investments. We’ve expanded investment in office properties through our office REIT, expanded our opportunity funds and entered the multi-family market, making four investments in the multi-family arena. We’ve also made our second and third investments in Europe.
A big event was making a co-investment with PGGM, a large (Dutch) pension fund, to acquire luxury apartment communities in the U.S. We will invest $125 million, while they will invest $100 million. They’re underwriting the fact that we can make sophisticated investments, (so) we will be able to buy $600 million to $700 million of assets.
CPN: In what property types have you been most active?
Aisner: Seventy percent of our capital comes from investors who want to invest in core office. We’ve also accelerated our opportunity types of investments. We’re seeing increased demand from our investors to invest in opportunistic-type vehicles.
CPN: What is your overall strategy?
Aisner: We want to create value add. If you are buying an office building that is from 98 to 100 percent leased, that asset is going to be fully priced. But an investment we like is an office building that is, say, 88 percent leased but in a market we like, where we feel we can boost occupancy. If you buy a 100 percent-occupied building, you do have some downside risk. But if you have some vacancy, we believe the economy should be strong, so office occupancy should increase in many markets over the next three or four years.
On multi-family, we work with developers, buying the property on completion. That way, you can acquire the property below retail—not wholesale necessarily, but below retail. We see ourselves as an asset manager that can add value to a property, as investors with an opportunistic bent.
CPN: In 2006, you formed a partnership with Germany-based HCI Capital AG to acquire as much as $1.3 billion worth of European real estate. How is that partnership working out?
Aisner: In Europe, we look exclusively for opportunistic investments. Cap rates on core properties in Europe are the same as the U.S. We’d rather make core investments in U.S. markets since we know those markets better. We also will not invest in Europe without a local partner. HCI owns millions of dollars worth of real estate in the Netherlands, so they have asset managers and leasing people on the ground who know the markets and know where the opportunities are. We also want our partners to invest with us, to put their capital at risk with us, and not just work for a fee. We’ve heard that Portugal may be a great country to invest in, but if we don’t have partners there, we are not going to do something there.
CPN: You have also bought a good number of hospitality assets. What are your criteria for such properties?
Aisner: In hospitality, we have seen the economy come back, but we haven’t seen a lot of new hotel construction. Now, that is starting to change, and one thing we know is that developers love to develop. We only work in the opportunistic sector of hospitality, and we look for hotels that need to be rehabilitated. ... We look for opportunities for assets with high vacancies or that may be de-flagged. We have a hotel project in California that is a total re-do where we are refurbishing every guest room, the public areas and the restaurant.
CPN: Are you interested in any other property types for investment?
Aisner: No, because through our three funds—our core, opportunistic and multi-family funds—we can invest in all property types. We don’t target a specific product type.
CPN: Do certain geographic areas interest you more than others?
Aisner: We’re everywhere as buyers. We want to be in markets that have enough velocity so when we want to sell something, we can sell it quickly. We are constantly looking at research on markets, whether it’s from Torto Wheaton, Reis or Real Capital Analytics.
CPN: There is heated competition for assets today. What is the key to acquiring the properties you want?
Aisner: It is hard to buy assets today, and it is harder to buy today than it was a year ago, to find assets to acquire that will satisfy yield requirements for investors. It is a tough market out there.
We’ve acquired $3 billion-plus worth of assets over the last three years. We are honest negotiators, and we close on a deal when we say we will close. We don’t re-trade on price, go back to a seller and say, ‘We’re going to pay $85 million rather than $100 million for a property because the windows leak.’ Some buyers will do that, figuring the process is so far along that the seller won’t want to start over. You may do that once or even twice, but then you get a reputation. Sometimes, of course, real issues do come up. But with our $3 billion worth of properties bought, that gives us an edge. That says we can deliver across the goal line.
CPN: Are there any macroeconomic trends that you feel may affect commercial real estate in the coming year?
Aisner: Obviously, the biggest factor is GDP and job growth. We watch that very closely. We are seeing, with the subprime situation, lenders increasing spreads and tighter lending terms over the last 90 days. While we have seen long rates turn down as capital has sought safety ... total costs are up 50 basis points over this recent period, which should translate into higher cap rates. Actually, we see this as a positive because it may knock some of the higher-leveraged players out of the market. We aren’t high-leverage buyers, so we’re monitoring what is happening with CMBS and the GDP.
Things will be pretty good, and I don’t see any shocks to the system. The next major change will be the presidential election and the turnover of people (in the government). ... But the pundits we read are optimistic, and the economic numbers seem positive.
Senior editor Eugene Gilligan spoke with Robert Aisner, president & COO of Behringer Harvard—a Texas-based integrated commercial real estate company founded in 2001 that invests in both domestic and international assets—about the firm’s investment strategies and criteria, its new partnerships and its acquisition approach within this ultracompetitive market.
CPN: What has Behringer Harvard been up to?
Aisner: We’ve continued to expand and diversify our asset base. Looking back over the past 12 months, we’ve invested $1.5 billion in all our funds in all asset types. When you go back to the beginning of 2006, we’ve made $2 billion worth of investments. We’ve expanded investment in office properties through our office REIT, expanded our opportunity funds and entered the multi-family market, making four investments in the multi-family arena. We’ve also made our second and third investments in Europe.
A big event was making a co-investment with PGGM, a large (Dutch) pension fund, to acquire luxury apartment communities in the U.S. We will invest $125 million, while they will invest $100 million. They’re underwriting the fact that we can make sophisticated investments, (so) we will be able to buy $600 million to $700 million of assets.
CPN: In what property types have you been most active?
Aisner: Seventy percent of our capital comes from investors who want to invest in core office. We’ve also accelerated our opportunity types of investments. We’re seeing increased demand from our investors to invest in opportunistic-type vehicles.
CPN: What is your overall strategy?
Aisner: We want to create value add. If you are buying an office building that is from 98 to 100 percent leased, that asset is going to be fully priced. But an investment we like is an office building that is, say, 88 percent leased but in a market we like, where we feel we can boost occupancy. If you buy a 100 percent-occupied building, you do have some downside risk. But if you have some vacancy, we believe the economy should be strong, so office occupancy should increase in many markets over the next three or four years.
On multi-family, we work with developers, buying the property on completion. That way, you can acquire the property below retail—not wholesale necessarily, but below retail. We see ourselves as an asset manager that can add value to a property, as investors with an opportunistic bent.
CPN: In 2006, you formed a partnership with Germany-based HCI Capital AG to acquire as much as $1.3 billion worth of European real estate. How is that partnership working out?
Aisner: In Europe, we look exclusively for opportunistic investments. Cap rates on core properties in Europe are the same as the U.S. We’d rather make core investments in U.S. markets since we know those markets better. We also will not invest in Europe without a local partner. HCI owns millions of dollars worth of real estate in the Netherlands, so they have asset managers and leasing people on the ground who know the markets and know where the opportunities are. We also want our partners to invest with us, to put their capital at risk with us, and not just work for a fee. We’ve heard that Portugal may be a great country to invest in, but if we don’t have partners there, we are not going to do something there.
CPN: You have also bought a good number of hospitality assets. What are your criteria for such properties?
Aisner: In hospitality, we have seen the economy come back, but we haven’t seen a lot of new hotel construction. Now, that is starting to change, and one thing we know is that developers love to develop. We only work in the opportunistic sector of hospitality, and we look for hotels that need to be rehabilitated. ... We look for opportunities for assets with high vacancies or that may be de-flagged. We have a hotel project in California that is a total re-do where we are refurbishing every guest room, the public areas and the restaurant.
CPN: Are you interested in any other property types for investment?
Aisner: No, because through our three funds—our core, opportunistic and multi-family funds—we can invest in all property types. We don’t target a specific product type.
CPN: Do certain geographic areas interest you more than others?
Aisner: We’re everywhere as buyers. We want to be in markets that have enough velocity so when we want to sell something, we can sell it quickly. We are constantly looking at research on markets, whether it’s from Torto Wheaton, Reis or Real Capital Analytics.
CPN: There is heated competition for assets today. What is the key to acquiring the properties you want?
Aisner: It is hard to buy assets today, and it is harder to buy today than it was a year ago, to find assets to acquire that will satisfy yield requirements for investors. It is a tough market out there.
We’ve acquired $3 billion-plus worth of assets over the last three years. We are honest negotiators, and we close on a deal when we say we will close. We don’t re-trade on price, go back to a seller and say, ‘We’re going to pay $85 million rather than $100 million for a property because the windows leak.’ Some buyers will do that, figuring the process is so far along that the seller won’t want to start over. You may do that once or even twice, but then you get a reputation. Sometimes, of course, real issues do come up. But with our $3 billion worth of properties bought, that gives us an edge. That says we can deliver across the goal line.
CPN: Are there any macroeconomic trends that you feel may affect commercial real estate in the coming year?
Aisner: Obviously, the biggest factor is GDP and job growth. We watch that very closely. We are seeing, with the subprime situation, lenders increasing spreads and tighter lending terms over the last 90 days. While we have seen long rates turn down as capital has sought safety ... total costs are up 50 basis points over this recent period, which should translate into higher cap rates. Actually, we see this as a positive because it may knock some of the higher-leveraged players out of the market. We aren’t high-leverage buyers, so we’re monitoring what is happening with CMBS and the GDP.
Things will be pretty good, and I don’t see any shocks to the system. The next major change will be the presidential election and the turnover of people (in the government). ... But the pundits we read are optimistic, and the economic numbers seem positive.
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