June 12, 2006 - Douglas W. Shorenstein is credited with taking Shorenstein Properties from a local business to a national real estate investment company. Not bad for a man who didn’t intend to join the family business.
A graduate of University of California, Hastings College of the Law, Douglas W. Shorenstein spent three years in the real estate group of law firm Shearman & Sterling LLP in New York. He moved back to San Francisco and joined his father’s real estate development company in 1983.
Since 1992, the company has sponsored seven closed-end investment funds that have invested in properties totaling 19 million square feet. Yale Endowment has been a significant investor since the first fund; almost all of the other institutional investors also are endowments and foundations.
In December, the firm underwent a restructuring in which its asset management group and leasing group were merged. The combined group is now responsible for creating an annual investment strategy for each of Shorenstein’s property portfolios, directing the asset teams and monitoring investment performance compared to the investment strategies.
This year, Shorenstein Properties plans to raise its eighth and largest fund. While many other real estate investment firms are expanding the types of properties in which they will invest, Mr. Shorenstein plans to stick with a single asset type: well-positioned office properties.
Tell me about the reorganization. The reorganization is more of an evolution than anything else. The company dates back to 1924 so it’s going back a long time. It’s a family company; my dad started with lease management and had the same life insurance partners up until 1991. In 1991, everybody was out of the market; particularly the institutional life companies were not interested in investing in equity real estate. In fact, they were turning debt into equity through foreclosure. We were out of the market from 1986 to 1991 just because everything looked very expensive. ... In 1991, we met Yale Endowment and raised our first fund. From my perspective, it was the mirror (image) of the relationship with the institutional equity partners. Funds structure is similar to family structure; the investment period was 20 years, not the usual short-term investment period, and everyone put in the same, $25 million each in committed capital. Our first fund had $150 million in equity. … The strategy always employed was to buy and develop Class A urban office around the country. Before, it was just in San Francisco.
What are your plans for the company’s future? We are now raising our eighth fund. The investors are college endowments and high-net-worth (individuals). The strategy is the same … acquiring and developing offices. We’ve just grown … I bought out my sister’s interest and we are moving the family business to a pure fund platform where we are investing family money through the fund platform.
Our last fund had $775 million and the eighth fund will be $1 billion, with $100 million of my money. Always, 10% to 15% of each fund is family money.
Do you have the same investors since the first two funds? All investors in the first fund have rolled into succeeding funds and as the funds have grown we have added one or two new investors.
Is Yale still an investor? Yale is our oldest and largest investor … and after Yale, we’re (the family) the second largest.
How do you see the competition in the real estate industry? The competition right now is fierce and honestly, the huge amount of liquidity from a lot of sources deeply concerns me. In the past, you could point to one or two sources like (real estate investment trusts) or foreign money. A few years ago, we bought most of our (properties) through the bid process where three or four credible people would show up to bid. Now, it is not unusual to see 20 people bidding on a deal. We have not changed the type of assets, but we have changed how we source deals and how we do deals. In the seventh fund, we bought seven buildings. We bought all off-market (privately rather than at an auction) where there were tax issues or debt issues or the seller wanted to stay in for a piece of the upside and wanted to monetize their equity. In each instance, we were able to structure the deal with the seller to meet their requirements, and their requirements prevented them from going through the bid process. The deals we do today tend to be larger and tend to be complex.
Do you offer co-investments on deals to your limited partners? No, that’s one thing I really avoided. … The funds are large enough so we don’t need to look for additional capital or co-investment. We run one fund at a time. We do development and acquisition through the same fund.
If you start offering co-investment, then you are asking investors to make specific real estate decisions. Many of them are not set up to do that … that’s why they hired us. To have co-investors you have to have investors with larger staffs and that could frustrate some investors.
Will you be investing outside the U.S.? No, we looked at it in the past and we always come to the same conclusion. We don’t know France or Germany. We don’t have a competitive advantage in France, Germany or name your country. We don’t know the laws and could not find better deals there.
Will you be making different type of investments? We will do any kind of office investment that makes sense. We’ll do anything from development to core office buildings to acquisition and everything in between.
Why are the deals you are doing these days more complicated? Our funds are longer term; they are 20-year funds. All our funds are pretty much the same strategy. One way is we work with existing developers that may want to stay in and do not want to sell and would rather have a 15% IRR (internal rate of return) over 15 years than 25% IRR in two years and so would our investors. That gives us the opportunity to work with sellers whose agendas are longer term.
Do you think the market is evolving to the point where you would have to stay out of the market again? It might. The market is evolving to where it would be very difficult to buy on a general bid market. It has not evolved to a point where there are no deals for us to do. If it does, we will sit on the sidelines.
Why do you have a 20-year investment period? One, we have a lot of our own money in the deals. We are not creating a hedge fund with hedge fund fees. We get paid for creating equity. Two, the type of investors we tend to have are longer-term focused and are more patient. We do not have huge pension funds with huge allocations that need to be invested. Investors that have been with us the longest understand our approach.
