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UpClose Shorenstein Co.'s Doug Shorenstein
By John Salustri - GlobeSt.com
October 3, 2003 - The buzz around town--and especially at Real Estate Media's recent RealShare New York conference--has revolved around Macklowe's record-setting $1.4-billion buy of the GM Building, which closed last week. At the conference, Douglas Shorenstein revealed that he had "looked at the property," although he wouldn't reveal how far off his numbers were from the winning bid. The chairman and CEO of San Francisco-based Shorenstein Co. LP was interviewed at the conference by Media's president and CEO, Jonathan Schein. At the event, and in a follow-up interview after the show, Shorenstein stated that the stakes got higher as a result of the bid simply because it underscores the amount of capital that is going after assets now. But Shorenstein isn't wavering from his strategy, and he's convinced that those who close such big-ticket deals are walking out on a transactional limb he won't consider. Who the wiser strategists are--the buyers or the balkers--remains to be seen. For the record, since the early 1990s, Shorenstein has embarked on a series of successful investment funds that have swelled its portfolio of class A downtown office space to its current 25 million sf, including last year's purchase (through its sixth investment fund) of Manhattan's 450 Lexington Ave.
GlobeSt.com: How would you define your investment strategy?
Shorenstein: Our investment strategy hasn't changed in many years--since my father's day. We focus on one asset category--class A office--anywhere in the US. (At one time it was just the Bay Area.) We look for assets that have a construction component or a capital component we can fix. We stabilize the asset, create a distributable bond-type return and when the capital markets fully value that income stream we sell. We employ reasonably conservative leveraging, by the way; we average around 60%. We try to create a high-quality asset.
GlobeSt.com: How do you define high-quality assets?
Shorenstein: It's an asset we can keep fully leased. The bedrock of our investment strategy is to create a durable cash-flow yield, and to do that you have to keep an asset leased. We seek to acquire class A office buildings that have a competitive leasing advantage because of their quality or location.
GlobeSt.com: And your ability to keep those assets leased isn't hampered by the current down-market fundamentals?
Shorenstein: You always have to compete on the basis of rent, and you may not get the rates you prefer, but the bottom line is that you have to keep that asset full. But especially in this market there is enough of a flight to quality to make that happen in the asset class we're focused on.
GlobeSt.com: You once said that if you hold an asset long enough, it will be worth nothing. What did you mean?
Shorenstein: We've seen it through many cycles. How often have you seen the typical developer buy the boat, lose the boat and buy the boat again? In down cycles, your equity begins to evaporate. So if you wait long enough and you have too much leverage on an asset, your equity can be worth zero. When you have that asset stabilized--and if the capital markets are fully valuing that asset--you have to be disciplined enough to sell in order to survive long term.
GlobeSt.com: You made your first Manhattan buy last year with 450 Lexington Ave. for $300 million. What was right about the New York market?
Shorenstein: We'll look at any quality building if it's available. We try to stay focused in the six primary markets--New York; Washington, DC; Boston; Chicago; San Francisco; and LA. Those are all places with deep leasing markets--even in downtimes like today. That's one reason we like those cities. On the capital side there's liquidity in those markets, which allows you to move out at the appropriate time. After that, we look for opportunities in related or secondary markets. For the balance of our funds, we look for highly structured, financially engineered deals. For instance, two month ago, we bought a mezz-loan piece secured by two buildings in Manhattan.
GlobeSt.com: As an investor in class A, major-market properties, what did you make of the GM Building sale?
Shorenstein: Obviously, the GM Building is one of the best buildings in the country. But right now real estate is largely a platform for debt. If the building is reasonably stable, the buyers are going to be leveraged and apply a huge amount of debt. As much as anything, they're playing an interest-rate game, not a real estate game.
GlobeSt.com: So why wouldn't you play the same game?
Shorenstein: It works for those people, but historically, when you use short-term cheap debt to buy long-term expensive assets, like GM, at some point there comes a train wreck.
GlobeSt.com: Will Macklowe crash and burn?
Shorenstein: Who knows? I don't want to say the GM building per se. It's a unique asset. In five years, Macklowe could look like a genius or be wiped out.
GlobeSt.com: What's the likely scenario?
Shorenstein: Again, who knows? When you use that amount of leverage, either the deal works and you look like a hero or you get squeezed in your negotiations with your banks. That's a very high-risk strategy. Our strategy is more in keeping with preserving the invested principal and not risking getting squeezed out by a lender.
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