By Janet Morrissey - The Wall Street Journal

- August 29, 2001 - New York (Dow Jones) - The stagnant economy may be giving some real-estate executives ulcers as they watch rents sink and demand for space decline. But not Doug Shorenstein.

Shorenstein, chairman and chief executive of San Francisco's Shorenstein Co., a closely-held real-estate company, is seeing dollar signs and a mecca of potential acquisition opportunity.

"We're most active in down markets when it comes to acquisitions," said Shorenstein, who recently closed his firm's sixth real-estate fund after raising $600 million in equity. "We buy when the capital is out of the market."

Subsequently, he sells when real-estate fundamentals are strong and executives are giddy with capital.

Shorenstein's funds all invest in high quality, state-of-the-art, so-called Class A office properties in major U.S. markets. The properties tend to be $100 million in value or more, and Shorenstein specifically seeks out properties that offer upside potential through redevelopment or below-market leases.

Between 1992 and 1996, for example, when the real-estate world was reeling from a meltdown, Shorenstein was an active buyer of class A office properties, "But in 1997 and 1998, real estate investment trusts bid up the prices and outbid us on everything. So we didn't bid in that time frame," he said. Then in mid-1998, "when the capital markets blew up, we were back buying again," Shorenstein said.

This strategy has been Shorenstein's forte since Doug Shorenstein's father, Walter, founded the company in the 1930s. Since 1991, the company has been investing in real estate primarily through its real-estate funds.

Performance of Funds

And how have the funds been performing?

The company launched funds in 1991, 1994, 1996, 1997, 1999 and now 2001. The first four funds have posted average annual returns of 20%, 16%, 25% and 33% respectively, according to Shorenstein. The fifth fund is not quite fully invested.

Even more importantly, Shorenstein noted, investors in the first four funds have already received more than 100% of their original investment back through monthly cash dividends that are based on the cash flow from the properties and cash realized from asset sales.

The company's latest fund, called Shorenstein Realty Investors Six, is the company's largest real-estate investment fund to date. The company itself committed $75 million of its own capital to the $600 million fund. Other investors include foundations, college endowments, pension funds and wealthy individuals.

Adding leverage of 60% to 65%, the fund will acquire up to $1.6 billion in properties.

Shorenstein said the economic downturn should allow him to re-enter several big-name markets that the company had been shut out of during the real-estate heydays of the past few years. Markets, such as New York, San Francisco, Washington and Boston, had seen prices skyrocket, prompting Shorenstein to stay on the sidelines. "We can now go back into those top-tier markets and buy quality assets that we could not have bought a year or two ago," he said.

Shorenstein isn't worried that the real-estate world is teetering.

"As long as you're buying quality properties" there's little risk, he said. "San Francisco, despite the dot-com blowup, is still a very real market. It's in an aberrational down period, but it will come back," he said.

"Our strategy has never changed," he added.

Different from other private real-estate companies and many opportunity funds, Shorenstein's funds operate and manage the properties, focus solely on Class A office properties, and have investment expertise needed to hammer out highly structured financial deals. Many opportunity funds don't have an operating arm or tend to widen their focus to include everything from office properties to Japanese debt, he said.

Since 1992, Shorenstein Co. has acquired and developed more than 12.4 million square feet of office properties, including the John Hancock Center and Prudential Plaza in Chicago, and the First Union Financial Center in Miami.