This isn't a question as to when the current cycle will change. Or what kind of change it will be. I think we all acknowledge that as some point the market will shift. If everyone had an option of choosing their "ideal" niche in the investment market, between now and when the market fundamentally shifts, what would it be? I am framing this question in terms of working for a firm with a specific investment focus.
i.e. would you play on the equity or debt side of the table? within that context, would it be senior debt, mezz, bridge? common equity, preferred, etc?
if on the equity side, would it be buying core in major metros? value add in secondary, tertiary markets? something altogether different?
as an example, a good friend of mine feels that a good strategy would be to be in the mezz space for development, the idea being that even some of the best development projects, depending on timing, will bust out over the next 3-4 years. If you work for a firm that can make mezz investments and has the stomach and development capacity to take over these deals and ultimately complete at a more attractive basis, there is money to be made in that strategy.
You ever heard of Corus Bank? They "specialized" in condo construction loans, didn't work out so well for them. Now I don't think we are as over heated in comparison but if you think things are going bad you don't want to be tied up in construction deals at all.
I remember Corus well. They were going to fund a pretty big cond development here in San Diego. Then it all went to shit in 2008. Corus collapsed. Chicago based bank if I recall.
Edit - The boring answer from me is to be in stabilized MF. As a lender most deals I see are less than 65ltv. As a principle, you may lose some value with declining rents but if your leverage is reasonable you'll make it through.
Also, lets not forget about our management companies out there. When all hell broke loose in 2008/2009 and beyond, they were still collecting 3% of EGI on MF projects. I know some management companies here in San Diego with about 4000 U's under their belt. They were fine through the recession. I firmly believe that companies like Greystar make/save/earn a huge chunk of earnings through management of their massive portfolio.
You could argue that special servicers will be busy the next 5 years with most loans originated from 03-07 maturing.
LNR. CW, C-III.
Let me rephrase my original question a bit:
If the goal is to maximize earning potential between now and when the market shifts (i.e. before buy-side shops slow down their buying significantly), what areas of the business does everything think will offer that type of potential?
Working for a special servicer seems more like the type of gig where you can "keep busy" during a slow/down cycle, but how much upside is there working for one?
For example:
Option A: working for a mid sized value add fund (hard commitments already raised) that targets mid-high levered IRRs buying office, retail, lodging. Primary and secondary markets nationwide. In my mind, there is risk in that a typical value add deal (buying 40% vacant office in B+ location in a market like Dallas), you may be looking at a 3-5 year investment hold, and the market may suck in 3-5 years such that exit caps make a sale difficult. Comp would be base salary, no bonus, but equity participation in each deal closed.
Option B: working for an owner operator with multiple large domestic and foreign separate accounts. Focused on buying in gateway markets, willing to pay sticker price, 10+ year hold periods, more cash flow focused than residual. May not seem as exciting as Option A, but I would guess that provided the capital is available, there might be higher potential for closing deals for a firm like this vs Option A. Even if the comp doesn't involve participation (again, on a core/core-plus deal with a 10 year hold, what type of meaningful back end would there even be?). Comp would be base, bonus depending on performance and amount of equity deployed, no back end participation.
Which would you choose, all other things considered equal?
I'd choose option A. True that you will have cap expansion, but worst case u just hold until market gets better again. In option A you have a cash flowing asset that's covering your debt service, option B you could get stuck in the cycle, not even lease it up, and have to give it back to el banco.
Edit: by option B here I was referring to Mezz positions in Dev deals you mentioned up above. After re-reading your clarification of the question, I'd still choose your option A. Main reason being back-end participation. Even if you get caught, you can hold, and depending on equity structure, still participate if you sell in years 6,7,8 when market turns back around again. Obviously your equity structure is crucial there though, if you have a high pref, or a bunch of high hurdles you're kind of screwed.
"structure is crucial" This is why, if you think there is a correction ahead, you'd be crazy not go with B (2nd version of B). Value-Add funds use leverage to juice returns and those loans are almost always floating rate short term deals with some extension options ( the cheapest option). So depending on the structure of your debt and if you think there is a market correction ahead you would most likely lose all equity participation in Option A.
2nd version of option B sounds better. I'm guessing this is more like a ODCE fund which focuses more on unleveraged returns so they'd be more willing to pay down debt or pay it off and still keep trudging along. You get paid, you get your bonus most likely.
yeah i hear you...
I guess Its depends on the magnitude of the value add. if you're solely going to focus on office that's 60% leased and doesn't cover the debt service day 1 of ops, then sure, that seems like a pretty ballsy option. But if you're just going to be doing MF deals that are kind of moderate/light value add, then you'll probably be able to cover your debt service the entire time, even with a rise in rates. (I realize now reading back someone already mentioned this as the 'boring answer')Also, you could still target value-add investments with low leverage or un-levered, it's technically still value-add, returns just aren't that attractive to most, just depends on your cost of capital. In which case, I'd definitely go with A.
so after all my rambling, I guess my answer is it depends on leverage and cost of capital for both options. but i guess you could say that about any real estate deal.....
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