GlobeSt.com: Are there any particular property sectors that your fund is targeting?

Miller: We're not looking at hotels or the big-box retail sites. Our primary focus, based upon talking with clients and potential clients, is that there seems to still be a flight to quality in terms of asset characteristics and location. Two years ago, some of our clients wanted us to chase yields by going to smaller markets and less desirable properties with "B" tenancies. There's been a divergence in appetite to the class "A" properties, and everything else has been left behind.

The focus for us going forward is primarily going to be office in prime locations. Why is that? Those will still be attractive in all parts of the cycle. Historically, it's generally been true, that better-located, better-constructed properties are the first to rebound coming out of a depression cycle.

GlobeSt.com: Are there any regions of the country you like?

Miller: The gateway cities are number one. Those would be the major markets on the East and West Coast. Washington, DC is number one. Second would be the Greater New York area, primarily not Manhattan, but Northern New Jersey. Boston, though it's a small market and can be volatile. And believe it or not, Miami. We've always had an office there and have a fair amount of interest from foreigners, both the traditional cold-weather Europeans, like the Germans, and even the Arab clients of ours. It's amazing how many Kuwaitis have gone to school at the University of Miami.

On the other coast, the Greater L.A. area is a very deep and broad market. We like areas like Westwood, where there are still very significant constraints on supply. And, maybe surprisingly, Seattle. We've always had a decent appetite for Seattle because we have quite a few investments there. It has a lot going for it, especially going forward in world trade. The Seattle port is actually closer to many of the locations in Asia as compared to Long Beach.

GlobeSt.com: What are the dollar ranges of the deals you are pursuing?

Miller: We probably would not look at something that would be less than $20 million. The top most range depends upon the client. With this particular fund, one of the primary objectives is diversification. I would think it would average between $50 million and $60 million. We've had deals in our company that have been $100 million or $200 million. But going forward, people who have that kind of capital will want to diversify because of the high level of perceived risk.

GlobeSt.com: You're also looking at partnerships with company's in distress that might have financing problems. What kinds of outfits are these in general? Private owners? REITs?

Miller: We would first look at the particular property. I'm looking at a building, and this is a building I would love to own anyway. It's currently owned by an entity that could be private, a partnership or public. Like many today, they have an existing mortgage that was written a few years ago in different underwriting times. When it's time to refinance, the loan proceeds will be much reduced. The current ownership has a choice. They can sell the property into a higher cap-rate market. They can come out of pocket and raise new capital to reinvest in that property for the new mortgage. Or they can bring in capital from a third-party source. Our view is that most deals that exist have a capital structure that is probably not willing to put more money into existing assets, maybe some but not all that's required. There is going to be a great demand for third-party capital to come in and replace what used to be the first part of the capital stack. That could be our kind of money. It's represented by real estate professionals, we understand operations and we're more of a sophisticated partner. We can deal with vacancies and the ups and downs of operations, where a traditional lender wants no surprises or uncertainties. People who are used to running their own shop and making all the calls with minimal oversight by the capital sources will now have to have shift in attitude and be more of a cooperative partner in the detailed decisions affecting the property.

GlobeSt.com: So we might see lenders take a larger role in, say, leasing?

Miller: The lenders would be a lot more conservative in the amount of loan proceeds they're willing to advance on a new loan. Where the loan amount has been reduced, that money is replaced by firms like us, who want to be involved in the daily operations.

GlobeSt.com: There is a lot of talk that people with capital are sitting on the sidelines waiting for prices to go down. What are your feelings about this?

Miller: We have to share that view because pretty much all of our clients are non US. We've been doing this for about 18 years, and we regularly go to the Middle East, institutional clients in Europe, such as German funds, and over the years we've represented a variety of these institutions, and it is true. Six months ago, we would go into the Middle East, and they were booming in both the local stock and property markets. They would laugh at us saying, "We have a nice property with a six percent cash flow and a potential IRR of 12% or 14%." They would say: "I can make that in a month here!"

Of course, that's all gone in reverse. They all recognize the need to diversify. They've had a very volatile couple of years, so our old contacts who didn't want to hear about US properties have said they want to talk about a fund. Our story to so many of them is: You can't wait for the bottom. You won't know the bottom until it's passed and in the rear-view mirror. More of the risk takers are coming first. You're going to have the traditional institutions that are afraid to make a decision because whoever makes that decision is going to have their job on the line. Those who are more entrepreneurial, like large families and family offices are going to be the first ones in, followed by the bank institutions.

GlobeSt.com: Is it hard to come up with an exit plan in this volatile environment?

Miller: As part of the initial underwriting, like most professional firms, we would have a series of due diligence, cash flows and a sensitivity analysis. One of the things we think is very important is to have a well-defined exit strategy as you go into the property. Of course, things may change. In our fund, we will definitely have to have a view of what we will do in the next three to five years. This has a finite life, and most people want to see a strategy executed and exited. We're going to look at a three-to-five-year timeline horizon for everything we go into.

At the same time, about half of our business is direct investment by investors, whether they are individual funds or institutions, and they take a much longer view. We're about to sign a contract with a major insurance company out of Europe, and their view is a minimum 10-year hold. So it adds a nice flexibility to our operations because we can look at assets, some of which have characteristics that lend themselves to turning around over three years, and others that are in prime locations that will always be desirable for tenants. You can hold those for a long, long time.

Instant Insights /

Falcon Real Estate Investment's Miller

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