New Player Plans to Capitalize on the Disruption in CRE

Seasoned real estate investors Ryan Gallagher and Mark Moshayedi have launched Space Investment Partners, a new value-add investment firm intent on capitalizing on the disruption hitting commercial real estate. The firm will acquire properties in all asset classes and renovate and reposition them to take advantage of the changing market dynamics, specifically changes in technology and demographic shifts. They have developed a unique strategy to harness these changes by sourcing both private and institutional capital. Large family offices are the firm’s primary backers, but Gallagher and Moshayedi have deep institutional relationships that they can leverage for larger deals. As a result, they will consider deals ranging from $15 million to $250 million. Southern California will be the group’s initial focus, but it plans to quickly expand through the West Coast, with Portland, Seattle and the Bay Area making their shortlist of target markets. We sat down with Gallagher for an exclusive interview to talk about the firm’s stagey, funding and how they plan to capitalize in this rapidly changing industry.

GlobeSt.com: What was the impetus for you and your partners to launch this new investment firm, and what is your vision for the company?

Ryan Gallagher: We believe that there are going to be a lot of disruptive forces that are going to change the way that commercial real estate is utilized going forward. We believe that is going to create winners and losers in the industry, which will ultimately create opportunities for us. When you look at the demographic shift, millennials and technology are changing the game in every aspect of our business, as they are in every business. Office space, for example, used to be simply a place to house a workforce. Now, it is a recruiting tool, a retention tool, a marketing tool and the place where you are going to come up with your next great idea. We are seeing companies really focus on those elements and the overall utility of the space—and they are willing to pay more for it. You are seeing properties that offer that experience lease up faster and at higher rates.

That is just one area. If you look at retail, there are many retailers shutting stores and declaring bankruptcy. For us, we believe that retail needs to serve a new purpose. We believe that everyone desires social interaction, and retail centers will serve as a center for the community, whether that is to eat or have coffee or workout or get medical attention. We also see retail centers as being sporting centers for kid’s activities.

With the affordability factor, we think there is going to be innovation in how people develop apartments to make them more efficient and cost effective, as well as cities creating a more lenient code on densities. Industrial is clearly experiencing significant demand as we are shifting from bricks and mortar to online sales. That is creating some new opportunities in the industrial sector. It is the hottest product type out there. We are looking at all of these things and how they are changing the industry. If you know where to look for the product and find out what the demographic demands are, there is a lot of opportunity out there.

GlobeSt.com: You expect these changes to come rapidly. What do you think the real estate industry will look like in the next five to 10 years?

Gallagher: If we look at the different demand patterns that we are seeing—which are caused by the combination millennials coming into the workplace and technology—we think that all of the product types are going to go through significant change. Retail is going to go through the most significant change, and that has already started. Office product is antiquated, and a lot will need to be changed. Apartment demand remains strong, and we see multifamily demand remaining strong. We believe that there is going to be urban demand in cities for the next three to four years, and then millennials will go to a close-in suburban location that is highly amenitized. Then, on the industrial side, last mile distribution is going to have a significant impact on pricing of industrial, the location of industrial and the configuration of industrial—which we believe will go to two or three stories.

GlobeSt.com: Tell me about your business plan for these assets.

Gallagher: We are going to be focused on value-add investment. We will hold onto some properties because some of our investors like real estate as an asset class, and because we have both private and institutional capital, we can afford to play in both parts of it. Generally speaking, we are flexible on the asset class. We are really careful on the location at this point. We think the location, especially at this point in the cycle, is critical.

GlobeSt.com: Yes, I wanted to ask you about the cycle. Is there any concern about starting an investment platform at what could be the top of the market?

Gallagher: We are taking a sniper approach right now, where we are not wholesale buying any one product type or category or market. We are looking very specifically at the assets and where we believe that there is dislocation or downstream demand. We believe that there are always opportunities if you look carefully enough and know how to reposition properties. At some point, we think that there will be a corrections, and we intend to be fully up and running to take advantage of it.

GlobeSt.com: What are your first-year goals for the company?

Gallagher: Our ultimate goal is to build a world-class real estate investment firm, and we plan to do that with the properties we buy and the team that we hire. Our monetary goals are somewhat secondary; however, we would like to buy several hundred million of dollars in deals this year if we can find them. We have enough capital right now to do close to a billion dollars in transactions. First and foremost, we want to build a great team and be methodical in the properties that we buy.

GlobeSt.com: That is a significant amount of capital to deploy. What is your average deal size or the price range you are targeting?

Gallagher: Our range is $15 million to $250 million. We don’t want to miss a deal just because it is $15 million. We have private capital, and if we can make money on it, we’ll do it. At the same time, we are very comfortable working on deals that are a $200 million or more. Because of our group has private capital and institutional capital relationships, we have the ability to close ourselves and that makes us nimble.