With transactions down by double-digits this quarter, it seems that any investor that is able to pull off a deal is worthy of a spotlight, especially in the office space. It helps that Torose, a real estate investment firm that targets value-add properties, is particularly focused on the southeastern U.S., particularly Florida, where growth is still strong. But digging into the story of the founder and principal of the firm, Scott Sherman, you will also see a lot of old-school advice that still holds true no matter how turbulent the market. Develop relationships with banks. Take a contrarian approach to investing. Use your creativity to secure financing.
As lenders tighten their lending standards, how does that change the way you approach funding acquisitions?
It is much more challenging to finance acquisitions right now, in particular for office properties. We are targeting more local and regional banks with much lower leverage (50%-60%) and some component of recourse. In the past, it was hard for banks to compete with the debt funds who were quoting 65% non-recourse with similar pricing to the banks when SOFR (Secured Overnight Financing Rate) was practically zero. Now, with debt funds pricing north of 9%, having long-standing lending relationships with local banks who understand the markets we target is critical. We also have a strong group of investors who continue to be bullish on the Southeastern U.S.. As a result, Torose has been able to move forward with strategic office and retail acquisitions in key markets.
Are you seeing a lot of distressed properties coming to market? How does that impact investment?
We have seen a few distressed properties come to market, but it's been a trickle so far, not a flood.
As a result of rising interest rates and continued uncertainty about the future of office, we anticipate that many commercial real estate investors and owners will have trouble securing financing. I think we will continue to see distressed opportunities pick up as we get to the summer and back half of the year. As this distress materializes, companies with strong financial backing will have leverage to capitalize as the pool of buyers shrinks.
Where is there opportunity in commercial real estate right now?
I think there are opportunities in all asset classes right now, you just need to find them and have the right vision and creativity to get them capitalized and executed. Torose is currently focusing mostly on office and retail, which is where we are seeing pricing adjust more quickly to interest rates and macro headwinds. Select markets across the Southeastern U.S. in particular continue to provide the fundamentals necessary to justify investment, such as Nashville, Atlanta, and most of Florida.
Many companies are waiting on the sidelines to see where the market is headed, but we believe strongly in a contrarian approach to investing. As companies apply a 'wait and see' approach, we proactively seek value-add opportunities. Our expertise is on capitalizing on a quickly changing market and delivering outsized returns to investors.
What markets are hot right now?
Florida as a whole is hot. We love both coasts and continue to see positive migration trends and job growth. We are an anomaly right now compared to most of the country in terms of fundamentals and growth.
Why are value-add properties attractive to investors?
Value-add implies there is more risk and effort but also higher returns. Investors today are looking for mid- to high-teen returns, which they won't be able to get on most core/stabilized deals. It really depends on the investor and their risk appetite.
Why is a contrarian approach to real estate useful in difficult economic environments?
I think it's always scary not to follow the herd. A lot of people and institutions have done well with that strategy, however, I believe to deliver better returns, you need to think differently and see opportunities where others don't. From my experience, the herd usually overreacts and then is slower to correct, so if you can be 2 or 3 steps ahead, you will do very well over the long term. I think our pivot to focusing on buying office buildings after COVID is a great example. These have been some of the best acquisitions I have made in my career but at the time, there was a lot of noise out there about people not going back to the office and work from home being the new normal. I was never a believer in that rhetoric and I think now most people would agree that office is not dead. The same thing happened 10 years ago when everyone thought retail was dead and everything was going online. Now you see all the online brands looking for retail space and driving more demand for brick-and-mortar.
Have you closed on a value-add CRE deal recently? Can you give us details?
Yes, we closed recently on 6302 Corporate Center in Tampa in partnership with Merrimac Ventures. We are very excited about this deal. We bought this at an incredible basis with double digit yield day one and have already had a lot of positive momentum on the leasing side. The best part is we now control 50 acres of land right at a highway exit in one of the most dynamic and rapidly growing cities in Florida. This is a perfect example of the types of opportunities that are available in the market right now if you have a strong financial backing.
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