Homeowners aren’t the only victims of the U.S. real estate crash. Developers have also suffered miserably since the bursting of the property bubble, which derived much of its hot air from easy access to financing. Many of them had big projects under way when the mortgage market began imploding in early 2007. For New York–based real estate firm Related Cos., these troubled ventures, whose woes range from scarce capital to fraud allegations, present an attractive investment opportunity. In January, Related closed its Real Estate Recovery Fund, which had raised $825 million to invest in distressed U.S. properties, with a focus on acquiring loans, doing conversions and renovations, and taking equity stakes in projects. The firm’s first such vehicle, it counts public pension plans, endowments, sovereign wealth funds and family offices among its limited partners.
Related has entered a fiercely contested space. “The pace at which opportunities have hit the market continues to underwhelm the investment community,” says Constantine Korologos, New York–based head of the real estate consulting practice of Deloitte Financial Advisory Services. “When you do have an opportunity that does come to market, you end up having some pretty aggressive bidding.”
But Related, which also keeps offices in Chicago, asserts that it has an edge thanks to its expertise as a real estate operator and developer. The firm’s flagship properties include Time Warner Center on Manhattan’s Columbus Circle, where it is headquartered. It has also developed projects in California, Florida, Illinois and Massachusetts, as well as in Las Vegas and the Middle East.
Meanwhile, Related’s fund management team runs some $1.5 billion in equity capital. “We have a set of skills on the real estate operations side that I think are different from a lot of groups in the fund management business, who maybe are more capital allocators,” says Justin Metz, who joined Related in 2009 to lead and build that group. A University of Michigan economics graduate, Metz previously served as global head of real estate alternatives at Goldman Sachs Group in New York, where he managed money for the firm and designed strategies for big institutional investors.
“Because we have the development platform, the construction expertise and the leasing expertise,” explains Metz, 38, “we can really go after these projects that require a lot of execution and hands-on real estate experience.”
Take One Madison Park, in the Flatiron district of New York. A 50-story luxury-condominium tower, the unfinished, $325 million project has suffered numerous setbacks since its launch in 2006, including lawsuits over defaulted loans, contractors’ fees, disputed titles and bankruptcy, all of them related to the original developers.
As owners of One Madison Park’s $230 million-plus debt, Related and a rival bidder, New York–based real estate developer HFZ Capital Group, joined forces to lift the development out of bankruptcy last December. Related has since settled nearly all of the creditors’ claims, and it plans to complete construction and relaunch sales of newly finished units this year.
One Madison Park’s developers had ambitious plans to create a landmark building, Metz says. “They got most of the way through the process before they realized that the effective amount of capital they put into the project they wouldn’t get out by selling the units.” By spending wisely on improvements, Related can unload condos at a substantial spread over its capital costs.
So far, the Real Estate Recovery Fund has invested in five deals in New York, Chicago and Florida, where Metz and his 20-member team did their first transaction. In August 2010 they purchased Oasis, a failing condo project in Fort Myers, Florida. The previous developer had presold units at about $400 per square foot, but buyers closed on very few of the 400-plus condos. With the builder on the hook for $200 million, Related picked up the property for $60 million, finished it and turned the unsold condos into rental units. Vacancies are down to a manageable number, and Related has already recouped its initial investment, Metz says.
Of the $825 million raised for the Recovery fund, the firm has deployed about 25 percent. Metz, who won’t discuss expected returns, estimates that he may find a home for a further 10 to 15 percent by the end of the year. With plenty of competition for deals, Related could have a fight on its hands. • •
