LOS ANGELES -- It's been a very good year for CB Richard Ellis Investors LLC.
Assets at the Los Angeles-based real estate advisory firm have practically tripled in the last two years, said Robert Zerbst, president and chief investment officer. Most of the growth has come through acquisitions and new clients.
In 1997 the firm did only $350 million in acquisitions. "The number doubled in 1998 and again in 1999, and we're pretty proud of that," said Mr. Zerbst, who joined the firm in October 1997.
CBRE Investors already has made $1 billion worth of acquisitions in 2000, and Mr. Zerbst expects that number to double by year's end. Of those, 50% to 60% will be in the United States, while the rest will be offshore for separate accounts. The firm currently manages more than $8.5 billion in assets for 150 institutional clients, with about 80% of them pension or endowment funds. Of that, $4 billion is from offshore clients.
In March the firm held a first closing on its value-added fund, CB Richard Ellis Strategic Partners LP, raising $240 million. CB Richard Ellis Investors co-invested, contributing $10 million.
Higher yield, lower risk
The value-added strategy is what many pension funds are opting for these days, according to Mr. Zerbst. "They want a higher yield than low-risk core funds can offer, but without the risk of opportunity funds. Projected net returns are 16% to 18%," he said.
The fund's strategy is to reposition, redevelop or release properties. It focuses solely on U.S. transactions and already has committed 70% of the capital with six different transactions, one of which was the purchase of a Los Angeles office building that was undercapitalized. The fund is providing capital for much-needed tenant improvements, which in turn has raised occupancy levels to 95% from 60%.
In addition to value-added strategies, the firm has been focusing on core strategies for many of its separate accounts. The $114 billion California State Teachers' Retirement System, Sacramento, is the firm's biggest client, with its $1 billion-plus separate account invested in low-risk core real estate. CB Richard Ellis already has invested $600 million for the system. Other clients include the $24.4 billion Alaska Permanent Fund Corp., Juneau; $13.3 billion Utah State Retirement Systems, Salt Lake City; and Deutsche Sparkassen-Immobilien-Anlage Gmbh a Frankfurt, Germany-based open-ended mutual fund.
Other new business has come from pension funds that transferred assets to the firm from other managers. That includes a $220 million portfolio from CalSTRS and a $900 million portfolio from BP Pension Fund, London.
Last year the firm won mandates totaling more than $1.5 billion, including a new $112 million mandate from ALSTOM Pension Fund, Rugby, Warwickshire, England; a $300 million transfer plus a new $150 million mandate from Civil Aviation Authority, London; and a $150 million transfer from City Parochial Foundation, London.
"Some of those new accounts were accompanied by new capital," said Mr. Zerbst. "We feel that is testimony to the fact that we must be doing something right."
Frank Blaschka, principal at The Townsend Group, a Cleveland real estate consulting firm, praised Mr. Zerbst for taking a unique approach to managing a real estate advisory firm. "One of the important changes he has made has been to reorganize the staff into dedicated teams to serve clients, while attempting to tie the compensation of the team to the performance they deliver for the client," Mr. Blaschka said.
Although it's not unusual to have compensation tied to performance, what is unusual is the amount of compensation, he added.
Mary McCarthy, a spokeswoman at CBRE Investors said that members of each team running a fund will get 20% to 30% of the profits. The leaders of each team will have a say in how the carried interest gets allocated to each person on the team. Mr. Blaschka said that is an unusual approach for a real estate investment firm.
"Bob has identified skilled people and put them in positions where they can manage investments. Giving them a big piece of what the firm will earn is a powerful motivation to get people to achieve. And it's all back-ended and vested over a long period of time, which will provide stability to the fund," noted Mr. Blaschka.
"It looks like they have designed a good mousetrap," he said. But he still has some reservations, observing that it's too early to determine if all the initiatives are working. "So far it looks positive, particularly in terms of the greater focus on clients. But it will take a few years to see the returns from Strategic Partners and other offshore products before we know how well they have done."
The firm also has been taking advantage of its global platform through its parent company, CB Richard Ellis Inc., Los Angeles, which offers property management, leasing, facilities management, mortgage banking, appraisal, research and consulting services through 10,000 employees at its 250 offices in 36 countries. CB Richard Ellis Investors can capitalize on those capabilities and invest in other countries without having to find local partners, Mr. Zerbst said. "That saves clients from the kind of commissions opportunity funds generally pay the local partner, which in turn results in a higher return to the clients," he said.
Mr. Zerbst is particularly bullish about prospects in Japan. "The greatest opportunities are there now -- sort of the early '90s of the U.S. revisited." He has been buying portfolios of properties, working with both the owners and the lenders to obtain the properties free and clear of all liens. "We have been buying them for pennies on the dollar and getting handsome returns of 15% to 20%, thanks in large part to the 2% interest rates in Japan," he said.
CBRE Investors has closed on $220 million worth of acquisitions in Japan so far this year and has capital available for another $600 million from offshore separate account clients.
Looking to the Continent
In Europe, the firm had concentrated mainly on the United Kingdom. But now it is looking at France, Germany and Italy because of the huge potential being created in those countries by the privatization of government assets. "Many countries are liquidating the real estate they had in public housing, office buildings, transportation facilities, which is a trend we expect to capitalize on," Mr. Zerbst said.
Companies in Germany once provided housing for their employees, but the returns were poor so they're getting rid of those properties, which provides a real opportunity, he said. "We're looking at buying them and selling them as condo conversions."
In the United States, Southern California is attractive, but Mr. Zerbst said he is selling in Northern California, where he believes prices are high and will come down. Prices in Silicon Valley have reached the bubble point and are out of touch with the rest of the country, he added.