“ I eventually invested in a number of successful transactions with [PropFund] and enjoyed better than satisfactory returns.”
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SIGNIFICANT ABOVE AVERAGE RETURNS DURING THE NEXT 3-5 YEARS:
A Letter from James Aldrich:
I have spent thirteen of my nineteen years in the real estate business patiently waiting for the commercial real estate market to flash a clear “buy” signal. It appears that my patience may finally be rewarded. I believe now is the beginning of a period when extraordinary returns can be achieved purchasing real estate assets while incurring acceptable levels of risk.
There are a number of factors that indicate it is the time to buy:
Significantly Reduced Rental Rates and Property Values: Rental rates and property values have declined by 30%-60% from their peak, depending on the product type and submarket of the property. All across the western United States, rents on commercial properties in many industrial, retail and office submarkets are lower than they have been in over 13 years. Rents will not be increasing any time soon and declining rental rates have a direct effect on the value of real estate.
Bank Failures: The major dislocations that have taken place in the financial markets during the past two years coupled with the downturn in the economy have precipitated significant problems within the banking industry. The Federal Deposit Insurance Corporation (FDIC) has already closed approximately140 banks during 2009, 20 banks in 2010 and currently reports that 702 banks are on their “Troubled” list. These conditions have created an environment where banks are unloading real estate assets.
Owner Capitulation: We are approximately 2 ½ years into this correction (peak being the first or second quarter in 2007). Many owners can no longer hold out in hopes of a brighter day. Some property owners did not acquire their properties through a direct purchase, but through an inheritance and lack the knowledge or wherewithal to manage them. Many of these eventually succumb to the wave of lost tenants, prolonged vacancies and capital expenditures that are no longer covered by the income of their property.
Even though the market has begun to flash a “buy” signal does not mean that we are going to snatch up every deal that crosses our path. On the contrary, we will be incredibly diligent in our analysis of each property and patient in the deployment of the capital held by the fund. It is our estimation that we will analyze hundreds upon hundreds of deals before we find one that meets our investment criteria.
Due to the present market and capital conditions, traditional financing for the purchase of commercial properties is almost nonexistent. Consequently, during the next year or two buyers will require large sums of capital to take advantage of the opportunities in the marketplace. At the present time, only the players in the market with cash readily available will be able to accumulate assets at attractive prices. They will enjoy above average returns while incurring marginal risk due to the lack of leverage to take advantage of the opportunity.
Now is the time to actively pursue multiple opportunities in well-placed, functional properties available at considerable discounts to their inherent value. What goes up must come down – for solid investment properties the reverse applies.
My partner, Allen Glass, and I created PropFund, L.P. to take advantage of what we believe is a tremendous opportunity that will generate significantly better than average returns while incurring an acceptable margin of risk.
Many of you have invested with me through the loan fund that I have managed during the past seven years. A few of you have been investing with me for fifteen years (since my days at Pacifica Capital Group). You have trusted my judgment and you have enjoyed above average returns that have been, over the long term, significantly higher (approximately a 90% cumulative return during this period) compared to the virtually 0% return generated by the S & P 500, the Nasdaq Composite or the Dow Industrial Index during the same time frame. Now I look forward to continuing this relationship during a time in the real estate market cycle that could be the best opportunity to secure significantly better than average returns since the early to mid 1990’s.
