Editor's note: One question and answer in this article was taken down due to compliance concerns.
Whenever the commercial real estate market undergoes a downward cyclical shift, there are players who have to contend with the negative consequences of falling valuations and tighter capital availability. At the same time, there are those who see new opportunities in lending gaps and discounted prices on otherwise promising properties. Investment management firm Kingbird Investment Management counts itself in the second camp, according to Mark Pasierb, who recently joined the firm as president. Previously, Pasierb led real estate investment firm Pitcairn Properties.
Boston-based Kingbird Investment Management is the real estate subsidiary of 100-year-old, Puerto Rico-based family office Grupo Ferre Rangel. The firm provides investment management services with a specialty in multifamily properties and invests its own capital alongside that of third-party family offices, other investors and operating partners in deals ranging from core-plus to value-add and opportunistic plays. It has invested at all levels of the capital structure (excluding senior debt). Kingbird has invested in more than 20,000 multifamily units across the United States.
Kingbird intends to capitalize on some of the distress the market is likely to experience as a result of higher interest rates, including property owners with loans coming due that might have challenges securing refinancing. In those situations, Kingbird would be able to come in and help them restructure their capital stack or purchase properties out of distressed situations. The firm has historically focused largely on multifamily investment, but it is starting to also consider industrial assets to take advantage of the continuing strength of that property segment.
To talk about how current market conditions are playing into the firm’s strategies, we recently talked to Pasierb.
This Q&A has been edited for length, style and clarity.
WMRE: If you could start by talking about the broader market conditions in the commercial real estate market right now? Where do you feel we are right now in the market cycle? What are some of the challenges you are most concerned about from the broader perspective?
Mark Pasierb: Well, right now, it’s probably the same opinion as many people have. But clearly with the Fed continuing to raise interest rates, you can bet let’s say 50/50 that they’ll raise another 25 basis points coming up. Then they will be in a pause, and that pause, a good guess [will be] of anywhere from six to 12 months, so you can call it nine months. And in that period of time, most investors are just waiting to see what happens so they can get some clarity from the Fed and then they can start making decisions once the waters have been smoothed out.
And looking at where the markets are today, I think it’s a very good opportunity to be raising the funds to invest for the upcoming next cycle. The challenges are really getting transactions to happen, sellers don’t want to sell because they are under the same mindset of “it’s 2020, 2019,” so there’s a big disconnect between the bid and ask price in properties, so the challenge will be to actually find people who’ll want to transact. I think what will help the transactions, with interest rates and loans coming due, it may force people into either a distressed sale or an opportunity with some preferred equity investment from our side.
With these challenges, there are great opportunities. So, we are in a good position to really pick up some distressed opportunities, whether it is preferred equity investment to bridge the current owner to the next loan or maybe something in the distressed space where someone just can’t manage the loan and property and we take it over.
WMRE: You recently joined the Kingbrid team, right, you were coming from another firm?
Mark Pasierb: Correct. I was the president and CEO of Pitcairn Properties Incorporated. I was at Pitcairn for 18 years. I was at the helm since 2010, so roughly 13 years I was running the company. And we were invested in all types of asset classes. We were in office, industrial and multifamily, and some land for redevelopment. We were an operating company, so I got some great experience from the front lines of real estate, dealing with the tenants directly, with the local communities directly and then also dealing with our LP partners from a JV perspective and reporting perspective.
WMRE: If you wouldn’t mind talking about why you decided to join Kingbird?
Mark Pasierb: Sure. I was in the process of basically selling off all of our properties, returning the capital to our investors. I am actually still in the process of purchasing my old company, name and goodwill. That isn’t final yet, but hopefully it’s final by the end of this month. So, I was looking for partners to help build the Pitcairn name brand and restart that engine. And in the meantime, this opportunity came up with Kingbrid. So, it was a good fit from the perspective of they are both family offices, the Pitcairn investment vehicle were mostly family office investing in real estate, same thing with Kingbird. It just felt [like] a very good synergy between the Ferré Rangel family, they are very astute investors, they’ve been in business for over 100 years, 30 years in real estate. It’s a very similar story to Pitcairn. I’ve had great experience working with family offices, so it felt like a good fit. Joining them is a great opportunity, they’ve got an amazing team.
WMRE: If you can talk about the kinds of equity investors that Kingbird typically works with?
Mark Pasierb: Yes. So far, it’s been a range of both high-net-worth individuals and some fund/pension plan investors. In addition, the family puts in 15% of the equity, up to a certain amount. They are shoulder to shoulder with their investors, so it’s not other people’s money for the most part, there’s a fiduciary responsibility both to the family and, also, the senior team puts in money. I am reaching out to my former investors, and they are high-net-worth, family offices and, also bigger insurance companies that have allocations for alternative investments which would include real estate. Because I am joining here, I have relationships with some people who are in touch with family endowments and school endowments, so those are two good avenues that the Kingbird team will be tapping into that it hasn’t previously.
WMRE: Does the firm offer the same range of products to all its investors right now?
Mark Pasierb: Correct. The family historically has been in multifamily investing. They had commercial investing ownership previously. What we are doing, because of what we are seeing in the market—a lot of people have run to multifamily investing, where the competition is higher, which we see. So we will be focused primarily on multifamily; however, we are adding in some commercial pieces to that, which will be industrial. We really like the industrial world. I have a lot of experience from the commercial side, as I mentioned earlier, so we are using my experience, my connections in that side of the business where we will be primarily focused on multifamily, but add in industrial components and deals as we see fit. I think multifamily and industrial have been the fair-haired children of the real estate investment world and it should continue that way for the foreseeable future.
WMRE: What are your return targets right now?
Mark Pasierb: Our targeted net returns, IRR, are mid-teens—so call it 12% to 16% net, targeted hold is on average about 48 months. I think we feel, as most people do, there’s a supply gap for housing. There’s a shortage of 4 million units. So that in of itself lands very well for multifamily investing because homeownership has become prohibitively expensive, and because of that, a lot of people are forced to rent. People need somewhere to live, so the alternative clearly is apartments. So that’s what we see as our continued overriding theme of why multifamily still works.
WMRE: What has been equity investors’ attitude to real estate in this changing market? Are you feeling people are being more cautious about their money, maybe changing a little bit what their goals are when they invest? Have you seen any kind of shift?
Mark Pasierb: We are getting repeat investors, which is always a good sign. New investors, sure, everyone has the caution, the pause button in what they should do with their money, clearly, because you could roughly get 5% on a money market these days, so returns have to be comparable to get people to invest with you. Again, I think it’s a kind of wait-and-see for some people, but others are willing to take that motion forward. We are cautiously optimistic, to use the cliché. But I think from an investor standpoint, people are, again, cautiously optimistic with their money, they know things will turn around, we are hitting hopefully the plateau of the bottom, barring some black swan event. But for the most part, the next nine months will be probably high interest rates, maybe they start lowering interest rates June of next year and that will obviously help with valuations and also the release of funds into other funds. People will start freeing up their money for investment purposes.
WMRE: You talked a little bit about this, but I did want to drill down more on the multifamily side. It does seem that Kingbird has been primarily focused on the multifamily product, but it has been across the spectrum, from core to value-add, development, workforce housing etc. At this time in the market, has the firm narrowed its focus with what kinds of multifamily properties it wants to pursue or is it still going to be all across the board?
Mark Pasierb: Again, our goal is to provide risk-adjusted returns in the mid-teens. And wherever we can find that is what we’ll focus on. I can’t say we will just do one specific piece of multifamily. Because it could be workforce housing, it could be a preferred equity piece, it could be a co-GP. The benefit of Kingbird is that we are smaller and we are agile. So, unlike some of the bigger shops, where they have to place all this money at once, or they have to return it, we are not forced to invest. We’ll walk away from investments that we are not interested in. I know our CIO and his team, I may be a little bit off here, but let’s say they are looking at five deals per day and we’ll pick about one per week that we are interested in to move forward to an actual underwriting scenario. So, they are very choosy about what we should be looking at and due to that, we have the flexibility to really invest across the capital stack, from the LP, GP perspective—meaning LP money, GP money, preferred equity. We are not looking at senior debt at this time, that’s not really where our focus is. But if we find multifamily in California in development and it pencils, we will invest in it. And if we find a preferred piece in Austin, Texas, that meets our return hurdles, we will certainly invest in it. We like to be flexible and not necessarily rigid with our investment style, so the main focus is to make our investors money, not to be too stubborn on the exact asset class and type of multifamily.
WMRE: How many attractive opportunities are actually coming on the market right now, given that sellers may not have a lot of incentive to sell unless they have to?
Mark Pasierb: One of the good things is we are really working with operating partners, so we’ve seen a lot of deals that are off-market, not taken to market yet. So, our model is basically working with operators and building those relationships, so the deals are not marketed by a broker, they are marketed by the actual owners of the properties. So, they are looking for co-investors, not necessarily selling out completely. Because the model that we have here is value-add/opportunistic, we are at the front end of the spectrum of buying something, renovating it, fixing it, stabilizing it, then selling it. So maybe some core fund will hopefully buy our assets two to three years from when we invest. So, we are seeing deals from our partners that are not marketed in some respect. And they are out in the markets, and they are frontline people in all their respective markets that we are really leveraging and basically becoming partners with them. The deals that we are looking at are from operating partners, not necessarily from a broker pitching some secure, stabilized deal.
WMRE: Are there any deals that you are looking at right now? Can you tell us any details about those assets?
Mark Pasierb: Sure. The first is an industrial deal, it’s a ground-up development deal with a new operating partner that I brought into the company and it’s in Phoenixville, Penn. It’s a smaller, bite-sized industrial deal. It’s 125,000 sq. ft. in an already developed industrial business park, I’d call it. So, it’s almost a no-brainer, it’s already set up as industrial. Industrial is still generating decent activity, it’s ticked down slightly, it’s not what it was in the heyday of a year ago, the new “gold rush,” it probably has gone back to what it was in 2019, which is still very good. And it’s good leasable square footage—so we are not looking for 2 million sq. ft., we only need 125,000 in an already established market in a suburb of Philadelphia, it just fits.
And then secondly, we’re looking at a multifamily deal in the Los Angeles suburbs. It’s a ground-up construction of, I want to say it’s 125 units. And it’s in a market where there’s some constraint for new development. So, we could be leveraging being the only game in this part of Los Angeles, which would be very good for our returns in rental values.
And with these partners that we have, we are also looking at other deals in Nashville, Tenn., and Phoenix. So, we are spreading and diversifying our investors’ money across different markets, different parts of the capital stack, so not that we ever want a deal to go wrong, but if one does go wrong, you are fully covered by other deals that will most likely go in the correct direction. So, we diversify the risks across geographic area and the capital stack.