Renowned Commercial Real Estate Investor Sees 2021 as Best Buying Opportunity in a Decade
American Ventures' Philip Blumberg to launch investment fund to capitalize on deepest market trough in commercial real estate since 2008
MIAMI, Dec. 08, 2020 (GLOBE NEWSWIRE) -- American Ventures' chief Philip Blumberg today provided commentary on the 2021 U.S. commercial real estate outlook. Mr. Blumberg is forming a $1 billion fund to invest in distressed Class A office properties, his fifth such fund over three decades.
Mr. Blumberg, highly regarded for his market forecasts, has a 30-year track record in raising investment capital, buying distressed commercial real estate and selling ahead of softening demand. In 2006, to much media attention, he foresaw the Great Recession. By 2008, Mr. Blumberg had sold his national real estate portfolio - comprised of Class A office properties in the country's Sunbelt - with most holdings selling at record prices.
Slated for Q1'21, the fund launch aligns with Mr. Blumberg's investment approach - forming funds shortly before or during market troughs. Over the past 30 years, he's presciently formed funds just prior to or amid virtually every major economic downturn.
American Ventures has generated an average annual return of 17.9% over 16 years, net of fees and expenses, to investors. In 2000, Pensions & Investments and The National Council of Real Estate Investment Fiduciaries each ranked American Ventures as their top investment funds. From 1992-2000, Mr. Blumberg's fund posted an average annual return of 22.5%.
"Difficulty typically begets opportunity. That axiom holds today like never before," said Mr. Blumberg. "Come January, government regulators will begin to take a much harder view on underperforming real estate loans. That, in turn, will impair more loans as banks mark to market the real estate underpinning the loans. This spiral will fuel one of the greatest opportunities in a decade to buy office buildings at steep discounts."
Mr. Blumberg shared several insights on the 2021 commercial real estate market:
In anticipation of a distressed loan/foreclosure market in Q1'21, the Fed last month issued a conserve-cash order to banks, prohibiting them from using capital for share buybacks and similar actions.
American Ventures is already seeing a spike in property foreclosures, indicating traditional bank-loan remedies are beginning to supplant loan forbearance.
Office values will continue to drop due to decreasing office-utilization rates as the pandemic hits its peak over the next several months.
A few Class A office properties are starting to sell below replacement cost - a trend expected to accelerate over the coming months, creating a self-fueling cycle of more market pressures on owners.
Mr. Blumberg sees the strongest buying opportunities in the Sunbelt - in part, due to the advantageous state-tax structures.
In Texas and Florida specifically, American Ventures is seeing increasing symptoms of market distress, including a torrent of sublease space hitting the market due to relocating or failing tenants.
The pandemic also has created a "new context" for acquirers in evaluating Class A office buildings - namely, the costs and logistics required to retrofit buildings to meet tenant demand for virus-free, healthy work environments (e.g., air flow, existing HVAC capacity, sanitized common areas, UV lighting).
Mr. Blumberg contends, for example, it'll cost $1.50-$2/square foot to retrofit most commercial properties now on the market in Dallas.
Building height and elevator capacity have also become important factors, since they can drive additional refurbishing costs -- to expand elevator capacity to eliminate queuing issues due to social-distancing requirements.
Vacant suburban malls are best suited to be repurposed as Class B office buildings - because they don't meet the needs of Class A office tenants and offer the most potential to incorporate "flex" space into layouts.
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