Like most in the financial world, Tim Wright is consumed by the search for value.
Amidst a fledgling recovery, the senior managing director in the San Diego office of Holliday Fenoglio Fowler LP (HFF) says commercial real estate professionals are fleeing to quality.
After a brief respite during the last decade, he says the balance between high- and low-quality assets has returned.
“There’s just a stronger aggregate appetite for high-quality, insulated, supply-constrained assets, whether it’s an office building in downtown San Francisco or a hotel on the waterfront in San Diego,” he said of the current climate.
That return to an emphasis on quality, Wright said, is an indication of what went wrong during the commercial real estate bubble. The lack of distinction between assets was at the root of the issue.
“One thing that struck me was that the interest rate on a nice, food-anchored shopping center in Del Mar, call it, the interest rate was only marginally better than an unanchored strip center in Indio, or Barstow,” he said. “And the lender would almost apologize for the premium!”
The traditional capital asset pricing model, which determines a reasonable rate of return of an asset based on its systemic risk, simply became too flat.
“I think it’s retaken its shape again even among asset types,” Wright said. “A hotel down on our waterfront is still going to garner aggressive pricing. A hotel in an inferior location with commodity-like appeal is going to be priced accordingly. The delta between the two has reasserted itself.”
After growing up in Chicago, Wright spent a summer before college working in California. When it came time to enroll, the only school he applied to was the nearby University of California, Santa Barbara. He went on to graduate there with a degree in business economics, and at 22, moved to San Diego to work for Bank of America (NYSE: BAC).
He ended up here, he said, because the city had the depth to support someone in the professional world, but wasn’t as edgy as San Francisco or as sprawling and overwhelming as Los Angeles. He knew it had professional sports teams, which was important, but didn’t know much else.
“I moved downtown when I was 22, not knowing everyone else in the world was in PB (Pacific Beach). What did I know?” he said.
From then on, he’s maintained an infatuation with the city’s economic center.
Of the more than $3 billion in real estate transactions that he’s competed during his time with HFF, one of his favorites was the $104 million in construction financing for the Omni Hotel Ballpark & Condo.
It’s where he most enjoys consummating a deal. “Downtown is kind of a showcase to me,” he said. “It’s fun to be a part of.”
His continued devotion to the architecturally diverse, supply-constrained area echoes his observation on the commercial real estate market’s rediscovered devotion to a traditional capital asset pricing model.
Another observation on the nature of the recession in his field further reverberates that echo.
During the recession, he said, “there was no marked fire sale of quality assets. There were just no unbelievable, once-in-a-lifetime sales for quality assets. They maintained some integrity, which just goes back to the validity of the asset class for institutional investors.”
Even his initial draw to real estate seems based on the spectrum of quality underlying the market.
“I’ve always liked the physical nature of real estate,” he said. While taking an appraisal course en route to an MBA in finance and real estate from San Diego State University, Wright said it was learning the basis of doing comps, in identifying “what’s better,” that pulled him in.
“It’s the art of the subjective element in real estate,” he said. “What you pay more for, what you pay less for: that’ll never be a science. That’s always continued to be fun.”
But in the current market, where he said activity noticeably began to increase about six months ago, Wright said one area that he and HFF have increased attention is in portfolio deals.
Academically, portfolios are attractive now for the same reasons they’ve always been attractive. They’re generally bigger deals, and thus appease those looking to invest efficiently, and they bring inherent diversification, either locationally or by asset type. Naturally, that hedge against risk is seen by lenders as having value.
But the pain of the recession still burns bright in the minds of lenders. Apprehensive to get burned again, portfolios have become an easy sale.
“There’s a lot of credit decisions by anecdote,” Wright said. “Having a more granular investment after a big burn is seen to be better.”