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David Sherman '82 is the president of Metropolitan Real Estate Equity Management, a Real Estate Circle Leader and member of the MBA Real Estate Program Advisory Board. David was the chairman of the 2010 Real Estate Symposium Steering Committee.
Interview conducted by Jason Chiang '12
Please tell me about Metropolitan’s business model.
We started in 2002 with the idea that we could help investors source, underwrite, and invest in best-in-class real estate managers around the world. Our job is to determine from a top-down approach which investment strategies we like, find diligence experts in those particular areas, and share those ideas and strategies with a wide range of investors who otherwise wouldn’t have access to similar opportunities.
We only invest in non-core strategies, and look for managers with operating or financial expertise to take broken assets and fix them through a workout or repositioning to ultimately create a core asset. Essentially, we are looking to partner with top quartile managers who can create the real estate equivalent of alpha.
We don’t take generic positions on markets, either. We focus on specific markets that we believe are going to outperform the overall real estate market. Across all geographies, we are looking to partner with highly specialized managers who have a successful operating history and know the local markets intimately. For example, if we determine that West Coast multifamily fundamentals look attractive, we will interview several apartment managers with long track records and have specific knowledge of the area before selecting one.
On average, how many funds and managers do you look at?
In 2010, we looked at 463 different funds, met with 172 managers and ultimately made 15 investments across four different continents.
What benefits do real estate fund of funds provide to investors?
Without question, a fund of funds provides diversification. By committing capital to a fund of funds, an investor can get exposure to 13-17 underlying managers and several hundreds of properties across many countries.
But more than diversification, a fund of funds acts as a form of risk management, especially as you invest further and further from home. If you were a US investor investing in New York or Chicago, you could probably do enough research and due diligence to avoid those few local managers who can and will do stupid things. But if you wanted to invest in Stockholm, Sao Paulo, or Beijing, it becomes much harder if you don’t have the resources to diligence markets and managers from your desk. You need the local networking and contacts in order to know who will be a good manager and partner.
Where are you focused geographically?
We have two programs offered each year: a US focus and a non-US focus. With our US fund, we can invest anywhere in the country. The non-US fund will invest about 50 in Europe, about 40 in Asia and the balance in Latin America. In Europe, we primarily look to Western and Northern Europe, and in Asia we are heavily weighted towards developed markets where we can look to a history of rental rates and property values to see where values should be today. In China, for example, cities are being created overnight and it is much more difficult to say with confidence what a piece of property will be worth. So, we focus instead on Japan, Hong Kong and Singapore. We’ve looked at India for years and haven’t invested there yet.
What current investment opportunities are you seeing in the market?
We’ve seen two themes develop. The first is that on a global basis, market fundamentals have bottomed. It’s very hard to find a market that’s still in complete freefall. In fact, there’s been selective recovery in a few markets due to demand drivers, such as with London office, US multifamily, coastal industrial, and office in Silicon Valley. However, it’s still going to be a long, slow recovery.
The second theme is that distress is everywhere. Everything we currently invest in has some kind of distress angle. For example, in Tokyo we are looking for managers with the ability to service and manage large pools of non-performing loan portfolios. In California, we have partnered with a retail leasing specialist who acquires releases and repositions foreclosed malls. These malls are acquired for below replacement cost, and we make equity-like returns by taking advantage of opportune timing.
Since 2008, investors have increasingly started separate accounts with GPs instead of going into blind pool funds, with many suggesting that the blind pool model is on its way out. Do you agree with this sentiment?
No, not at all! Of course, there’s been a lot of press around fund managers with poorly conceived strategies who invested and went bankrupt. But what I believe is that the market’s ability to differentiate between the smart managers and the not-so-smart managers was not where it needed to be in 2007.
Many investors, including us, have spent the last three years thinking about what caused busted funds to be unsuccessful. On the one hand, you have good managers who were still patient and smart at the top of market and had sound strategies around buying underperforming assets and truly adding value. However, they’re underwater today because of poor timing. On the other hand, you saw fund managers buying a lot of assets that didn’t actually belong in the blind pool fund model. You also saw other managers who didn’t have capital markets discipline and won’t be raising money again. Again, these were poor managers that the market didn’t identify, but there’s really nothing wrong with the model itself.
What was the biggest take away from your Columbia Business School experience?
I don’t remember - it was about 100 years ago! Maybe having bagels in Uris Hall?
In all seriousness, CBS gave me a solid finance education. I was math major in my undergrad, but I knew nothing about finance, economics or money in general. CBS allowed me to go from an operations scheduler at Mobil Oil into the finance business. It gave me exposure to a lot of New York-based firms, and I got to meet, speak with, and get to know a lot of members of the business community here. It was an extremely helpful experience.
You’ve recently joined the MBA RE Program Advisory Board. What is your opinion of the Real Estate current program at Columbia?
While there wasn’t a real estate program when I was a student, I taught at Columbia Business School from 2000-2006. I know that the program today is so much deeper and better than it was when I was teaching here. Lynne Sagalyn and Chris Mayer have really done an amazing job raising the level of the program.
Columbia students in the Real Estate Program have a huge amount to offer employers. The value of a focused real estate program is that it really gives a student the time and energy to study real estate and figure out what they like. One of my biggest issues in hiring people out of school is that you’re always afraid they will change their mind. The real estate focus gives students a credible position, it gives them the ability to hone their interview skills, and it allows them to say with confidence what skills they can bring to employers and how they can execute on Day one. It’s huge.
Do you have any advice for current MBA students about to re-enter the job market?
MBAs have tons of experience and examples of when they led projects or have done amazing things, but they don’t always share those examples in interviews. They should be trying harder to sell themselves and make a compelling case as to why they should be hired. It’s really no different than trying to sell a property or close a deal; generic answers don’t work.
Do you have any intention to return to the classroom as an Adjunct Professor?
I would absolutely return if possible, probably when I retire and have time again. I had a wonderful experience teaching those first seven years and working with Lynne and Chris to create new course materials, come up with new cases, and think about new ways to explain real estate fundamentals to students. Unfortunately, my current business has gotten too big for me to teach currently, but I would encourage all alumni who have some kind of real estate specialty to come back and teach.