David Scherer, a principal at Origin Capital Partners, recently shared with Illinois Real Estate Journal updates in the capital markets, his thoughts about the first half of the year in the real estate industry, as well as his predictions for the second half of the year. Here’s what he had to say.
Illinois Real Estate Journal: How long have you been in the real estate industry and what made you get into it?
David Scherer: I have been in the real estate industry for over 16 years. Given my background in finance and economics, I have always viewed real estate as a vehicle to preserve and accumulate wealth. It appeals to me through its characteristics as a financial instrument and also a tangible asset.
IREJ: What’s the driving force that has kept you in the industry all this time?
Scherer: Commercial real estate, when bought, capitalized and managed correctly, is a unique asset that provides outsized dividends and has proven to be a long-term holder of value. Simply put, it is where I want to put a large portion of my own personal wealth.
IREJ: What are the predominant trends/updates in the capital markets/real estate private equity segment?
Scherer: The trend over the last three years is one that I would classify as “normalization”. Low interest rates, coupled with a competitive lending environment, have created low debt costs on assets. Equity providers are having more and more difficulty finding and placing equity into quality assets. Currently, those who own and control quality real estate have more leverage in real estate transactions.
Secondly, investment banks, family offices, and larger private equity and hedge funds, which previously had minimum equity requirements of $20 million per deal or higher, are now moving into the smaller deal space of $10 – $15 million. This again reflects the transition from an investment environment when capital was scarce and deals were not, to an environment where capital is no longer scarce and quality deals are harder to come by.
IREJ: What do you like most about the industry?
Scherer: I find it challenging. Real estate demands expertise in asset selection, operations, driving revenue and cutting costs, properly capitalizing assets, and knowing when it is the right time to either restructure or sell.
IREJ: What do you find most challenging?
Scherer: The most challenging aspect of real estate is the illiquid nature of the asset class. Transactions cannot be undone quickly or easily; therefore, it is important for any real estate firm to have mechanisms in place to maximize your ability to make the correct investment decisions.
IREJ: How would you rate the first six months of this year? Was it good or bad? How are the dynamics changing?
Scherer: The first six months of 2014 have been the busiest period in our company’s history, in terms of new deals in our pipeline, and it has been the most successful due to the realization of three of our fund assets. Origin typically invests $3 – $14 million of equity per deal, and with the changing dynamics discussed earlier; it is a very exciting time. There are more opportunities to form quality partnerships and to play in the $20 – $50 million deal space. Because we capitalize debt at conservative LTC ratios, we also have a competitive group of lenders looking to offer attractive rates on our deals.
IREJ: Looking to the second half of the year, what are your predictions for the industry?
Scherer: We believe that the commercial real estate markets will continue to strengthen, but the rate of appreciation on assets will slow. At Origin, we monitor the Federal Reserve FOMC minutes, inflation data and unemployment rates. It is our expectation that interest rates will rise gradually over the next 12 months and capitalization rates will fall at a ratio below one to one.
On the NOI side, we expect the economy to strengthen and NOI at the property-level to increase. The higher NOI and cap rates will result in a lower growth rate of real estate pricing; however, we do expect real estate pricing to trend higher.
IREJ: Please share some of your company’s recent successes.
Scherer: 2014 has proven to be a very successful year for Origin. We sold three assets in the Fund I portfolio, and returned 49.34% of capital back to investors. Fund II held its second and final close, doubling our total equity raise in just 16 months. Fund II is already 40% invested across six assets in four states. Lastly, we just announced the launch of our third value-added investment fund, Fund III, which we will begin marketing over the next 12 months.
IREJ: What do you like to do when you’re not working?
Scherer: Spending time with my family is the most important thing for me. I have two boys who are active in sports, ages 6 and 8, and I enjoy getting a chance to either coach or just watch them play. I am also very active in my non-profit work. In 2006, I co-founded One Million Degrees which has raised over $9 million and served over 500 students. OMD empowers low-income, highly motivated students to pursue degrees in community college, and our recent partnership with the Mayor’s office will help to expand the program to 4,000 students per year.
IREJ: Is there anything else you’d like to add?
Scherer: I am honored to be working with such a talented group of individuals. We have eight professionals at Origin, all of which come from institutional backgrounds. I am lucky to work not only with an exceptional group of people, but also ones that enjoy each other outside of the office as well.