The 1980s savings-and-loan crisis, in which hundreds of thrift institutions, staggered by bad mortgage loans, were taken over and bailed out by the federal government, came to a head when that era's real estate boom petered out.
Terrell Gates, a third-generation real estate investor, owner and operator, witnessed the havoc up close. "My family lost it all in the 1980s during the real estate S&L crisis here in Texas," he says. "That experience is indelibly printed on my mind to say the least. My experiences from the past inform what's going on today."
What's going on today is a much happier scenario. Virtus Real Estate Capital, which Gates founded in Austin, Texas, in 2003, is raising its 35th private equity fund. The firm has bought 127 commercial properties over the past decade, some $1.7 billion in acquisitions, and divested itself of 24 of its partnerships. The majority of its assets have been sold.
"We've been fortunate and blessed to have a very strong return profile and track record," Gates says.
Early on, Virtus invested in commercial real estate deal by deal, with most of its capital coming from family offices and institutions, according to Gates. Eventually, it moved into blind pool investing through discretionary funds. In 2008, it entered the retail channel. Today, Virtus's client base comprises high-net-worth accredited investors, some of whom come through broker-dealers and others through RIAs; traditional institutional investors; and ultra-high-net-worth foreign investors who come mainly through an offshore note structure.
The firm employs 35 people in its corporate office and oversees another 120 or so who work for its property management companies.
Bracing For The Storm
In late 2006, Gates and his team met to review the firm's success during what he calls "the rising tides of all rising tides of commercial real estate," and to look ahead. Since opening, Virtus had posted "ridiculous returns" and rewarded clients handsomely. Now, they wondered how they were going to replicate the success of the past going forward.
"We had no idea 2008 was coming, but we did perceive storm clouds on the horizon," Gates says. The majority of their assets had been in "basic food groups": mainly multi-family assets. But when they could no longer "buy right"-for the right valuation among other things-they figured things were probably going to change, and not for the better.
"Our challenge became, how to insulate ourselves from capital market, economic and real estate market cycles-none of which we control," Gates says. "If we could find non-correlation, we could have more insulation during the downturns."
The upshot of this strategic brainstorming was a decision to focus on four demographic trends and the specific types of commercial real estate these would demand. "Our thesis," Gates says, "was that if you could figure out the real estate needs of these major demographic trends-which are going to happen whether the S&P is up 50 points or down 50 points-that would provide you some of the insulation you were looking for."
The demographic trends in their analysis:
The leading edge of the 78 million Americans born into the baby boomer generation was moving into retirement and had growing health-care needs.
The 74 million offspring of boomers, the Echo Boomers or Millennial generation, was coming of age.
The Latino market in the U.S.-46 million and counting-was growing, and constituted the largest minority group in the country.
The U.S. population was highly mobile, owing to the transitory nature of employment, among other social forces.
The Virtus team identified investment opportunities in four sectors that would directly benefit from these trends. Aging and longer-living boomers were going to need senior housing and medical offices to meet their accelerating health concerns. Echo boomers would require student housing as they headed off to college. And individuals following the job market would increase demand for self-storage facilities, as would empty nesters and boomers downsizing their households.