After scouring the distressed real estate scene since 2008, Dickey has put three vehicles on his approved list. One is the Michigan Avenue Real Estate Opportunity Fund, which is affiliated with Chicago's Reinsdorf family. The fund has raised $10 million to date and invested in two condominium buildings and a rental apartment complex in the Windy City. The second vehicle Dickey likes is a private placement from Dallas-based Macfarlan Capital Partners LP that invests in southwestern commercial properties. The third is the American Realty Capital Trust, a non-traded REIT that buys debt and equity issued by owners of properties leased by well-known retail chains. (The REIT is distributed through RIA custodial platforms and brokerages.)
The common thread among these funds' managers, Dickey says, is their financial and operational experience and their predilection for investing in local markets that they know well. These managers also avoided the inflated prices that prevailed just before the 2008 real estate meltdown.
"In any asset class, we look for managers who have strong convictions but know they don't have all the answers," Dickey adds.
One of the core problems facing advisors in the market is that distressed real estate spawns hordes of so-called experts in local markets who think they can rehabilitate, rent and flip properties purchased with other people's money.
"It's an amateur hour production," says Rick Ashburn, the founding principal of Creekside Partners, a Northern California RIA that manages almost $69 million of assets for 45 families. Ashburn, who's based about 75 miles from Sacramento-what he calls the foreclosure capital of the west-has been deluged with pitches to buy distressed debt and foreclosed homes through private placement offerings.
"Operators are coming out of the woodwork, but real estate isn't like stocks," he says. "It's a really complicated investment and the decision isn't about the asset class but about whether the guys know what they are doing."
Ashburn has resisted investing in residential deals, and has not yet found compelling ways to exploit the acres of distressed office buildings, apartment complexes, industrial parks and other commercial real estate littering the landscape. "We'd love to buy something, but there isn't any major play on distressed commercial property," he says.
Several of his clients are commercial property developers that have been searching for opportunities but have yet to find banks or troubled property owners willing to sell at realistic prices. "Yields are still just 5% to 6%," he says.
The weak supply isn't limited to the retail market. One of the great ironies of the property-induced recession and its lingering effects on the economy is that even the largest and most experienced real estate managers haven't been able to put their money to work.
"There's almost nothing for sale," Sternlicht told an audience of high-powered investors and financiers at a panel on commercial real estate at the Milken Institute's global conference in Beverly Hills last April. Banks or their regulators are reluctant to sell deeply impaired loans and foreclosed properties at deep discounts, and other troubled assets are trapped in complex commercial mortgage-backed securities.
"A huge amount of money was raised to invest in distressed opportunities," Richard LeFrak, chairman and chief executive of the LeFrak Organization, a huge residential apartment developer, said at the conference. "I'm not sure that we're gonna see [those] opportunities until such time as the gridlock that's inside the banks ... inside these complex structures, start unhinging."