McKinley's Berriz: Some real estate sectors will take years to recover

May 6, 2009

by Dan Meisler | Michigan Business Review

Thursday May 07, 2009, 6:50 AM

An Ann Arbor-based real estate company with more than 6 million square feet of commercial and retail and 28,000 apartment units owned or under management will continue to look toward central Florida and the southeast as areas for acquisitions.

McKinley Inc. CEO Albert Berriz said the company's attitude toward its properties in Ann Arbor is to hold, while focusing on expansion in the southeast to maintain geographical diversity.

And he predicted that it would take between five and 10 years for the office and retail markets to recover.

Meanwhile, McKinley will focus on its increasing workout business for large banks and government agencies, and two growth corridors for commercial expansion -- Interstate 4 through central Florida, and Interstate 85 between Atlanta and Washington, D.C.

Berriz recently spoke with Ann Arbor Business Review reporter Dan Meisler about his business and the national real estate market.

Business Review: Describe some of McKinley's recent activity.

Albert Berriz: In central Florida, we've completed the acquisition of exactly 3,300 (residential) units, a little over 15 properties in three basic areas: Orlando, Pinellas County, which is St. Petersburg/Clearwater, and Volusia County, which is Daytona/Daytona Beach. And those have been primarily previously distressed condominium conversions that we converted back to conventional garden apartments. We've been able to acquire fantastic buildings across the street from buildings we already own in markets like Winter Park, which is in Orlando, or southwest Orlando which is the Disney area, or along the Gulf of Mexico in St. Petersburg and Clearwater ... I would say in the past 15 months. That now brings our total of what we own in central Florida to over 5,000 units.

Are you looking at other parts of the country for more acquisitions?

In the acquisition area, it's central Florida.

What is your attitude toward Michigan in terms of acquisition or selling opportunities?

We are a diversified business, so for us geographic diversity and product line diversity is important ... We have 5,300 units in Washtenaw County, that's 60 percent of all the garden apartments in the county, which makes us far and away the largest residential landlord in the county. So from a diversification perspective, we've got enough exposure to Washtenaw County ... The same would hold true for commercial.

Are you concerned about the softening of the commercial real estate market in downtown Ann Arbor?

The phenomena you describe is a direct correlation to the distance to the University of Michigan. The further away, the more pronounced the problem. Main Street's very different than our Google building on Division ... I think that the economic driver is the university and therefore the distance from the university has a direct impact on rent and value. Main Street will act differently than where we are on campus.

What are the criteria you consider when looking for acquisitions?

Secondary and tertiary markets. We won't go to a New York or Chicago... any market that we go into has huge employment drivers. Our theory is that jobs always create rent... Central Florida of course has the commercial tourist industry as a great example of that. In Ann Arbor, the University of Michigan is a great example of that. We're in Norfolk, Va., the Naval Atlantic fleet is a great example of that.

Anywhere we're located there's going to be a huge employment driver, and the characteristic of that employment driver is it won't go away.

... Our theory is we would always buy the buildings right across the street from those employers ... In Orlando, our buildings are right across the street from the theme parks.

You've identified southeastern states as potential areas for expansion. What are the specific secondary and tertiary markets there that are attractive to you, and why?

There are two major areas we're focusing on for acquisition expansion in this geography. One is the I-85 corridor ... essentially from Atlanta to Washington, D.C. You take that road and I-4, the road that connects Orlando and Tampa. Along those two corridors, will be the greatest number of jobs created in the United States in the next 20 years (according to) all prognostications of job creation ... We see it as the economic equivalent of what happened in the 1960s and 1970s connecting Los Angeles and San Diego.

Are you interesting in buying more commercial properties that are not residential, such as office or retail?

We're not currently in the acquisition mode on the commercial side. I just don't think the time is right. I think you'll see a continued drop in values in shopping centers and office buildings ... I think you'll see significant devaluation occur across the country in both of those asset classes. ... It could take a decade.

We built too many shopping centers as a country, and we built them at a time that we were relying on our homes as ATMs, as a method by which to buy flat-screen TVs, and it was a false economy. We won't be able to go back and consume at the rate we consumed between 2001 and 2007, so therefore we just need less brick and mortar to sell things out of.

So would you consider selling that type of asset?

It's a terrible time to sell, because everything is being sold as distressed, so the answer is no. We're happy with what we have. It's very diversified. It's in a lot of different places. It's all value retail, so we don't do any high-end retail. Our office buildings are tremendously well-occupied.

Have the frozen capital markets affected McKinley?

We find tremendous support from the capital markets. We have significant access to capital from the commercial banking communities. We've got long-term relationships with our financial partners.

Describe McKinley's current workout business.

Candidly, at this point, it's the larger of the two parts of our business. Today McKinley is approaching almost 18,000 apartments and on the commercial side, 7 to 8 million square feet of shopping centers.

The geography's the same. We have people in these locations (Atlanta, Florida, Virginia) that have been with us for many years.

This business is doing real estate workouts for our financial partners. These are people that are typically lending us money ... these are Wall Street lenders, insurance companies, pension funds and servicers from across the country.

The choice comes in our geography. We can't execute outside that geography ... we're often asked to go to places like Texas or Arizona ... we can't go, because we won't be good for them.

We have people in position that can execute, and we know the markets (that we're in). We would be slow to expand because we're highly focused on execution. The reason why people retain us is our results are extraordinarily good. If we get outside of this geography, it changes our ability to execute.

Is there a common thread in all the workouts you take on?

Sponsorship. The person who they lent money to is the single biggest reason we have to come in and fix the problem. The number one criteria is weak sponsorship - somebody doesn't have enough money or enough experience or enough talent to deal with the issue, and typically they don't have all three ... Leverage is a problem. It is not a consistent thread. There are people who have overleveraged properties, but they have the financial capacity to weather the storm, they have the talent to weather the storm, they have the relationships to weather the storm, they have the expertise to weather the storm.

How long will it take for the markets to recover?

Office and shopping centers, 5 to 10 years. Apartments, depending on the market, are already healing themselves. Retail and office, in some locations, you may see things not come back because we built in places we shouldn't have built.