Institutions Start Thinking Small


Happy New Years! Featured here we have a great commercial real estate article from It looks deeper into how the appetite for deals is changing for institutional buyers.

By Paul BubnyNational

LOS ANGELES—Good things can come in small packages. That’s the emerging thinking among large institutional investors, says Transwestern’s Steven Orchard, who in a recent interview charted institutions’ increasing openness to smaller transactions—those with a total capitalization of $5 million to $20 million—for higher yields to fit their capital deployment requirements. The interview was part of Transwestern’s Ask the Expert series.

It’s a strategy that can work for institutions with higher yield requirements, Orchard, SVP in the structured finance group at Transwestern, told his colleague Dave Rock, managing SVP in the firm’s West region. With pricing on core product pushed upward by competition, institutions typically can find better returns “by developing new build-to-core assets for their own portfolio or buying either in secondary markets or lesser quality properties.” Building in primary markets has proven popular; acquiring assets in secondary markets or of lower quality, much less so.

“Pricing on smaller transactions can be less efficient, which translates into opportunity for disciplined bidders,” Orchard said. “This is partly due to the larger ratio of transactions to investors, competition not being as fierce and the supply of capital to this space being more modest.”

Orchard pointed out that while institutions have plenty of company in the space since barriers to entry are low for smaller assets, “the traditional small-deal buyers are less consistent in their strategy, investment appetite and capital availability. Therefore, large investors that are willing to do the work can unearth value.”

Although institutions are willing to play in this particular sandbox, Orchard said that “the risk adjusted returns have to be compelling. Small initial capitalizations that seed bigger projects work well,” with land development and construction, for instance.

He added that institutions favor programmatic aggregation strategies. “One of our clients in Los Angeles attracted a major-brand fund for a $150-million equity commitment with which to procure assets in the $8-million to $20-million range, within a very narrow strategic niche,” said Orchard. “In addition, Transwestern recently arranged a $35-million joint venture equity commitment for construction of four multifamily projects, some of which individually contemplate less than $5 million of equity." He said that even standalone small-deal investments can attract institutional capital "if the execution is clean and the whole-dollar returns are exciting.”

That being the case, Orchard cautioned that large investors turn a wary eye toward “wasting manpower chasing small transactions without results. And since the incentive structure in big shops does not generously reward employees for small-deal execution, the phenomenon of large investors doing small deals is thin, selective and perhaps fleeting.”

Most institutions who do go after smaller transactions have been doing so through off-brand subsidiary entities, “possibly to protect their reputation as a large-scale investor, and certainly to simplify their exit strategy,” said Orchard. “Nevertheless, the environment presents an opportunity for private sponsors, who can provide a tremendous value proposition to big capital as investment ‘finders and minders.’ 


He also offered advice to small-deal players hoping to draw the interest of institutions. Among other pointers, he advised, “Institutional investors venturing outside their comfort zone will focus on relationships first, so it’s crucial to develop capital relationships before they are needed.”

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