Each month we’ll bring you interviews from executives around the country who are given the chance to talk about their background, and business impact. Today we thought there was no better way to start, than with Northstar Commercial Partners CEO, Brian Watson.
Q: Tell us a bit about your background – both personally, as well as the reason behind starting Northstar Commercial Partners.
BW: I come from a background of hard-working family of humble means, some of which were entrepreneurs. The idea of starting my own business really resonated with me. I grew up on the western slope of Colorado, and graduated from The University of Colorado at Boulder where I got a degree in real estate. After graduating, I took a job as a broker with Cushman and Wakefield in Colorado. By design 80% of my work was landlord representation where I represented some of the largest landlords in the world. The remaining 20% was tenant representation where I got to see how corporations viewed commercial real estate, and that really prepared me to start Northstar. It was tough work which involved 7 years of working many hours as a broker. But because of that, I was fortunate enough to start Northstar Commercial Partners 17 years ago. 80% of what we buy are vacant or distressed assets with sub 30 or 40 percent replacement cost values, and trying to provide a 25%-plus annualized return, pre-tax where we enjoy cash flow as we lease them up, and then sell them at some point. Our average hold period is about 2.7 years in our 17-year history. The other 20% of what we do is to work with corporations to help build or buy facilities across the U.S. They’ll give us a 10-20 year lease, and we’ll build assets and hold them – and they’re risk-adjusted returns where we try to hit a high-teens, low-20s return.
Q: Why don’t you buy core assets?
BW: Our philosophy is, you make money on the buy. Real estate by nature is an inflexible animal – you can’t pick up a building and move it across town. It is where it is. The best way to create flexibility is by having a low basis. If I have a lower basis than the competition, and I’m below 30 or 40% of what it costs to replace, then I can be patient, creative, and flexible.
In the Core space, there’s so much capital chasing so few deals. This is because many buyers have a mandate for large amounts of capital deployment, as well as perceived safety and cash flow. Ultimately, they pay dearly for that perceived safety and often buy trophy assets because it’s their only option. They’re bloodying their knuckles over price. They have to get capital out the door. The only time to buy core is when a market is struggling or when you see value. When a market or asset is fully stabilized, the pressure on the asset is too much. You’re not going to garner the long-term type of return that we’d like.
Q: Why real estate as opposed to startups or individual stocks?
BW: If you take a look at wealth creation in the United States, as well as the world for that matter – investing in real estate has been a large component. I like real estate because it is a solid, tangible asset that I can see, touch, and feel. Unlike a company where you have to move the dial of EBITDA based on income, and sales, employees and marketing, and a host of other things where the stars have to align – I can go in and buy a vacant or distressed piece of real estate and increase the value multi-fold in a short amount of time with a lot less risk. Additionally, you then add on the benefits of leverage or things like tax write-offs – Real estate is a phenomenal vehicle for wealth and value creation in America.
Q: The 2008 financial crisis put a bad taste in peoples’ mouths when it comes to investing – what was your personal experience with it?
BW: We got hit, just like everyone else. We had a few assets on one hand that were in some very tough markets, but the vast majority of our assets still did very well. We made it through 2008 and outperformed the S&P and NAREIT Index. During that time period we were actually able to do some of our best deals – some of the best that we may ever do. At the same time, we had some legacy assets that we had to deal with – we lost some money like everyone else.
I always tell people, “If someone tells you that they didn’t lose money in 2008, they were either A). Not invested at all. They had their money buried in the sand. Or B). they are lying to you.” Everybody was impacted by the financial crisis at the end of the day. It was a very painful period for us all.
The reason we weathered the 2008 financial crisis so well was because our model was buying vacant or distressed assets from corporations. When the crisis hit – 80% of the market value fell through the floor. Because our average hold period was so short – 2.7 years – even including our long assets, we’re usually in and out in 12-24 months. Because of this, we mitigate our exposure to fluctuations in the market. The question is, what did you do with it? We were able to show that we could vastly still outperform the markets.
Q: 100% of Northstar’s Assets are based domestically – do you see that continuing, or would you like to potentially go international?
BW: We have stayed focused on the U.S. for a few reasons. As an investor, I have a fiduciary responsibility to our investors to make sure I know what I’m doing and that I understand the market. I’ve been working in the U.S. for a very long time and given the amount of opportunity and fiduciary responsibility – we’ll be staying in the U.S. In addition, the USA is still the biggest real estate market in the world, we have a stable legal system and political system, as well as property rights that many other countries do not have. When you add in the diversity, the size, the tax treatments – it’s a superior place to invest. I spend some time traveling abroad and speaking with foreign investors who are looking for US real estate investments because they see the same strengths as I do in the US market.
Q: Politics aside, President Trump is a real estate developer – can you see how that will potentially impact the industry?
BW: What I say to people is – whether you agree or disagree with President Trump – this is the first time in American history that we have a commercial real estate investor as the president of the United States. President Trump signed up for a four-year job, and he might get eight years but he’s here for at least four. I believe all of his policies are geared towards benefiting U.S. assets and real estate. After he leaves office, all of his family’s net worth and business interest around his children, are still tied up in real estate. So, all of his policies, the energy industry or controlling inflation, are geared towards generating value. We believe that bodes very well for the future.
Q: Can you talk about the philanthropic side of Northstar? Is this something as an aside, or is it tied into your business?
BW: We believe in doing well by doing good. We have this form of real estate and we ask, “How can we benefit the community at large?” We believe we have a social responsibility to our community – we can do something when we buy vacant buildings and empower Americans with jobs and opportunity – not to mention the construction jobs that are created in the repositioning of these assets. We can take something with low utility, and turn it into a highly productive environment that has a social impact. High tides raise all boats – if we can do well by doing good and give returns back to our investors and prove an asset and help achieve dreams in the community – then that’s a life well lived.
Q: Are there any specific projects you’re proud of?
In terms of specific projects, we don’t have a mentality that we only want to impact one thing. We’re very open and thoughtful about what we pursue in our community. Some of the neat things we’ve seen at Northstar are buying vacant buildings to build schools to provide education for kids. Right now, education is a civil rights issue in America. Literally, our society depends on it. So, if we can buy a vacant building and empower our students – that’s what we want to see. We’ve empowered immigrant communities and business incubators – these are people who have left everything in pursuit of the American dream. We believe the American dream is alive and well, so if we can help facilitate an incubator, then that’s very exciting. Right now, we’re building a hospital for a company called Clinica. Clinica helps serve individuals who don’t have healthcare access. With all that’s going on right now, there’s a segment of society that doesn’t have health care. We’re honored to build the facility so we can empower people in the community, in order to help provide them with jobs.
Q: Do you see Northstar ever go the more crowdfunding group – focus on smaller investors? Or do you want to go the institutional route? Do you see a middle ground?
BW: Every deal that we do, we always allow outside investors. We never cherry-pick deals, and only offer it to ourselves or certain people. As for crowdfunding, the term “crowdfunding” has been hijacked a bit, but we have been syndicating investments with groups of individual and institutional investors for more than 17 years and will continue to do so in the years to come. The nature of our strategy, too big for most sponsors to do on their own or with friends and family and too small for most institutional investors, lends itself well to having a mix of individual and institutional investors. In addition, a large part of our success is owed to the individual investor, and we’re honored to have people trust us and want to continue to build relationships with these people. We always welcome different levels of investors. As we grow we may work with more institutions or international investors, but we will always accept individual investors.
Q: You’ve talked about co-investing alongside Northstar before, as opposed to simply putting investors into the company’s deals. That means you have your own capital at stake – can you speak a bit more about that?
BW: Correct – we’re not here to sell anything. We consider opening an investment to investors as an opportunity for them to create wealth as opposed to a sales opportunity for us; after all, we don’t make our money buying assets, we make our money by getting assets to perform and selling them thereafter. For nearly all of our opportunities, I invest my capital alongside our capital partners in order to align interests. Our incentive is most often based on getting a share of the profits after we have given the investors a preferred annual return and their initial capital back. People invest with us because they appreciate and value having an investment manager with expertise and years of experience.
Q: A number of investors right now might think “Prices are too high right now – the sky is sure to fall soon! It’s just like 2008!” – What are your thoughts on the market right now?
BW: We come from an opportunity-rich mindset – you can make a good or bad investment in a hot or down economy. After almost two decades, we can source and execute deals in strong markets like everyone, but we’ve shown that we can do an amazing job in distressed markets. Our goal is to look at the entire landscape and scoop cream from the top and only do the best deals. In the end, we are primarily value-add and opportunistic investors.
Q: Why Colorado? Do you see yourself leaving here?
BW: We’ll always be headquartered here. I love the quality life and mindset of Colorado. We attract a great talent pool – I’d stack up people in Colorado to anyone in the world. Most people here have such a positive mindset and healthy standard of living. We want to build a world class organization to compete head to head with anyone. Right now, we do have satellite offices in Los Angeles and New York, and down the road we may go international. But we’ll always be headquartered in Colorado – the minds match the mountains of Colorado.
Q: While no two real estate deals are the same, are there certain aspects you look at? Maybe two or three in particular?
BW: Well for starters, the old real estate adage of “Location! Location! Location!” is true. Clearly location is important. Two, good buildings with good bones. Through some creativity, we can make these buildings become something even better. Three, cost basis. We are cost basis investors. We believe the lower the cost basis, the more flexibility, patience, and creativity we can employ. This helps us implement our strategy. Finally, we want to look for a reasonable population base. When combining all of these together, alongside a great team, we can return amazing results.
Q: Outside of work – what do you like to do for fun?
BW: I’m a big family guy. I’ve been married almost 20 years here in September, and I have 3 kids – so anything involving them. I also love most anything in the outdoors – hiking, fishing, golfing, boating, horses – just spending time out there. I’m an avid reader and I love learning new things.
Q: What’re you reading now?
BW: Chasing the Scream – it’s about drug policy in the United States and how we’re handling the war on drugs. Another book, Just Mercy which is about the prison system in the U.S. – how it’s been unfair to certain minorities.
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