REAL ESTATE FINANCE AND INVESTMENT – Sondra Campanelli, May 4, 2017
JCR Capital, an alternative investment manager focused on middle-market commercial real estate investments, is expecting to see increased sponsor and investor interest in alternative capital products. The firm has deployed more than $343m of investor capital in its bridge loan program over the past three years.
The middle market space, which accounts for about 95% of transaction volume in commercial real estate, has been underserved. “We don’t see institutional capital coming into this market because the check size is too small. When you raise a billion-dollar fund, you can’t play in this space. We’ve been left along to play in a huge sandbox with little competition,” said Jay Rollins, managing principal.
Once a firm reaches a certain level of middle market success, its partners frequently branch out into the institutional space to chase larger loans. It’s a theme that Rollins has seen play out time and time again, but he maintains that JCR plans to stay focused on middle-market investments. “We run a series of funds that cap out at $300m,” said Rollins. “We’ve emerged as one of the few institutional managers in the non-institutional space, but it’s difficult to find those groups.”
The other reason why this space is so devoid of competition, according to Rollins, is due to the operational structure that’s required to manage a larger portfolio of smaller assets. “It’s hard work,” he added. “It puts us in the market raising money more often for the business, plus the margins aren’t as good for us as the manager. We have to employ more people and have the same level of diligence over a larger group of assets, but we can’t charge more to the investor.”
Due to the funds’ structure, JCR has broad flexibility in determining which assets it chooses to invest in. “In the institutional market, you’re forced to make market bets because the deals that come to you are coming from places like CBRE or JLL and you have to participate in this efficient market,” said Rollins. But in the middle market, assets are frequently coming out of a semi-distressed ownership issue, which allows firms like JCR to make money at the acquisition from the basis and structure of the deal.
Looking ahead, the firm will look to implement a lower-risk strategy to increase investor protection amid increased uncertainty in the global ecosystem. “Investors recognize there is a lot of uncertainty in the market, but there are still opportunities out there, particularly in undervalued middle market properties,” he added. “Our goal is to find the best risk-adjusted returns in the current economic climate that we can for our investors.”
The firm also closed approximately $60m across 11 debt and equity deals in the first quarter of 2017, which represents an increase of nearly 28% compared to the same period last year. JCR’s equity platform has been in place for seven years, while the bridge lending platform was started three years ago. This year, the company hopes to originate a total of $400m across its bridge and equity platforms and plans to roll out an additional fund product by the end of 2017.