Photo by Christopher Navin What we look for are buildings that are difficult to replace. We don’t want to buy commodities. We want to buy unique assets.” Alan Leventhal, chairman and chief executive officer of Beacon Capital Partners

Keeping His Eye on the Prize: Questions and Answers with Alan Leventhal

By Charles Keenan

Since opening its doors in 1998, Beacon Capital Partners has swiftly risen to become a force in the private real estate world, having amassed a series of portfolios worth an estimated $12 billion spread across 10 different cities, including London and Paris. The company’s portfolios have delivered solid results; ranging in gross cumulative returns between 17 percent and 51 percent through early June. Much of the credit for the growth goes to Alan Leventhal, the 54-year-old chairman and chief executive officer who founded the company.

Leventhal’s vision is simple: concentrate on office space in urban markets that have little new supply and those that offer a highly educated workforce. That philosophy had been honed over the years through Leventhal’s family background where he says real estate was in his blood from the start, drawn in part by the profession’s entrepreneurial nature and the potential impact it can have on the lives of others.

Portfolio interviewed Leventhal recently to hear his thoughts, ranging from his outlook on the market, to Beacon’s strategy, to how real estate has changed over time.

What is your current outlook on the office market? Given the recent run-up of prices, is there more room for appreciation?

Leventhal: We have been through a period in the past few years which has been a tremendous time for real estate. We’ve enjoyed enormous profitability as well as success and recovery of the markets. For example, you read in the newspapers about San Francisco and New York, how expensive these cities are, the high cost of living and of how those cities don’t have a great migration of population moving in. In spite of that, I think we are going to have a continued period over the next few years—especially in supply constrained and knowledge-based cities—during which property will continue to deliver solid returns.

Some investors have been worried about a real estate correction or collapse. How is the market different now than during the real estate crash of the late 1980s? Or even during the softening after the dot.com bust five years ago?

Leventhal: There’s a big difference. We had a tremendous oversupply in the late 1980s and early 1990s. That was fueled by the availability of capital, and the savings and loan debacle. There was a coupling of a tremendous oversupply with the weakening of the economy in the early 1990s. In the 2000–2001 period, you had the Internet boom, with trillions of dollars raised on Wall Street that was available to companies that never generated a profit. You had companies taking space that never had a use for it. The market had a shadow demand. So when the economy weakened, in 2000 and 2001, you ended up with a tremendous amount of space coming back onto the market.

		Looking For Opportunity Beacon Capital Partners knows a bargain when it sees one. Since its debut eight years ago, the Boston-based private real estate fund and asset manager has been snapping up office properties at a fast clip, outbidding rivals and paying top dollar.

How is it different today?

Leventhal: Companies have been very careful in their expansion plans. As they have improved their profitability over the past three or four years, they have been very careful about their expenses and in particular, their space needs. They have only started to take new space when needed to house employees and to drive additional revenue.

While we can’t predict where the economy will be a year or two from today, I do believe that even with short weakness in the economy, you won’t see material weakening in fundamentals. You will slow them down, but you are not going to see a dramatic rise in vacancy rates, or a fall in rental rates in these supply constrained markets. Vacancies and rents will be driven by supply when it is significantly added to the market. However, that will happen some period of years out in the future.

Why do you invest in certain cities, such as Boston, San Francisco, Washington, D.C., Los Angeles, and now London and Paris?

Leventhal: These are cities that have the knowledge base, that have the great educational institutions and teaching hospitals and research centers. They are cities that attract research dollars and have financial services with expensive, highly educated workforces. They are also cities where there are constraints to new supply, where it’s a very long period of planning and a very difficult process.

Over the years, what deal stands out that defines your success?

Leventhal: The purchase in 2003 of the Hancock Tower in Boston is certainly one transaction, given its size and the speed with which we completed it.

What set you apart from the compe­tition in the bidding for the Hancock Tower?

Leventhal: We did all of our due diligence up front and that was in a period of time where we were very concerned about short-term weakness in the leasing market. We said to Hancock that we would close with them within seven days of the deal. We basically signed a purchase and sale at closing. The second thing is we paid them a higher price to master-lease essentially what was the vacant space in the building, so we eliminated any leasing risk for almost four years. That ultimately brought the occupancy of the building for us to 96 percent. That gave us more comfort and downside protection in case the market didn’t recover for a few years.

You mention how you look for buildings that are not commodities. What characteristics do they have?

Leventhal: We look for properties that are difficult to replace. It doesn’t mean it’s a trophy like the Hancock complex in Boston. However, the complex is not a commodity because it is not easily replaceable. You could never replace that asset at that scale today or build a building that is 60 stories high in Boston’s Back Bay with unobstructed views for 360 degrees.

How does the “adding value” concept factor into your strategy?

Leventhal: The potential for adding value drives our philosophy of where and what we buy. What is so important in terms of driving return is how you increase value through the operation of the asset. That involves capital improvements, re-leasing space and being more economic in terms of the use of energy. That has a significant impact on operating expenses.

How has being a private company affected your investing time horizon?

Leventhal: We have finite life funds. Our current Fund IV is a $2 billion fund. It has an eight to 10-year life with extensions. Generally we look to own these assets for about five years. A public company would tend to be a longer-term acquirer of assets.

Having been on both the public and private sides of real estate, what makes you stay in the private domain?

Leventhal: The public company is a different format. It provides excellent access to capital and it attracts a different type of investor. Public companies tend to be longer term holders of assets by the nature of the way they are organized, but they also tend to be vertically integrated. This is appropriate if you are a long term holder of assets with property management and leasing and all those various functions within the company. As a public company, we did the same thing. As a private company, we have more flexibility in terms of timing, and our approach is quite different. But I’m not going to suggest one way works better than the other. For what we are trying to achieve, the private format works best.

Private funds seem often to be the winning bidders these days. What advantage does the format give you?

Leventhal: You have the ability to put more leverage on the assets. That has been very helpful on the private side. Generally the public companies have tried to limit the amount of leverage they have overall.

This year you expanded into Europe (London and Paris) for the first time. Why now?

Leventhal: I think London and Paris are very similar to parts of the U.S. right now. The London market is recovering very sharply. There’s not a lot of new supply. Market experts are predicting there could be 40 percent to 50 percent rental growth over the next five years. Paris has experienced some very strong growth as well in movement of rents. You don’t see significant new supply, and given the amount of demand, I think it points to an attractive time to invest.

With your expansion have come new faces, such as Adam Popper, managing director in the New York office, Paul Parkinson, a senior managing director in London, and Jean-Marc Besson, a senior managing director in Paris. What do you look for in a candidate, and how do you find someone in this competitive market?

Leventhal: It takes a big commitment of time. We interviewed 35 to 40 people in London and Paris. Ultimately, your ability to operate successfully is based upon not just having someone who has the experience, but also someone who matches the culture and approach of the company. That is something that is very important to us. We feel successful with the individuals running those offices.

How has the real estate industry changed since you first entered the field?

Leventhal: There has been enormous change. When I got out of business school and started at Beacon in 1976, the business was dominated by major insurance companies. They provided the debt and equity capital. Many of those companies don’t exist in the real estate business today. While you did have a public market, you didn’t have the depth and variety of public companies that you do today. It has been a tremendous transformation.

What does it take to succeed as a CEO of a real estate company nowadays? How has that changed over the years?

Leventhal: We are in a very competitive marketplace. Not just real estate, but across all industries. Companies used to have more of a competitive advantage. Today, you have to compete every day. There are a lot of smart people, a lot of money and information flows quickly. Because of the judgment you have to render and the speed of your actions, it’s a much different world today. I think in any industry, whether it’s public or private, to be successful you need strong daily leadership. It’s a very competitive environment and you have to maintain that.

You mentioned part of your job is to worry. What about climbing interest rates? Are higher long-term rates around the corner?

Leventhal: It is very difficult to predict that. We don’t run our business based upon predicting interest rates. When we make investments, we lock in our rates generally for five years. We’re not betting on what is going to happen with interest rates. What we focus more on than anything else is what it costs to replace the asset.

Your family background exposed you to real estate, but when did you decide it was the career path you wanted to take as well? Was there a time when you were thinking about an alternative career?

Leventhal: Real estate was part of my upbringing. What interested me was that it is very entrepreneurial, you are not manufacturing a product and you don’t need thousands of employees. Real estate has an enormous impact upon the cities in which it is located. These large assets have a great impact not just for tenants who have their offices there, but also the environments they are in. I found real estate to be very exciting and I think always had a desire to do it.

In terms of motivation, what keeps the fire burning inside?

Leventhal: It’s funny, when we sold the public company in the fall of 1997, I only took two weeks off. It’s my upbringing and personality. I have a lot that I want to accomplish and a great sense of commitment to the institutions, the endowments, foundations and pension funds that have been very supportive of us over the years and have been such a significant part of our success.

When you get to a certain level of accomplishment, you raise the bar to the next level. Fortunately, we have had investors’ support and a wonderful organization of people who have grown over the years and assumed more responsibility. What is exciting are all the new daily challenges we face. I very much enjoy the challenge of what I do and the colleagues that I work with.