Pacifica has a consistent approach to investing that it has opportunistically deployed in select markets in the Western United States over more than three decades. Our approach relies heavily on the belief that markets are cyclical, and one of the keys to success is anticipating the next phase of the cycle ahead of the competition.
The best investments we find exist in markets that are depressed due to temporary conditions – typically, in response to a local economic downturn. In real estate, we seek to buy at a discount to replacement cost which is an important measurement of intrinsic value. The advantage to buying at such a discount is that no competitive construction is likely to occur until rents rise further to justify the higher cost of new development. Waiting patiently for those types of buying opportunities provides us with a margin of safety and greater potential upside.
We focus on markets that have good, long term potential. And we enter them initially when the local economy appears to have begun its recovery by generating sustainable growth. We either are local experts or join with local operators who have that expertise. We stick to product types in which we or our partners are also experts: most often industrial/office/showroom; R&D and retail; and occasionally multi-family and office. With superior product and market knowledge, contacts and expertise, we feel we can limit the downside risk on our investments.
When those conditions exist, we begin buying the best buildings in the market. At that point in the cycle there is limited competition and typically some distress in the marketplace due to the weak or recently recessed economy. As the market tightens, it’s necessary to find acquisitions where we can add value by repositioning buildings to make them more desirable and/or re-tenanting them.
As the economy and real estate markets improve, buyers enter the market and drive up acquisition prices. As they approach replacement cost, we begin buying land, figuring it is preferable to own new product at a comparable price point. New product commands the highest rents and sales prices from tenants which can provide attractive exit opportunities from owner/users and institutional investors. Typically, more construction follows as the building herd arrives in response to higher rents and strong demand. At that point Pacifica evaluates whether it makes sense to continue to hold or consider selling based on emerging supply and demand conditions.
Whenever we sell, Pacifica evaluates the benefit of completing tax deferred exchanges with reinvestment opportunities.