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Pacific Coast Business Times: East Coast in focus as Somera Capital reaches $2B mark

December 12, 2014
Santa Barbara, California – Published 12/12/2014
By Elijah Brumback

The Santa Barbara-based private equity firm Somera Capital Management is celebrating its 20th year in business and recently surpassed $2 billion in deal volume.

With a core portfolio of assets from Palo Alto to Los Angeles, the company has started fishing for deals in the Seattle market and putting even more focus on East Coast markets from Washington, D.C., to Savannah, Georgia. The company currently has interests in 25 properties, most of which are hotels.

Apart from two recent deals in San Luis Obispo County, where the firm teamed up with hotel developer Postcard Properties for sites at Avila Beach and Pismo, Somera President David Brown said the company is “poking around” Seattle and has a property in the Georgetown neighborhood of Washington, D.C. under contract and at least one other acquisition target in the area.

While the local deal market in the first half of the year was a flurry, with a number of high-profile assets trading hands, the latter half of the year has “kind of died down,” Brown said, which is why the company has been turning more of its attention to the mid-Atlantic. The number of properties that could be targeted for acquisition by the company are dwindling, he said.

Competition for the best pieces of property in markets like Santa Barbara are garnering multiple above asking price offers. With supply limited, off-market deals are on the rise and many brokers the Business Times spoke with said they’re starting to cold-call property owners to find deals for buyers.

According to Radius Commercial Real Estate & Investments’ most recent market and forecast data, 24 commercial properties were sold in the third quarter. Individually, many of those deals were valued at more than $10 million. Predictions for the year, according to Radius, include more 1031 exchanges, more development projects breaking ground and buyers moving into secondary markets due to low building inventory.

The South Coast is in the midst of a historically active cycle for commercial sales, resulting from a nearly “perfect storm” of investor demand, owner-user demand, low interest rates and willing sellers, according to Hayes Commerical Groups third quarter market report. Data from Hayes puts the number of commerical sales on the South Coast at 72 as of Oct. 1, a 31 percent increase compared to the same point in 2013. Excluding hotel sales, commercial dollar volume through three quarters is the largest the firm has on record.

With hotels included, this year’s total, when annualized, is 5 percent below the record level from 2013, which included the sale of the Bacara Resort, data shows. Office property has been the hot commodity this year, with 32 sales totaling $178 million and the number of off-market deals accounted for 39 percent of the transactions in Santa Barbara.

For Somera, one key to success going forward will be partnering with regional developers where the firm is already active.

“Typically we don’t go out and invest directly. We usually team up with a local sponsors or operators and that’ll be something we do more often than not,” Brown said. “It expands our abilities and allows us, in our parlance, to leverage our way in to assets classes where we don’t have the talent to leverage internally.”

To that end, the company is contemplating efforts to dig further into multifamily housing and retail markets in SLO county.

“Those markets are perennials up there,” Brown said.

Like many private equity firms involved in real estate, Somera’s philosophy is controlled by seeking out undervalued assets with existing cash flow that can easily be repositioned and redeveloped. After establishing a solid relationship with local real estate developers or operators, the firm is working to become the area’s primary source of capital for future projects.

The company changed gears in 2003, opting to work within in a series of closed-end real estate private equity funds with capital committed by institutions, investment managers, family offices and high net worth investors. Before that, Somera invested capital through individual real estate limited partnerships. By September 2010, Somera had acquired a diversified portfolio consisting of 71 properties with an original cost basis of almost $1.9 billion dollars.

At one point, the company had about 30 employees and four offices, including one in Denver and one in Los Angeles. Somera rode a wave a deals between 2003 and 2007, but ultimately had to dial back their operations when the recession hit. The firm currently has 16 employees and Brown said he expects that number to stay where it’s at for now.

“The opportunity periods typically come after some dip in the economy and what we’re doing now is orienting ourselves to more interesting opportunities,” he said. “We’re not yet getting back to that stage before the recession, but we’re growing capacity in mid-Atlantic, which we’re very excited about.”

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