3. The Private Operator

Company: Bernstein Management Corp.

Bernstein Management Corp. president John Bernstein equates his firm’s acquisition strategy to the old tortoise and hare fable. “I guess we are the tortoise in the analogy,” Bernstein says of his firm’s first half of the year acquisition volume of $272.8 million. “As soon as the race slows down, we are a bit more visible, particularly in a market like D.C. that everyone is interested in. But in reality, we are keeping the same pace and acquisition strategy that we have always had.”

Based on a long-term owner/operator holding model, the Washington, D.C.-based Bernstein Management portfolio of multifamily, office, and industrial assets has indeed made steady growth progress ever since the firm was founded in 1953. And although that portfolio is historically exposed to most commercial real estate asset classes, it’s been multifamily that has been boasting the better operating fundamentals across Bernstein’s Capitol region markets. “We really focus primarily on the Washington and Baltimore markets and within those, three core asset classes, including office, multifamily, and industrial. But across those asset classes, multifamily has enjoyed the greater performance,” Bernstein says.

To that end, the firm has made a point of targeting high-end luxury apartment assets in one of the highest-barrier-to-entry markets in the country. The company looks for stabilized deals but also regularly underwrites value-add and unstabilized properties where Bernstein credits local market knowledge and intimacy of historical and cyclical operating and rent trends as a key advantage in the competition for Class A and A-plus multifamily product.

Case in point: West End Residences purchased from the Chicago-based Hyatt Hotels and Resorts in April for $22.5 million. Still 25 percent vacant at the time of sale, the 85-unit building nonetheless sits in the exclusive West End neighborhood of Washington, D.C., close to Georgetown, Dupont Circle, and the Foggy Bottom metro station, offering plenty of long-term upshot to the deal. (continued on page 48)

“We are a regionally-focused firm, and we have no plans to look for opportunities outside of our region,” Bernstein says. “We are also long-term, non-opportunistic holders and that model allows us to look at both stabilized and unstabilized assets—and even land opportunities—as appropriate for our investors.”

That conservative market approach was notable in Bernstein securing a joint venture partnership agreement with Cleveland-based Forest City Enterprises in February 2009, a partnership that immediately yielded a 1,340-unit, three-property acquisition—the 549-unit Grand in North Bethesda, Md.; the 385-unit Lenox Club in Arlington, Va.; and the 406-unit Lenox Park in Silver Spring, Md.—at a combined 6.5 percent cap rate.

Since that deal, however, cap rate compression and corresponding price pressure in the Washington, D.C., apartment market have kept Bernstein on the sidelines. “There are a lot of out-of-state buyers exercising some extremely aggressive underwriting and purchasing in terms of expected rent increases over the next couple of years,” Bernstein says. “We are being outbid on some deals by up to 20 percent.”

Still, Bernstein characterizes the firm’s long-term and conservative capital as completely synchronized with its acquisition philosophy and operating platform and expects opportunities in 2011 and beyond to reveal themselves after the placement of impatient capital chasing deals has ebbed.