The firm recently added former Fort Worth mayor Betsy Price to its leadership team. Overwatch Fund hasn’t made any acquisitions this year, but is expecting to see more opportunities in Q3 and Q4.
Five years ago, Loughry left that firm and founded Overwatch Fund with the intention of investing in properties in more locations around the U.S. The company is a boutique firm, and many of its investors are directly involved in real estate.
The leadership team at Overwatch invests in every deal alongside investors.
“That’s the reason we named ourselves Overwatch,” said Blake Lloyd, principal at Overwatch Fund. “We’re there to have the backs of our investors.” – Blake Lloyd, principal at Overwatch Fund
The company has taken a more cautious approach as the market has turned, and hasn’t made any investments so far this year. Overwatch has considered several properties, but so far none have met the return threshold or criteria the company is looking for, said Price, senior executive of business development.
Overwatch expects more opportunities to hit the market later this year as adverse economic conditions drive more property owners into the seller pool. There’s reason to believe more owners will consider selling in the third and fourth quarters of this year.
Price, Lloyd and Kromann spoke with the Dallas Business Journal about what’s coming next for the company and how the firm is approaching the market.
Tell me about the current situation with the market and with your firm.
Price: A lot of our investors are sitting on the sidelines a little bit right now. There’s money out there, but it’s got to be the right deal for them because they’re all reading about rents, interest rates and caps.
Kromann: There’s a little bit of ambiguity about where the market is headed right now with regard to when the Fed will stop raising interest rates and at what point they begin to ease up on interest rates. Are we in a recession or not in a recession? There’s a little bit of ambiguity, but as Betsy and I were discussing yesterday, there’s an old adage that says, “Out of adversity comes opportunity.”
Tell me a little bit more about about that.
Kromann: We’re trying to be very cautious and careful.
There are a lot of properties that are going to have loans renew in this year, and they’re going to go from a very low fixed rate to a completely different rate environment.
We feel like there’s going to be some motivated sellers. We’re looking to be opportunistic about finding good opportunities that present themselves to our investors. As Betsy said, there’s money waiting to be put to work, but we want to make sure it’s put to work in a wise way.
Price: We want our investors to not be nervous about it. Everybody is a little nervous right now in the market. There are an awful lot of people younger than me who may have seen a little bit of it in the 1980s, but they haven’t really seen this big a shift in the market this quick. And they’re a little nervous, but they trust Overwatch because we’re all invested too.
How many opportunities like that exist in this market?
Kromann: We have that data. It’s meaningful. It’s significant.
Price: But it’s not yet. Third or fourth quarter what they’re estimating.
Kromann: The other component is that even if you don’t have a maturity, let’s say you had a variable rate loan with the interest rate cap. There are durations of that interest rate cap, with one or two or three years or whatever was purchased.
Some of those interest rate caps are expiring as well. That will bring a property into the same type of environment where you’re going to have to either raise capital to buy another interest rate cap or you’re going to have some decisions to make with regard to the property.
And not everyone has the ability to go out and raise capital, correct?
Price: They’ll spend the first quarter and part of the second figuring out what they’re going to do. I’m betting, ultimately, that many of them will come to the market at the start of the third quarter.
Lloyd: You’ll see in a lot of developments people will get caught on construction loans. You’re going to see that, you’re going to see land. Really, the majority is going to be on interest rate caps and then on construction.
Kromann: Given our historical track record and investors that have had good success with us, we feel like we’re going to be well positioned when those opportunities come along to be opportunistic in acquiring properties.
The firm has been primarily active within multifamily and industrial. Are there any other asset classes you’re paying more attention to now that the market has turned somewhat?
Lloyd: We’re looking at all sorts of asset classes. Right now, you’re going to see opportunities to buy different kinds of asset classes because people may have gotten a little bit over extended.
We look at all commercial properties. The other day Barry and I looked at some student housing. Betsy and I looked at senior living. We’re looking at office properties, retail, land and development. We’ve just stuck with multifamily and industrial because it hits our returns, and we can typically move those properties in three to five years.
It seems like you like Sunbelt markets. What do you look for in markets that you invest in?
Kromann: We seek to be in markets that are growing at least twice as fast as the national average, if not more than that.
Lloyd: We look for good locations, good schools. One thing Betsy brought to our attention is asking about if there are fire departments or police departments close by. There are just little things. One thing I think is unique about our group is we all have a specialty. My speciality is commercial real estate, Barry’s is banking, Ben’s is in the appraisal businesses. Betsy is a little bit of everything.
Betsy, Barry, you both recently came to the firm. What drew you to the company?
Kromann: I had been investing in this type of asset for close to 20 years, and it has become much more of a significant part of my financial picture. Ben has asked me to join several times and I’m very interested in it.
I’d like to help other people gain access to an asset class and to an investment arena that has been very good to me. I had an individual, many years ago when I was in high school, sit me down. He said the way to build net worth is through equity. That’s stayed on my mind.
Allowing people to have an investment in an equity allows them to build net worth, and I think this is an excellent tool. It’s a nice way for people that have already developed net worth to diversify their portfolios. I believe in the product and I believe in the people.
Price: We’ve been investing with Ben for several years, and I’ve known him since, believe it or not, elementary school…
I think it’s important to be able to tell other people where you’re invested and what you’re doing. People like to know, particularly with public figures… It also gives me a chance to keep my hand in the market a little bit and see what’s going on and share what I’ve learned about different communities and different things that matter.
What are the plans for the company moving forward?
Kroman: First of all, we need to make sure we continue to monitor and manage the properties that we already have. We want to try to optimize the performance of those properties and coordinate with our sponsor to make sure we’re doing all that we can to make those opportunities perform the best that they can.
Next is just continuing the same process that has existed to this point. We’re not really changing any of our objectives. We’re still looking at the same type of returns in our targets, but we just have to make sure that we believe the underlying assumptions of those opportunities. We’re going to be opportunistic and continue to actively look for properties that make sense. When we come across one, we will jump in.
We don’t set a maximum or minimum number. If we end up doing five properties this year, great. If we end up doing 10, great. It’s going to depend on what the market will allow.
Price: We want to continue to offer the service that we have to our investors. We want them to know that we’re here and we’re watching out for them.
Kromann: Similar to having a wealth manager for a stock portfolio, when there’s a lot of dust flying in the economy, I think people just want to be able to have someone to go to to answer their questions and be given a little bit of assurance that they’re reading it in a proper manner.
This interview has been edited for clarity and brevity.