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Angelo Gordon’s Adam Schwartz On Real Estate Opportunities in a Downturn

Co-CEO of the alternative investment house says rising rates aren't necessarily as scary as they seem


What’s one of the busier investors in commercial real estate think about the topsy-turvy market? Angelo Gordon co-CEO Adam Schwartz got on a Zoom with Commercial Observer as summer faded to fall — and interest rates and inflation spiked — and talked every asset class from industrial and office to life sciences and multifamily to, yes, malls.

Schwartz has been at the alternative investment firm since 2000, when it was much smaller. He arrived from Vornado Realty Trust, the owner and operator of tens of millions of square feet of commercial real estate.

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“At the time, it was a much different firm than Vornado,” Schwartz said of Angelo Gordon. “There were four people on the real estate team. It was, I think, about a $250 million fund. They were very entrepreneurial, they were smart, they were fun.”

Now, the Angelo Gordon that Schwartz helps run as co-chief executive — since January 2021 — as well as co-chief investment officer and head of global real estate has a property investment team in the dozens with operations and assets in the United States, Europe and Asia. (The company overall includes more than 600 employees.) Its holdings total about $19 billion of gross asset value and about $15 billion of equity value.

This interview has been edited for length and clarity. 

Where did you grow up, and how did you get into real estate? 

I was born and raised in the New York area. I went to Horace Mann and the University of Pennsylvania thereafter. I had two working parents growing up. My dad was in the manufacturing business — he made light fixtures — and my mom was in fashion. I guess that’s where I get my sense of style from [laughs]; but, more importantly, from my dad the ability to sort of fix anything. I used to take everything apart and put it back together; I loved building things. That was kind of my introduction to a tangible asset like real estate. 

I always loved the idea of business as well. As a kid, I was always trying to sell everything my parents would buy me. I lived in an apartment building; I set up shop in the lobby and would sell whatever I could, whether it was baseball cards or rocks. I was fascinated by the stock market and learned a lot in my economics classes. I was really fascinated by the concept of compound interest and the impact of investing over the long term.

My first investment was probably a share of Berkshire Hathaway. It was my bar mitzvah savings. It was under five thousand bucks a share at the time, and it’s grown to be about $450,000 a share.

Do you still have the share?

I never sold it. I let it compound, believing in the compound interest tables. And a couple of years ago I put it into a donor-advised fund to use for future charitable giving. 

The point of that is that real estate in my mind is always an asset that appreciates. Certainly, there’s volatility, but the highs have always been higher than the prior highs despite the volatility along the way. 

So the trick with real estate is to really have staying power and not to overleverage yourself. As an investor, you can’t ever really get your timing perfect always, but if you buy good assets and you put yourself in position to hold them long term, you’re going to be in good shape. Or you have to invest opportunistically where you see an avenue to create value. 

Circling back to how you got started in the business… 

I started right out of undergrad. I was in the acquisitions department at Vornado. The company was led by Steve Roth, and Mike Fascitelli was the president; and I thought they were the smartest people in real estate. They were doing the most interesting projects, especially for a public company. 

I was on the acquisitions side, and I really wanted to learn how to buy and sell real estate. Given the size of Vornado at the time, the acquisitions side was much more about acquiring other companies vs. buildings in order to move the needle. So I found myself reading 10Ks and Qs when I really wanted to be working on acquiring assets. I stayed for two years, and I then met the Angelo Gordon folks.

How big is Angelo Gordon’s real estate team now?

Globally, we’re about 80 investment professionals across real estate. It still feels like a small team in terms of working together. Over time, I took over responsibility for a number of different geographies. I took over the New York tri-state area for us; I covered Texas, the Southeast, I did our hospitality deals. And I eventually launched our European real estate business right after the financial crisis.

And you took over as co-CEO with Josh Baumgarten during the pandemic. What was that like?

It was an interesting time. About two-thirds of the firm is credit, the rest is real estate. On the credit side of the business, there are more publicly traded instruments than on the real estate side. So the volatility of the pandemic was certainly something we witnessed. Fortunately, too, we were able to make some really good investments through the early days. We’re seeing the results of a lot of those investments now.

Angelo Gordon says that it targets underperforming assets and asset classes. How do you determine that, and how do you beat the rush? 

We definitely target underperforming assets; not necessarily sectors or asset classes. We’re looking to buy assets from people who lack the capital or the expertise or the time to maximize the value. We’re not trying to predict the future. Rather, we’re trying to be good managers of the real estate, good executors. Even better if we can do both. 

We like to invest in what we can control, not what we can’t. With the economy and the overall market, we can’t control that. But with subperforming assets, we can implement the business plan to correct the subperformance; that can be anything from repositioning an asset to change of use to ground-up development.

There are two ways to make money in real estate: You can buy good assets and hold them long term. Or you can buy assets that are subperforming, fix them up, and decide either to hold them or sell them; and then redeploy the capital and try to do it again and again. 

In terms of how do you beat the rush, our model is to use joint venture partners. We have a network of operating partners across the country who typically specialize in a specific asset class and a specific region or city. What we find is that real estate is all about relationships. It’s not like buying stocks or bonds — the relationships matter. It’s an inefficient asset class, so the ability to have these local relationships, to hear about a deal first, source things on an off-market basis — that’s really important. And that’s what we do to leverage the model and the local relationships and all that local knowledge. 

How do you find those partners?

We’ve been doing this for 29 years, so we’ve been building the relationships for a long time. Some of these relationships go back the entire 29 years. We generally look to form long-term relationships, so it’s not something we’re looking for every single year. 

The way we’re staffed is geographic so we have teams that focus on certain markets. They’re supposed to know everything going on in those markets; they’re supposed to know the active players — who’s really doing deals that are attractive and generating profits; who’s just getting lucky.

Life sciences obviously did well during the pandemic and even before due to demographic shifts. What was the thinking behind it then and what’s the thinking behind it now?

This issue is that everyone who owns an office building today is trying to reposition it to be a life science asset [laughs]. In reality, it’s a very small market. It’s concentrated in a handful of cities around the country. Tenants in that sector have a pretty high failure rate; and the cost to build a life science asset is very high and typically will result in a basis that won’t work for another use. 

The way we’ve tried to play life science is we’ve focused mostly on the GMP space — good manufacturing practice. Tenants looking at this space are focused on the manufacturing phase of their products, which means that they’re through the proof of concept and are now focused on bringing the product to market. 

There are a couple of good things in this for us. One, they’re less of a financial risk. Because of that, the space needs of these tenants are highly individualized. So they tend to do a lot of the work themselves rather than traditional life science, which is sort of more generic labs. Those spaces demand a big investment from the landlord before you even lease the space. What we’re trying to do is buy office buildings and industrial assets that have the physical characteristics that work for GMP and then convert the asset. We minimize that additional capital contribution that would normally be associated with building a proper life science asset that was plug and play/ready to go. 

It sounds like a lot of homework. You need to know a lot of specifics going in. 

You need to know the markets, where these tenants want to be — again, it’s a handful of cities around the country; it’s not everywhere, despite everyone thinking that they want to convert their building to life science. And, as it relates to GMP and, really, to life science in general, there are certain physical characteristics that make a building better or worse for that conversion. 

How does the United States compare as far as desirability of investing compared with other parts of the world? Given all that’s going on…

The perceived safety of investing in the U.S. is always going to mean that investors will require a higher rate of return to go elsewhere. The other locations offer certain different benefits in addition to potentially a higher rate of return or something to offset what might be viewed as requiring a higher rate of return.

Asia, where we’re a big investor, has historically been perceived as a higher growth opportunity than, say, the U.S. and Europe — although that was focused around China, which was probably historically the biggest driver of that perceived growth. More recently, though, there have been questions raised about investing in China. We see opportunities across the region. We’ve been active in Japan, Korea, Hong Kong and mainland China, and we like the markets. 

Europe has never really been a growth story. Today it’s even less of a growth story. Europe has been a market that we’ve been in for about 12 years, and, frankly, we’re pretty excited about a recession there because we see that as creating opportunity. When others are scared or uncertain about how to invest, that’s when we dig deeper and we start looking for distressed opportunities to take advantage of. 

How does inflation enter into all of this? Do you see opportunity in that? 

Generally speaking, real estate should perform well in an inflationary environment depending on the assets and the lease structure; you want a lease structure that can capitalize on inflation. So short, dated leases — assets like multifamily, where you have a one-year lease, or a hotel, where you have a one-day lease. 

The bigger challenge in an inflationary environment is that it’s typically accompanied by higher interest rates. Then the question becomes: What do increasing interest rates mean for borrowing costs, real estate valuations and cap rates? Our experience today is we’re seeing interest rates go up. We think that real estate cap rates got to levels that were really unsustainable. They were the beneficiary of 30 years of cyclical declining interest rates, and now we think that there’s reversion to the norm. 

Again, going forward, this is not an opportunity to take advantage of declining interest rates and the positive arbitrage or financial engineering of buying a real estate asset. It’s really an opportunity to take advantage of repositioning these assets to create value at the asset level in order to offset increasing interest rates and increasing cap rates. 

There are only so many assets that can be repositioned. In general, if there is a recession or inflation continues high, is it going to tamp down dealmaking activity? 

In the near term, it certainly has. There are a number of investors who can buy things on an unlevered basis so they are not necessarily impacted by increasing interest rates. Overall return requirements certainly have been.

I don’t think, necessarily, that increasing interest rates will have any permanent impact on activity. It’s more of a question of their overall impact on pricing levels. There is a lot of money that’s been buying stabilized assets and a lot of those have been bought by capital that you might call more permanent capital — longer hold periods or indefinite hold periods — and so those assets are less likely to come back into recirculation. So it does make the universe of assets that are available for acquisition smaller. 

I wanted to get to two more asset classes: malls and retail. Do you have any thoughts on them as an investment? 

As it relates to malls, we’ve never owned a mall that we’ve kept a mall. All of them have been converted to other uses, primarily repositioned to office. The mall space is challenging. There are some very good mall assets, and most of them are owned by a handful of individual landlords. It’s really hard to compete with those landlords, who have a nationwide footprint and nationwide tenant relationships that they can leverage to fill their assets. 

More generally, we’re probably entering a point where we think retail is more interesting. It’s been an asset class in decline for a long time, well before the pandemic. I think we’ve probably seen the shakeout of the tenants and assets that were not long-term survivors. So, at this point, I think generally we’re now more open to investing in it. We’ve always liked grocery-anchored assets. We’ve been active this year in New York, where we’ve bought a few assets that were ground-floor retail with a few floors of either office or apartments above — generic street retail that we think has good value long term. 

What about industrial? It boomed during the pandemic and now there’s a pullback. Amazon, the biggest tenant, is pulling back. 

Amazon was certainly a big piece of the market in terms of leasing absorption, but there is still broad-based demand for industrial space, especially from e-commerce. For the last few years, demand has really outstripped supply, so fundamentals have been very good. 

We’re a little bit more cautious going forward as supply is starting to ramp up — although costs of construction have been increasing, and we think that’s going to help keep a lid on supply. We’re still overall positive on the sector. We focus more on the smaller, infill assets where we see a deeper pool of users than sort of these million-square-foot bombers 30 miles outside of a metropolitan area. That’s less interesting to us.

ESG is a major topic in the business world and in commercial real estate in particular. Do you have any approach to it or any opinion on it right now?

ESG is certainly something that has always been important to us. We’ve signed up to the United Nations’ Principles for Responsible Investment program. We’ve beefed up our internal ESG team significantly. We hired Allison Binns [in 2021], who is leading that effort for us. It’s really important to integrate it across the entire investment process. 

There are different ways in which we incorporate and integrate ESG into our investment process given that we invest across a spectrum of assets ranging from real estate, where we control the asset, to stocks and bonds, where we have no control. But, on the real estate side, we’re definitely seeing it as a much more important driver in tenant demand and asset value. It’s not really a question of whether there’s a financial benefit to paying attention and being good stewards of ESG. We’re clearly seeing it in terms of tenant and investor interest. There’s no debate. 

Tom Acitelli can be reached at