Shlomo Chopp On Finding Distressed CRE Opportunities
Restructuring veteran Shlomo Chopp, whose commercial real estate career spans more than 20 years through multiple market downturns, has launched a new asset management firm targeting investments in undervalued properties through derivatives.
Chopp, who forged his CRE career in proptech two decades ago, formed Terra Strategies this spring with the aim of capitalizing on a disconnect between real estate bond and equity valuations — the goal being to find quality assets at significant discounts often bypassed by market participants. This marks the latest CRE venture for Chopp, who previously founded distressed debt consulting firm Case Property Services in 2010 and in 2017 developed the retailOS platform.
Terra Strategies was formed at a time when more than $1 trillion of CRE debt is projected to mature by 2025, with borrowers seeking refinancing, recapitalization or exit options in a higher interest rate environment while lenders look to offload certain assets at steep discounts. The firm is focused on all aspects of CRE financing, including funding property operations, loan financing and debt restructurings.
Chopp spoke with Commercial Observer about his motivation to launch Terra Strategies, how the proptech industry changed over the last 20 years, his outlook on the office sector, what geographic markets he is avoiding, and how volume is shaping up for the rest of 2023.
The interview has been edited for length and clarity.
Commercial Observer: Where did you grow up? What was your path into commercial real estate?
Shlomo Copp: I grew up in Brooklyn and started working with some family and dabbled in tech and also worked with my father after hours, and then I got an opportunity with a real estate company that had a proptech product in 2003, and that’s how I got my start. Eventually, while seeing operations internally at a bunch of brokerage houses, I decided that instead of selling software to brokers, I’d rather go into the business that they’re in.
How has proptech grown since you first entered the field 20 years ago?
It’s funny because proptech started out as very, very applicable where it was a solution to specific issues and then it widened itself to be very theoretical, and it’s evolved to maybe mean things that it shouldn’t mean. It’s gotten a little out of hand to be very frank with you, with automated buying of houses. The industry has definitely changed a lot.
What was the impetus behind launching Terra Strategies this year?
Given the fact that there is a disconnect between the bond markets and the real estate markets, I saw a good opportunity to get involved on the investment side and use what I’ve employed on behalf of others to make investments.
What property sectors in particular do you see as ideal investments in terms of distressed opportunities today?
I would say almost every sector with specific focus on the best properties and the best assets in the most maligned sectors. So essentially anything where the baby is thrown out with the bathwater, so to speak, I want to be there.
In terms of geographic markets, where does your focus lie?
I’m not opposed to geography generally, but we’re staying away from San Francisco, and we are staying away from Chicago. We are pretty wary about certain types of properties in New York City because we think that’s changing as well, but generally we’re geographically agnostic as long as it fits our ‘best assets, best locations’ type model.
The sector that’s the most distressed now is the office, to say the least. What is your outlook on the office market now — not so much for the near term, in your long-term view?
I believe that a lot of office [valuations] are going to go to zero, and that a lot of other offices will get way more expensive and pricey with higher rents. I think it is going to be a great bifurcation and it’s going to widen significantly. What’s tricky is to be in the right properties — you have to be flexible in how you see the assets moving forward and what you are providing to tenants as a value add.
There’s a lot of talk about conversions for certain office properties to either multifamily or life sciences. Is that something that you’re looking at closely?
Not life sciences. While there’s demand for life sciences, it’s pretty expensive and it could be a borderline fad. I don’t like jumping on bandwagons, especially not the ones where institutional capital is investing heavily. I just feel like I’m a little late to the party — if the party ever even existed. With regards to conversion to multifamily, I think there’s opportunity in certain assets, but you have to be smart about it. Not every property converts and not every location is conversion-ready, and you also need to figure out if people would even want to live there. Then, you have to consider the structural concerns, the costs involved and whether you can get the asset at the right price.
Since you launched Terra, what has demand been like for your business given where we are in the market?
We are burning the candle on both ends. For example, right now we are modeling potential conversions and we are looking at so many other opportunities because almost every asset in this country is available for sale in one form or another, whether it’s equity or whether it’s debt. Everything is an opportunity. It used to be that you could close your eyes, put your finger on the map and you could find the office building worth 1,000 bucks a foot. Today it’s a case of closing your eyes, putting your finger on a map and you can likely figure out — within a couple of centimeters from your finger — a property that you can buy at a decent price if you have a good plan to turn it around.
How do you think transaction volume is shaping up for the rest of 2023 now that we have a slightly better sense of where interest rates are headed?
I don’t think we’re going to see much of an increase in transaction volume, only because people are still tied to yesterday’s valuations. The owner doesn’t want to sell at a cheaper price, or the lender doesn’t allow them to sell it at a cheaper price. I think it’s a really big challenge and I really don’t see transaction volume picking up, but there’s an opportunity for people that have nontraditional business models to actually make a splash.
What are some of your near-term or long-term goals for Terra Strategies?
We’d like to take great yielding positions in various assets, be it properties or bonds that are convertible or could be turned into a decent-sized portfolio. We’d like to be forward thinking innovators with regards to the use of those assets, whether it’s office, whether it’s retail, or even mixed-use multifamily to certain extent.
Andrew Coen can be reached at firstname.lastname@example.org