Charting a Tectonic Shift: Inside the $1B Cottonwood Group Special Situations Strategy

There’s an oft-cited story about Joseph P. Kennedy Sr., father of John F. Kennedy, during his years as a stockbroker on Wall Street. One day in 1929, a time when it seemed the economic boom had no end, he stopped for a shoeshine. While polishing his shoes, the young attendant began volunteering stock tips. As the story goes, Kennedy took that as the canary in the coal mine and sold off all his market holdings, a decision that helped him preserve his capital when the stock market crashed, heralding the onset of the Great Depression.

Whether the shoeshine story is genuine or a myth, the lesson it carries is real. Alan Greenspan called it irrational exuberance. In the early 2020s, I had a “shoeshine boy” moment of my own — and it would go on to inform one of Cottonwood Group’s most ambitious and successful ventures to date.

It came about from an investment pitch by a real estate operator seeking a programmatic joint venture. During his pitch, the operator said, “This stuff is like the U.S. Treasury.” It was a misguided descriptor for Rust Belt value-add multifamily assets, but in the context of that overheated market, it was the kind of hyperbole that was par for the course.

Meanwhile, looking out our Boston office windows, I watched as developers and investors descended on the city from all over the world, determined to stake a claim in what they believed was a life sciences boom with no ceiling. Some had no background in the field, and no experience constructing labs — or in some cases, constructing anything — but they came anyway. I recall a Greater China group investing in Class B and C office space to convert it into laboratories. A California-based residential developer successfully secured institutional financing for a life science speculative development on the other side of the country. A hospitality and restaurant group was outbidding institutions for lab development projects. Suddenly, from Somerville and Revere to Watertown and Waltham, every town was the “next cluster” after Kendall Square and Seaport. For that matter, so were New York and San Francisco, and everywhere in between.

The evidence contradicted the hype. In 2022, office space remained vacant, despite headlines promising a full return to in-person work. Kastle’s turnstile data showed office usage stuck at around half of pre-pandemic levels. Interest rates started climbing, and a major bank quietly approached us, looking to “lighten up real estate credit exposure.” By May 2023, that bank was one of three — Silicon Valley Bank, Signature Bank and First Republic Bank — that had failed. Combined, their assets exceeded those of Washington Mutual, which in 2008 experienced the largest commercial bank failure in U.S. history.

Thanks to the lessons learned in 2009, these collapses did not cause a systemic meltdown. Still, these were signals of a fundamental shift. Operators who rode the boom without heeding the underlying fundamentals would struggle. Capital would retreat. However, opportunity would remain for disciplined investors willing to meticulously vet each deal to identify pockets of value created by stress and dislocation. That was the basis for establishing Cottonwood Group’s Real Estate Special Situations Strategy.

When we launched the Strategy in 2023, the environment looked nothing like the sharp shocks of 2008. This was not an earthquake that wiped the slate clean overnight. It was a slow, tectonic shift that would reshape the market over a period of several years, in ways that were harder to detect. That environment created risk for anyone making broad, lazy bets on sectors or geographies. But it brought opportunity for those willing to cherry-pick. Instead of following a one-size-fits-all playbook, the move was to target micro-markets and individual projects where stress, timing, and sound fundamentals intersected to create untapped value.

That perspective guided the Strategy’s mandate. Rather than focusing on a single sector or region, we targeted special situations across various asset classes and geographies. Take life sciences, for example. Buying every half-empty lab in sight was never the play. Instead, we homed in on specific assets in superior locations, with credible tenants and proven demand, such as a structured credit investment in East Austin, Texas.

Our thesis resonated. When our fundraising window closed on Aug.31, 2025, the Strategy had reached the milestone of $1 billion, double our initial target of $500 million. At a time when private equity real estate fundraising had fallen to decade lows, that milestone carried all the more weight. Our initial portfolio reflects the breadth and precision of our strategy, with a diversified mix of industrial logistics warehouses, data centers, multifamily apartments, and mixed-use developments across high-growth U.S. markets. Each investment is structured for downside protection, with select deals offering equity upside potential where the risk-reward equation justifies it.

What began as a thesis has become an actionable strategy. In special situations, it’s never about “betting the farm” on a single conviction. It’s about assembling a portfolio of well-chosen opportunities, each with its own path to value — and together, resilient even in volatile market conditions. The results have validated that approach. Since the Strategy’s first investment in October 2023, we have made eight additional investments, and the Strategy has generated a net internal rate of return of over 20 percent.

Every cycle — and every period of disruption — offers opportunities to position capital in the pockets of value revealed by tectonic shifts in the market. For Cottonwood Group and our U.S. and global institutional investors, the Real Estate Special Situations Strategy provides us with the resources and scale to act on these opportunities at a time when most of the market cannot yet see the potential.

*Commitments received comprised of pooled-fund vehicles and separate accounts.