Orleans

Towering Investor

Judah Hertz quickly has amassed about a quarter of New Orleans' top office properties, and local officials welcome his involvement in the market as a positive influence.

Sunday, August 7, 2005

By Greg Thomas

Real estate writer

Two-and-a-half years ago, California real estate investor Judah Hertz was little known in New Orleans circles. Today, after a 36-month buying spree, he controls more of the city's top office space than anyone else does. Hertz has spent about $155 million -- including at least $38 million of his own money -- acquiring four trophy office towers downtown.

And he's planning to buy more.

In the process, Hertz has done something unprecedented. In the 25-year history of the modern New Orleans Class A office market, no single owner has controlled 25 percent of the city's top office building market. The achievement is probably rare across the nation.

"I've never seen anyone come into a market and try to dominate it" as Hertz has" said Greg Riera, a 23-year industry veteran and local vice president of Jones Lang LaSalle real estate services company.

"I think a lot of people are scratching their heads," said Steve Riesig of SRSA Commercial Real Estate in Metairie. "It's very uncharacteristic for any institution or private capital to acquire that much in any one market anywhere."

'Contrarian investor'

For Hertz, it's not uncharacteristic. It's part of his investment strategy. Hertz invests in cities that aren't considered hot spots by big investors. He looks for areas where the values on office buildings are depressed. And he's finding lots of opportunity in New Orleans.

"I'm a contrarian investor," Hertz said. He recently attended a retreat for investors hosted by Jones Lang LaSalle, he said. "They asked: 'If you had $100 million, where would you invest?' Without exception, everyone said Washington, D.C., New York and Southern California. So, you know I won't be buying anything in Washington, D.C., New York or Southern California."

Hertz is chief executive officer of Hertz Investment Group, which has a real estate portfolio valued at $700 million. During his career, he has made money by acquiring overlooked properties that have the potential to increase in value. He buys in cities and neighborhoods that other investors aren't excited about. And when those neighborhoods increase in value -- sometimes years later -- he sells.

For Hertz, timing is everything. His business is all about getting in and out of markets at the right time. For that reason, he focuses exclusively on buying existing structures rather than building his own. The sometimes yearslong process of erecting a building could tie Hertz down and prevent him from leaving a market if the business climate changed.

He's more investor than developer.

Hertz, 56, was born and reared in New York, and that's where he began his real estate career in the late 1970s. He was among the first to snatch up dilapidated SoHo district warehouses. He renovated the properties. They became "trendy lofts." And he sold them just as demand skyrocketed.

Hertz then moved to condo development in Miami and eventually landed in Los Angeles, where he amassed a 3.5 million-square-foot office portfolio and based his company.

But not all has gone well for Hertz.

In Nevada, gambling regulators rejected his application to buy three Reno casinos in 2000 because of his "reputed mob ties." Hertz this week said the problems with the Reno casinos were instigated by Las Vegas interests that didn't want his competition.

Hertz hired a former U.S. Justice Department prosecutor and a corporate investigation firm to conduct a six-month investigation into the allegations. The firm, in its report, concluded "that the central allegations made in the (Nevada) Gaming Board's denial recommendations are not supported by evidence we have reviewed."

The most damning association was with an Israeli immigrant Hertz had a minor real estate investment with in Los Angeles during the late 1980s. The Israeli man was later indicted in a large Ecstasy smuggling import ring by federal authorities.

Hertz, earlier this summer, said he had no idea of the criminal activity of the associate, and that the indictment against the man dates the criminal activity to a period after Hertz no longer had a relationship with the smuggler. Hertz added that he had met the man in a social setting and made one small transaction with him. As he said at the time, "If you have dinner with someone you don't know well, are you expected to know" their criminal intent or involvement in criminal activity?

Regardless, the damage has been repaired and Hertz has long been back on track doing what he does best.

Focus on New Orleans

Now, Hertz has set his sights on the Big Easy.

He said this week that he's selling his Los Angeles holdings. He will keep a home in Malibu, but he is shopping for a home in New Orleans and may move his company's headquarters to the city.

Hertz broke into the New Orleans office market in early 2003 with the purchase of the 27-story Poydras Center. Later that year, he snapped up the Dominion Tower and the adjoining New Orleans Shopping Centre.

This year, Hertz added two more Poydras Street properties to his portfolio: the LL&E Tower in May and the Texaco Center in July. All told, that gives him 2.5 million square feet of space in a 9.5 million square-foot market.

He recently bought 1.5 million square feet of office space in Pittsburgh and made a 1 million-square-foot investment in Tulsa, Okla., buildings.

But for now, his focus is on New Orleans.

And he said the undervalued nature of the local market is a big reason why.

"We're among the least-expensive markets of our size in the country," said Maria McLellan of Real Estate Services. "That's why an investor like Hertz is coming and taking advantage of the rates."

Evan Stone, managing director of the capital markets group in Dallas for Jones Lang LaSalle, said Hertz is looking at New Orleans as a market with a very low risk rate. "I think people like the risk profile of New Orleans, the organic growth of the office market, the stable business environment in the city," Stone said.

Another advantage Hertz says he sees in the New Orleans market is that the construction of new high-rise office buildings is highly unlikely.

Bruce Sossoman of Equity Office Properties said rental rates downtown are hovering around $15 per square foot per year. Rates would have to climb closer to $22 per square foot to justify new construction, and available land is in short supply.

The lack of new construction is a good thing for Hertz because it means he can buy buildings with the confidence that most of his tenants will stay put.

Whether Hertz's presence in New Orleans is long-term probably will be determined by the local market. He could be a player in New Orleans for years to come, becoming an important business leader in a city where the ownership of major office properties often changes. But if the local market takes off, and prices climb, Hertz could just as easily sell his holdings for a profit.

"Judah can hang on for 15 years, or whatever it takes . . . to get through the bad times (waiting) for a market turn," said Gary Horwitz, chief operating and financial officer at Hertz Investment.

Hertz has been financing 25 percent of each purchase in New Orleans with his own money, which gives him the ability to hold on to those properties almost indefinitely, Horwitz said. Hertz Investment "continues to look at other assets" in New Orleans, Horwitz said.

Hertz is "buying by the pound, and he's buying pretty cheap" and can "wait for the market to turn in the other direction," said Riera, of Jones Lang.

Hertz might be adding a fifth New Orleans office building to his portfolio. The Pan American Life Center, built and owned by Pan-American Life Insurance Co., is close to deciding whether to sell its 685,000-square-foot building at 601 Poydras, Pan-American Chief Executive Officer Jose Suquet said. Suquet said that there are "many buyers in the wings" who have expressed interest. Hertz said Tuesday he is among them, but has made no decision. Besides, the building is not officially on the market, he said.

Vote of confidence

Real estate specialists and city officials have welcomed Hertz's involvement in the local market.

Stone, of Jones Lang, said, "It's exciting for downtown to have new capital come into the market with fresh perspectives, and it's an obvious big vote of confidence in the market in greater New Orleans. These investors could invest anywhere in the country."

McLellan, of Real Estate Services, said Hertz is a breath of fresh air and a contrast to the real estate investment trusts that bid up prices on downtown office towers in the late 1990s, only to leave the market and sell at a loss. "We need everything we can get in economic development and Judah is the newest breath of economic development we've seen in a long time," she said.

She admits surprise at this latest twist in the office market. "I never thought I'd be in this industry long enough to see something like this happen in New Orleans," said McLellan, who has been in the business for more than 20 years.

Could Hertz's extensive holdings in the local market reach a point when he would control rental rates marketwide? Local brokers don't seem worried, and many expect Hertz to raise rates gradually anyway.

"They're at about 80 to 85 percent occupancy in all of their buildings," said Riesig of SRSA Commercial Real Estate. "At some point, the simple mathematics would require rate increases, especially with operational costs nearing $8 per square foot" because of homeland security issues that have driven up insurance rates.

Mayor Ray Nagin, who has met with Hertz, also is pleased with his move into the market. "Judah's experience and professionalism, combined with his growing interest in our city, have resulted in substantial stimulation in the downtown market," Nagin said. "This synergy is good for New Orleans."

Hertz said he has been impressed with Nagin. "I think he definitely is for business growth and is trying to do the best job for the city. Considering the political reputation of New Orleans, that's not the easiest thing," Hertz said.

In the market for a home

Sossoman, who publishes a comprehensive office report quarterly, said preliminary second-quarter information shows Hertz Investment properties doing fairly well -- with one big exception on the horizon.

Chevron Corp., which acquired Texaco Corp., pulled out of the Texaco Center and has been trying to sublease the 320,000 square feet it occupied in the building. Bryan Burns of Transwestern Commercial Services, who manages the building, said about 200,000 square feet of the former Texaco/Chevron space has indeed been subleased.

Hertz said he expects many of those sublease tenants to convert to full leases. And he said he's close to landing a major tenant for the top three floors of the building, a deal "that will make a story on its own."

If that deal transpires, it ruins plans Hertz had for the top floor of Texaco Center, with its angled, glass roof. He was going to convert it into his home in New Orleans.

Earlier, he bought a condo at trendy One River Place on the river next to the Hilton New Orleans Riverside. His condo was one floor above that of former NBA Hornets owner Ray Wooldridge. But after he saw Wooldridge's improvements to his condo, "It made mine look like a dump," Hertz said.

He sold the One River Place condo, and with the Texaco Center top floors possibly being leased to an unannounced tenant, he's now looking for a French Quarter home.

One way or the other, Judah Hertz appears here to stay for some time. And the real estate community, amazed, dazed and confused by Hertz's interest in the Big Easy, has a new major landlord.

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Greg Thomas can be reached at gthomas@timespicayune.com or (504) 826-3399.