Michael J. Alter is president of The Alter Group, a national developer of office, medical office and mixed-use campuses throughout the U.S. He is responsible for all of the Chicago-based company’s planning and operations. The company was formed in 1955 by Michael’s father, William Alter. The firm started out brokering raw land, grew to building industrial and flex space near the growing interstate highway system and then began to develop Class A, sustainable build-to-suit offices for Fortune 500 corporations and small to medium-sized businesses.
Since its founding, the company has remained a family-owned business, financing projects with internal capital and through lines of credit from major financial institutions with which the company has worked for decades. With no next-generation family member prepared to take the helm of The Alter Group in the future, Michael Alter is helping the company transition from a closely run family-owned business into an entity that will allow outside financial participation.
Development: You are planning a major restructuring of the company. Why are you doing this? Why now?
Alter: It is an evolution of the company, not a restructuring. Make no mistake: I love what I am doing. I plan to continue in the business for another 15 or 20 years.
In looking at the company over the long term, I came to the conclusion that it is more probable than not that the business will not continue as a family business for another generation. Certain decisions then flowed from that conclusion. The Alter Group has always been a family business, and we have never had outside partners. Over the years, we reinvested the family profits back into the business to finance new projects, combined with leverage from construction and permanent financing from banks that we have worked with for decades. We have built a successful business doing that.
Because real estate is such a high-risk, capital-intensive business, it is not a wise investment strategy for the Alter family to be passively involved while someone who is not a family member runs the business. In terms of the next generation, it makes no sense for me to hire a manager and have the family continue to reinvest in real estate as heavily as in the past. Therefore, we needed to create investment diversity and liquidity for the family. That was step one.
When you undertake something like this, there is a domino effect because one decision leads to another. To create liquidity in a very deliberate way over the next three or four years, we will sell many of our existing assets at times that are most appropriate for each particular asset. Then, instead of reinvesting that money in real estate as we did in the past, we will distribute some of it to the family to create diversification.
The other consequence of that initial decision is that we will bring in third-party capital to finance Alter Group projects in the future.
Our first priority moving forward will be to develop the considerable land that we have in our inventory. We have over 1,000 acres nationwide with 750 acres in the Chicago area alone, and we see many positive signs that this is a great time to put that into the development pipeline.
Development: How will The Alter Group of tomorrow look different from what it was in the past?
Alter: We really won’t change our focus much, which will primarily be on the office sector, including medical office, where we will continue to do ground-up Class A development. That is a good place for us because we have a good, competitive advantage in that area. We will do more acquisitions than in the past because we can do value add, which would have a development component to it.
Development: What challenges do you expect to face as you bring in outside investors?
Alter: Bringing in third-party capital will be interesting and challenging culturally. There is considerable capital out there, and many people want to do deals with us. There is no question that real estate is a coveted asset class: There is $60 trillion of capital worldwide. And, at a time when the prime interest rate is under 3.5 percent, global investors are chasing higher yields than are available with fixed-income securities. Real estate offers yields that are double or more of what you would achieve with more traditional investments.
Obviously, we will carefully consider who we want as partners over the long term and how we want to structure things. This is something I will work on over the next year or so. My hope is that, when bringing in partners, I will be able to nurture the same quality of relationships that we have had with our bank lenders, which we will continue to maintain. Our company has always been extremely relationship oriented and will continue to be. It is a matter of developing these new relationships and finding the people who have a shared vision of what we are trying to do. We want partners who are strategic and have the long view like us.
Development: Over the next 18 months, what challenges/opportunities do you see for the office and industrial development business?
Alter: On the medical office side, we think there will be good opportunities now that the Affordable Care Act is in play. Whether people like it or not, it is here to stay. There is still a lot to learn about it. The marketplace is beginning to adjust in terms of hospitals and insurance companies. This will lead to more medical office building facilities. I think hospitals, which are under increasing pressure to perform and to strengthen their bottom lines, will be looking to outside people like The Alter Group to build those facilities. We are optimistic about this sector given the numbers: 2012 was a record-setting year in which medical office buildings reached an annual transaction volume of over $6.4 billion. The pattern looks to repeat this year, with nearly $1 billion in sales activity in the first quarter.
I am cautious about the office side over the next 18 months. The existing office market is very strong, and it is strong because there has been so little new supply added. Also, we’ve seen a lot of migration of companies from the suburbs to 24-hour downtown locations, especially in gateway cities like New York, San Francisco, Boston and Washington, D.C., which has generated new development.
Optimism for the U.S. economy has reached its highest level in a decade, and the private sector is now generating over 200,000 jobs monthly. As a result, you’re seeing cap rates under 6 percent in the primary downtown markets. From the perspective of a developer, we want to build; however, demand is not quite ready yet for new office development. Employment needs to show sustained growth. It still does not have the growth that I think is necessary for new speculative office development. Add to that the fact that corporations are trimming their space requirements because of remote work and the drive to greater efficiency. So the marketplace is extremely positive for existing owners of office buildings, but as a developer, it will be a little slow going.
Development: Looking out three to five years, what do you see on the horizon that will impact your business? What are you doing today to prepare?
Alter: My hope is that, once the economy gets back to more traditional growth patterns, there will be a good opportunity to do a lot of new development. Right now, the cost of capital is low: 10-year Treasury yield rates are lower than they were in 2008, and serve as a cushion for the fact that yields are becoming constrained. But this will change. One factor will be the unwinding of the third round of quantitative easing, which will ultimately cause rates to rise. That said, I am cautiously optimistic about the next three to five years. I will not bet the house on it, but I am optimistic. It is more likely than not that we will get back to those growth patterns. So we are in a good place with our land and our organization. We don’t have the capital structure in place yet, but we will get there.
Development: What is the most valuable lesson you’ve learned over the course of your real estate career?
Alter: For me, the most important lesson is that you have to have a long-term perspective in this very cyclical business. This business is very up and down, and you have to be prepared on the development side. You need to have a plan in place to survive the ups and downs of this industry. You have to think long term and be strong enough financially to make it through the tough times. That comes from having a long-term perspective. A lot of people focus on the moment; when things happen, they get stuck.