Christopher Merrill, Co-Founder, President, and CEO of Harrison Street Real Estate Capital talks differentiated investing at the Allen Center
On March 6th, Christopher Merrill spoke at a student luncheon about his career and the investment strategy of Harrison Street Real Estate Capital, a firm which he founded in 2005.
Mr. Merrill started his real estate investing career at Heitman, where he started working at a young age as a summer employee. After several years at Heitman and some preliminary advocacy of opportunities for investment in Central Europe, Merrill was given the green light to move to London and attempt to expand Heitman outside of the US through the creation of a new business unit for the firm. He identified Poland, Hungary, and the Czech Republic as strong fundamental markets that attracted little attention from major Western investment funds. Having identified a cap rate spread between cities in those countries and nearby cities in Western Europe that was unjustifiable based on risk properties, Merrill raised a series of Central European equity funds.
After returning to the United States, Merrill decided to leave the pension advisor to start a new real estate private equity business. In 2005, Harrison Street was formed in partnership with Chris and Michael Galvin, members of the founding family of Motorola. The investment thesis was based on identifying demographically driven economic opportunities and continuous operational improvement using Six Sigma principals. As a result, Harrison Street was the first firm to establish a private equity model focusing exclusively on less cyclical assets including senior housing, medical office, student housing, and self-storage.
Harrison Street focuses on maintaining a healthy diversification of investments at all times to maintain competitiveness and continues to look for new strategies within this already diverse set of asset classes in order to continue to invest opportunistically. Similarly, Harrison Street is now diversifying into funds with an open-ended “core” focus on income as a compliment to its initial appreciation-focused opportunity funds. As with the opportunity funds, Merrill sees the open-end core fund as the first of its kind, exclusively targeting the demand driven asset classes it invests in, which are traditionally perceived as non-core. His argument is that the assets have lower volatility, and healthy operating income. The pairing of the two funds, along with their REIT securities business, gives him multiple ways to serve the same investors with different exposure needs, investment horizons, and liquidity concerns.
Harrison Street is unique in that it actively seeks to apply its experience and continuous operational improvement principals to help its investment partners improve their performance. He describes them as operating partners rather than capital partners because of the relationship he expects to have with them and believes Harrison Street is unique in that it is neither a pure operating nor pure allocating fund. Merrill sees the spread of institutional best-practice knowledge across independent businesses as a significant source of competitive advantage and the selection of operating partners, as opposed to the selection of deals, as being critical to maintaining it. In operating partners, he seeks experience, healthy balance sheets, and openness to a different kind of partnership involving more than just money.
Merrill sees Harrison Street maturing now in parallel to his prior Central European business in that both funds initially started with ideas that had to be explained to investors, but, after some success and responsible investing, began to attract capital based on performance and reputable leadership. He laments that “innovative” has become an overused word in the mostly commodity-like real estate industry, but he takes pride in both the investment thesis and the operating model at Harrison Street for being strategically different than prevailing market offerings.