Alexander Shing started Cottonwood Group 12 years ago “to capitalize on the opportunities that came about after the GFC (global financial crisis of 2008).”

Over the last five years, the downtown-based real estate investment firm has grown its gross assets – including debt, equity, development, EB-5 and advisory investments – from $3 billion to $6.4 billion. Shing, Cottonwood’s chief executive, attributes the growth to a cautious investment strategy.

Operating under the lens of changing economic cycles in the last five years, Shing recalled taking note of indicators – such as offices trading at 4% or below rate cap – that it wasn’t an ideal time to go on a buying spree. Acting with restraint throughout that time allows Cottonwood to now operate relatively care-free, Shing said.

“Because we’ve been cautious, we are not dogged by our own sets of troubles,” he added. “If half of your portfolio is underwater and you’re worried about writing down your investments, you don’t get a lot of mindshare to think about new deals, putting out new money… We don’t have that distraction so we can focus on what is the opportunity today.”

Looking at the firm’s growth

Shannon Ching, principal of HP Investors’ El Segundo office, evaluated Cottonwood’s growth.

“In a time when there’s a very capital-constrained world and the cost of capital has gotten a lot more expensive, to be able to raise that kind of capital in the last couple of years is very impressive,” Ching said. “That tells me that a lot of their investors are probably institutional.”

Ching also shared his insights on the investing landscape recently, relative to an inactive approach versus an active one.

“In the last couple of years, for the most part, values have probably decreased rather than increased in general. If (Cottonwood) was very inactive by design and waiting to observe the market, then they don’t have any legacy problems to deal with today in the short term,” Ching said.

While Cottonwood acted with a cautious approach, it was still involved in some projects over the last few years.

In the Los Angeles area, Cottonwood provided a $190 million construction loan for master plan development of Hollywood Park in 2020 and a $62 million bridge loan for redevelopment of 8850 Sunset Blvd. in West Hollywood in 2022. The firm has also completed deals in New York City, Boston, Houston, Seattle and San Francisco.

Ching said many investors who were more active in the last few years are now forced to play defense in managing their portfolios to account for struggling deals.

“I don’t think there’s a long list of investors that have said, ‘Oh, I missed so many deals in the last couple of years. I wish I would have done more.’ I don’t think that is a common thesis amongst investors today,” Ching said.

Evaluating deals individually

Cottonwood doesn’t have a fixed amount in mind to loan this year; instead, the firm favors a deal centric viewpoint.

“If it’s the right opportunity, there’s really not a size constraint,” Shing said.

“We’ve done a lot of nine-digit type investments, both in debt and in equity, and we think this is just the first few innings of the game. There’s a lot more opportunity that’s going to come up,” Shing said.

On average, Shing said loans of $200 to $300 million are Cottonwood’s “sweet spot,” but the firm also serves as a sponsor doing $20 to $50 million investments.

Because Cottonwood functions as a “one stop shop,” as Shing put it, in its ability to act as a lender, investor, operator and sponsor, it is able to provide clients with a variety of services.

For example, Shing referenced Cottonwood’s many roles in a Boston development, EchelonSeaport, a luxury condominium building with hundreds of units.

“The capitalization of that project was $900 million, and we capitalized that entirely ourselves: equity, debt, both the senior piece and the mezzanine piece, the preferred equity and the common,” Shing said.

Opportunity as a mid-size firm

Shing attributed Cottonwood’s ability to wear many hats to the structure and capacity of his team. As a mid-sized firm, Cottonwood has built a network of experts in a variety of investing strategies and markets, while also still being small enough to have open communication about deals and opportunities.

“If you’re a larger organization, the debt group, the mezzanine group, or the senior lending group, versus the equity, special situations group – they don’t necessarily talk to each other… Whereas our team, we look at every deal together,” Shing said.

“That’s one unique feature of having all your teams be specialists, but also work together as one big generalist team,” he added.

Both Shing and Ching referenced the opportunity of debt financing particularly in the Southern California market.

Cottonwood led a $310 million debt investment in 2020 for the THEA at Metropolis, a 56-story luxury rental complex in downtown, which Greenland U.S. sold for $504 million in 2022.

“The debt vehicle has a lot more opportunity to be deployed, probably relative to equity investments, because there seems to be more of a gap between the bid and the ask, and no one’s selling unless they have to,” Ching said.

Unlocking housing potential

While Cottonwood works in a variety of real estate sectors, Shing said he is particularly interested in housing right now, calling it a “big driver” for the firm.

With the demand for housing on the rise, Shing said investing in this market is a “no-brainer” and that can range from high end developments to affordable housing and student housing at colleges.

Even with high demand, Shing acknowledged that it can be difficult to get projects off the ground in L.A. right now, however, he said he believes more communication between the private and public sector will help spur development.

“Increased public and private engagement will get to that right equilibrium to actually make projects be able to go vertical and break ground,” Shing said.

Additionally, Shing said he is interested in partnering with the city to fund infrastructure that will benefit Los Angeles and increase housing stock. 

“We are fiduciary to investors, pensions and whatnot and we obviously have to deliver a positive return, but you can do well for yourself and do good at the same time,” Shing said.