Robert Barth entered the workforce at a time marked by anti-establishment sentiment and free of inflation, he said.
From the early 1970s to now, Barth had a front row seat to the evolution of real estate financing as institutional interest in the realm began to take off and business dynamics saw dramatic change alongside technological developments.
Currently, Barth is the chief executive of Brentwood-based Sonic Equities which specializes in real estate investment and development. He began this venture in 2023 following a 35-year stint at Black Equities in Beverly Hills, where he served as chief executive prior to a falling out with the firm’s founder and chair, Stanley Black. This turned into a five-year legal battle which Barth attributes to Black’s dementia diagnosis. Medical records filed with the Los Angeles County Superior Court affirm this diagnosis.
One lawsuit brought by Black in the name of his family trusts alleged Barth had breached fiduciary duties, among other things. This, however, was dismissed several years ago.
Another suit stuck which involved the sale of a single-family residence in Beverly Hills. It alleged that Barth wrongfully pocketed excess profits from the sale that should have gone to Black and other investors. It resolved with an order for Barth to pay $13.4 million to Black and investors. Upon appeal, the suit re-settled for about half of the initial judgement amount, though there was an opt-out option if investors felt they were not wronged.
In the end, court records show that only about 15% of eligible investors, excluding members of the Black family, opted to receive payment – a retroactive win of sorts for Barth.
In a twist, Barth recently teamed up with Black Equities current Chief Executive Zach Zalben, who is Black’s grandson, to co-manage a new entity, BESE Management which stands for Black Equities plus Sonic Equities. This firm will manage $600 million in jointly owned assets between the two entities.
Having spent his entire career in Southern California, Barth sat down with the Business Journal to discuss the launch of BESE Management, L.A.’s overall real estate landscape and current obstacles facing the industry.
How would you describe the strategy of BESE Management?
The new firm is just to maximize the value out of the existing assets. There’s a number of industrial buildings, there’s some retail, but it’s principally industrial (and maybe about 4% office) and I think it’s just about keeping them filled in this environment, selling off some of the smaller pieces where it makes sense.
There’s a pretty good geographic dispersion of the assets…
Doing it jointly made more sense than splitting it up and saying, you do half, and I do half. I wanted input on everything, and I think they wanted input on everything.
Given your focus on industrial assets, how has the current tariff situation impacted business?
We don’t know yet what’s going to happen here, but what I can tell you is that the industrial market is a lot softer than it was before because of demand. Nobody knows how much space they’re going to need if they’re an importer… There’s a lot of uncertainty now, but most of (our portfolio) is at the infill area. If you go out to the Inland Empire, you’ll find a real softness, because these were the big distribution people getting out of the port.
I think the jury’s out right now on what’s going to happen. But because most of our assets were acquired many years ago, we have very low levels of debt, which makes it a lot easier than the vast majority.
Describe what a typical deal that you get involved in looks like in terms of cost, size, length of ownership, etc.
I like to look at (the) fundamental value of the real estate – in other words, on a per square foot basis or relative to purchase price. I don’t want to overpay more than replacement cost. So, we’re very sensitive to that.
(Separate from BESE) I’m involved with a lending business called Arixa Capital and Crosswind Mortgage REIT which I helped start at the very beginning. We have a portfolio of about $1.5 billion in loans. We make first trust deed loans on income properties or in residential properties to the developers that are going to buy it, build it and flip it.
To what extent are Sonic Equities and Black Equities aligned in strategy and expertise?
Each of us can contribute something, and it’s kind of a gut feeling on some of these deals… It’s a joint thing, like “What do you think?” Then, “What do you think?” … (The partnership) more or less happened out of practicality… and out of mutual need… It works out for everybody’s benefit.
Given your legal history with Black Equities’ founder, Stanley Black, this new collaboration has brought things really full circle. Is there any sort of lesson or takeaway that you’ve derived from the legal entanglement?
Instead of where we used to rely on handshakes for many years, get everything in writing. I think that’s the best takeaway.
Through your years in the industry, how have you seen real estate investing evolve and what do you do to stay current?
Real estate has become much more institutional. The costs of the projects are so expensive now and the lenders are not the way they used to be. They’re much more value oriented, not these 80, 90% loans. It’s evolved into a fee driven basis for a lot of people. In other words, they do a project, they get some development fees and they get part of the upside – if it works. For the last five years, very little has worked, but they have fees to keep themselves alive…
Many years ago, if you go back to the ’70s and the ’80s, if someone had a deal, they’d send it to you by fax as well as to five or six other good clients. Now with a push of a button, 10,000 people can access the same deal. That has really changed the entire face of the investment real estate business; it’s become much more difficult. I think you have to be more creative in what you do…
Other than that, there’s been a real slow down, almost a stop, in multifamily construction in Southern California. The state of California is trying to pass programs to provide more housing but I think the biggest problem they’ve had there – and why people are hesitant to use their programs even though they agree to higher density and they get this or that – is that the prevailing wages are so high compared to a nonunion that anything you get in bonus costs you 25% more to build.
How would you remedy that hurdle?
Maybe one of the solutions to alleviating the housing shortage in the current economic environment would be for the government to subsidize conventional financing by implementing tax-exempt financing instead. That would lower the current cost of 6% to 4% or less, making development economically justifiable.
Can you pinpoint a period where you think that real estate was at its prime or peak?
Between 2016 and 2022, the people building and selling were making tremendous profits. The low interest rates you saw drove a tremendous amount of construction, which may have not taken place in another era. People would develop with cheap money; they would sell and there was cheap financing.
Then as your interest rates started rising, the margins started getting squeezed and the costs went up tremendously. Your cost to build with inflation was probably 25% more between 2021 and 2022.
Where do you see the biggest opportunity in L.A. real estate right now and how does the firm plan to take advantage of that?
We’re really in a holding pattern now, with the higher interest rates and the higher cost to build, we need something to happen to either one or both of those. And I think that’s the key here. Where it is now, there’s no incentive for anyone to build. The risk is not worth the reward at this point…
I’ve spoken to entitlement lawyers, and they said almost every one of our projects is on hold just because it’s uneconomic to build today…
It’s too expensive for people to go buy a single-family house. (When relatively small homes in less desirable neighborhoods) go for $1.4 million, apartments are the only thing people can afford. So, we need to be able to create quality apartments. And so far, with the costs and the requirements of the prevailing wages, it’s just not economic to do now.
Are there any other regions you’re looking at?
A number of years ago we went into Salt Lake City and we went to Denver because they were major metropolitan growth areas. We have a few assets in Albuquerque, New Mexico, that’s really doubled in value, certainly in population and density over the time. Colorado and Salt Lake City have done very well.
We went down to Texas and did some industrial in Houston and then Dallas, and here we have additional industrial in the Mid-Cities area in Santa Fe Springs and Cerritos. The infill area has done very well because the trucks don’t have to drive an extra hour out to the Inland Empire… It’s been mostly industrial properties with some retail in Denver.
How has your experience founding California Republic Bank in 2007 impacted how you view real estate finance?
The problem when you have a bank… is it’s highly regulated, and if you lose a million dollars on a loan, you have to do a lot of business to catch up because your margins are so thin. And so, I think it just gave me a more conservative outlook on everything. You see what goes wrong, as opposed to when you’re out in your own world and everything’s going up, everything’s great, but then at a bank, you can actually see what went wrong. Whether it went wrong or not, you got a feeling that things were different.
