Scott Scharlach on Launching a Value-Focused Retail Investment Firm

Aug 14, 2015 | Career, Entrepreneurship

I love interviewing real estate entrepreneurs who’ve recently launched their company. They’re passionate, energetic, and full of actionable advice. In my latest investor spotlight, I chat with Scott Scharlach of Progression REI. Scott’s story is similar to many of the entrepreneurs I’ve interviewed in the past (you can view all investor spotlights here). His institutional background, reputation, creativity, and passion for real estate has enabled him and his partner to execute their first 3 deals and go under contract on their 4th, a $33M retail deal.

Learn how Scott went from an office leasing broker to launching a successful retail-focused investment firm.

Enter Scott:

After working for an institutional firm, what was the defining moment where you knew the timing was right to go off on your own?

I’ve alwProgression REIays had an entrepreneurial nature and eventually found myself wanting more control over my time, career, and compensation. I began my career working as an office-leasing broker in downtown LA, first with a boutique tenant representation firm and subsequently with CBRE. After five years of brokerage I decided to move to the principal side of the business. To help facilitate this transition, I went back to school to earn a Master’s of Real Estate Development degree at USC. After graduating in 2012, I joined a large institutional real estate investment management firm. We invested along the entire risk curve from buying existing core to light value-add to development, in all product types, and in every major metropolitan market throughout the country.  Our typical deal size ranged from $50M – $200M.  Gaining exposure into this type of real estate investing was invaluable.

I had a close working relationship with SVP/Principal Jim Howard, who left the firm in September 2013 to start Progression REI. Recognizing he and I had complementary skill sets and experience, I realized joining him was the ideal way to launch my entrepreneurial career. I believed the economic recovery had become real and sustainable, with enough time remaining in the current cycle to build a strong portfolio. It was also the right time personally; my wife had a steady income to support us initially and we don’t have debt, a mortgage or any kids. After giving notice with my company, I approached my former colleague and we agreed to a partnership.

What’s been the biggest surprise of starting your own investment firm? What’s been one of the biggest challenges? 

I have been pleasantly surprised by the support and enthusiasm of our investors, and how quickly we were able to grow our deal size and volume. When we started Progression REI, I expected our first few deals would be relatively small and they would gradually lead to increasingly larger transactions over time. Our first acquisition was a shopping center shadow-anchored by a grocery store in suburban Phoenix. The price was $5.1 million, and we raised the equity via a small syndication of very close friends and family. Since completing that transaction, our investor base has grown much more rapidly than I anticipated. Today, just a year later, we have acquired retail centers for $15.1 million and $18.3 million, and are under contract on a $33 million joint venture acquisition with a prominent institutional equity partner.

The biggest challenge has been learning the criteria and objectives of various types of investors. After many, many conversations with potential capital providers – friends and family, family offices, online crowdfunding, institutional funds – as well as debt and equity brokers, we are improving our understanding of which deals meet each investor’s needs. Investors differ on risk tolerance, return requirements, ideal investment size, preferred hold period, financial incentives, etc.; and getting a solid grasp on their needs is crucial to successfully fundraise.

Tell me a bit about the Progression REI story. What’s your competitive advantage and what is your primary focus?

Progression REI’s core business is the acquisition and management of well-designed shopping centers within strong trade areas, at premiere intersections, that attract national retailer anchors.  Our transaction size range is $5 million to $40 million, and we are focused on secondary markets that meet our criteria.  This strategy intentionally avoids competing against many institutional investors that are unable to invest outside core markets and that need to find very large transactions to meet capital allocation goals. We believe focusing on non-core markets has enabled us to find investments that generate highly attractive risk-adjusted returns.

We have worked hard to cultivate strong relationships with national and regional retailers as well sales and leasing brokers in the markets in which we operate. Our extensive network helps us source new investment opportunities, new tenants, and valuable market information; all of which lead to a tremendous competitive advantage.

You’ve successfully closed your first 3 deals. How did you overcome the challenges of raising capital and tying up the deal with no track record?

We got our start with a relatively small deal and looked to very close friends and family as investors. That’s how the vast majority of real estate companies start. When we initially approached various investors we received a lot of positive feedback and many groups said they wanted to invest with us, but only after we’d done two or three deals first. I have a lot of friends and peers who have received similar feedback. The good news is that now that we have completed several deals, our momentum is beginning to build and more and more people/groups have expressed a desire to work with us in the future.

Also, the endorsement of a good debt & equity broker is invaluable. They can provide access to a pool of capital providers, and greatly accelerate the process to cultivate relationships. We have relationships with several groups who assist us with both debt and equity capital and consider them integral members of our team.

What has you the most excited about the real estate industry today? 

We are cautiously optimistic about online crowdfunding. The industry is still young and has yet to prove itself as a sustainable long-term model, but we are closely monitoring it and are interested to see its evolution over the next few years. We believe crowdfunding has the potential to change real estate by:

  • Providing small retail investors access to opportunities they did not have in the past
  • Assisting less experienced investors to better judge an opportunity’s risk vs. return, thus helping them make confident decisions to meet their investment goals
  • Offering investments in relatively small increments, allowing greater diversification between risk, product types, geographic markets, and hold periods
  • Tracking deal performance and returns in real time, making private real estate markets more transparent and holding sponsors to higher standards
  • Making the fundraising and reporting process more efficient for sponsors

What’s one piece of advice you’d give to a young person just starting his/her real estate career today?

I started my career in a very specific niche of the industry – representing office tenants in downtown Los Angeles – and found making my way to the principal side was a lengthy, difficult process. My advice is to find a role that will provide the maximum amount of flexibility and optionality for future career paths. As a young professional, how much you learn is just as important and valuable as your financial compensation, so choose your first job accordingly. Find a role that provides as much exposure as possible to different types of deals, product types, and markets.

You can view all investor spotlights here.