Brokerage

A Time to Buy

Investors found opportunities in big and small markets in 2010.

By now it’s well-known: The commercial real estate recovery already has begun in core markets, where big deals are closing regularly. But there’s a lot of action in secondary and tertiary markets too. As these transactions illustrate, investors everywhere are moving off the sidelines to inspect the inventory, convinced that it’s time to buy.

Catching the Wave

It’s a common saying among investment advisers these days: Get in at the bottom and ride the wave. But it takes a special kind of faith to swim out on an $800 million surfboard. “We’d been talking to our client about investing early in the recovery period of the real estate market cycle and that’s exactly what they did,” says Jay D. Skelton, CCIM, portfolio manager with Principal Real Estate Investors in Des Moines, Iowa. Principal’s client, a major pension plan, purchased in joint venture a 68-property national industrial portfolio of class A space for approximately $800 million from Panattoni Development Co. The deal also included a $300 million commitment for new investment production.

“At the end of the day,” Skelton says, “what made the transaction work was the relationship between our client and Panattoni,” which stayed in for a minority ownership interest.

The sheer size and geographic diversity of the transaction, however, presented some obstacles for Skelton’s team. More than
72 percent of the assets were located in California, Atlanta, Reno, Nev., and Memphis, Tenn., with the remainder located in core industrial markets including Chicago, Dallas, Houston, Denver, and Seattle. “Take a one-off acquisition and all the tasks you would normally perform, multiply by 68, and add to that the negotiation of two joint-venture structures and new financing arrangements,” he explains. “In due diligence, our team reviewed over 15,000 historical documents, 300 new reports, 150 leases, and more. You name it, we did it.”

But Skelton is confident that all of that effort will eventually pay off for the client. “As we work our way out of this recession people will be spending more, which means more need for product in these warehouses,” he says, citing Los Angeles’ Inland Empire submarket, which saw six quarters of positive absorption and single-digit vacancy rates by year-end 2010. “We are extremely excited about our client’s acquisition and the opportunity to be in a great partnership with Panattoni.”

A Boost From Abroad

“Hotel deals often take more than a year to complete; this one took five months start to finish,” says Tony Cho, CCIM, president and CEO of Metro 1 Properties in Miami. In November 2010, Cho closed the $14.7 million off-market sale of the 40,000-sf Peter Miller Hotel in Miami Beach, Fla., from Kabo Realty Trust to Lennox Hotels, a foreign investor. He attributes this swift turnaround in part to the location, lately a magnet for international investment. “Miami is a politically stable gateway city with strong property rights,” Cho says. “Foreign investors feel at home in our international city.”

The main issue, Cho explains, was educating Lennox Hotels on market valuations and trends to make them comfortable with the investment. He provided them with market data, comp sales, and case studies of other deals Metro 1 Properties had worked on.

“Obtaining financing for foreign nationals also is extremely difficult,” Cho says. But the buyer has a good reputation in its home country, and Cho worked with a lender to verify assets and put together an assumption consistent with market rates and terms.

The transaction capped a better-than-expected year for Metro 1 Properties and the hospitality sector in general. Cho expects that momentum to continue in 2011. “We’ll continue to see an increase in leisure and business travel,” he says. “And Miami is recuperating faster than most markets thanks to international investment.”

Numbers Don’t Lie

“You need to believe in what your numbers, demographics, and forecasts are telling you,” says Terence P. O’Leary, CCIM, of ePartment Communities LLC in Kansas City, Mo. “If there’s any hesitation, the big project won’t get done.” In this case, the big project was the development of the first high-density apartment complex in Overland Park, Kan. O’Leary’s company put the land under contract in 2009 and began working to get it rezoned from 80 condominium units to 212 multifamily units. But in fall 2009, the initial investor backed out. “Financing had dried up, construction in the region had basically stopped, and our rents were going to be 20 percent higher than the going rate for the area’s garden-style apartments, so it was difficult to find someone who was interested,” O’Leary says.

But O’Leary didn’t let this faze him: He knew the numbers were solid. During the marketing push, Johnson County was experiencing relatively low unemployment at around 6 percent, the local multifamily market was 91.5 percent to 93 percent occupied, and several companies were relocating to the area. A gap analysis illustrated the need for 1,500 new apartments in the market. And taking a cue from the CCIM CI 102 course, O’Leary compared the area’s three-mile radius demographics to other markets in the region such as Kansas City, Mo., and Denver, which both had success with similar projects. The marketing package, which O’Leary asked fellow CCIMs to peer review, included a three-dimensional image of the building, industry articles, market data, and pro formas.

“We also talked to private wealth managers and investors to evaluate different fund-raising methods,” O’Leary says. “You need to know what’s motivating investors and how commercial real estate compares with other investment types.”

His due diligence paid off. In July, Mission Farms West Apartments LLC, led by Bret Sheffield, CCIM, heard the pitch and stepped up to the plate. “The financial projections made sense,” says Sheffield, director of Caymus Real Estate in Kansas City. “Our interest was based on specialty multifamily’s promise: niche infill projects that meet an unmet need.”

The group closed on the 3.5-acre site in December for $3.5 million. “Specialty multifamily deals are complicated,” Sheffield says. “When you’re talking to CCIMs, who have the same knowledge base, it helps to expedite the process.” O’Leary’s company also will handle the marketing and property management of the $32 million, 212-unit Village at Mission Farms complex, which is expected to open in 2012.

Pre-Approved for Financing

When Steve Williamson, CCIM, a senior vice president with Transwestern Commercial Services in Dallas, listed 158,546-sf Guylane Plaza shopping center in Dumas, Texas, he knew financing for prospective purchasers would be scarce unless the grocery anchor tenant extended its two-and-a-half-year lease. He advised the owner, Guylane Plaza Center Ltd., on how to approach the tenant, which eventually agreed to exercise its five-year renewal early, resulting in a seven-and-a-half-year term. “It took several months to negotiate the extension, but it was well worth the effort,” Williamson says.

After that, everything fell into place. Recognizing that prospective buyers probably would have a Texas Panhandle connection, Williamson began “farming” the market. “We spoke to the local chamber of commerce for marketing ideas and contacted local and regional banks to inquire about interested buyers and financing availability,” he explains. To Williamson’s surprise, most of the banks were interested in financing a purchase of Guylane Plaza.

“Once we had an indication that reasonable financing was available, interest in the property increased significantly,” he says. Williamson and his team marketed the property through the CCIM MailBridge platform and Transwestern’s internal list, and soon generated five offers on the property. One used financing from a life company; three relied on local banks that were familiar with the property thanks to Williamson; and the final offer was funded with 100 percent equity. “Our targeted marketing produced knowledgeable and qualified purchasers … and our ‘pre-financing’ efforts convinced the prospective buyers that this was a real deal,” Williamson says.

The ultimate buyer, Burns Family Trust, was represented by Parker Carroll, CCIM, of Coldwell Banker Commercial in Lubbock, Texas, who saw Williamson’s “have” message on the CCIM MailBridge platform. “Since there were already multiple offers on the property, the trust had to step up to the table with a full-price offer to win the deal,” Williamson explains. “Parker and I put the $5 million deal together in a matter of days. MailBridge worked like a champ!”

Flipping Lots

“This very well could have been a once-in-a-lifetime situation,” says John L. Hummer, CCIM, president of Steinborn TCN Commercial Real Estate in Las Cruces, N.M., whose company represented all 10 parties in the simultaneous purchase and flip of land in Las Cruces. “Everyone won on this deal.”

The property, phase three of The Pueblos at Alameda Ranch, consisted of 94 upscale residential lots ranging from .22 acres to .29 acres and 15 acres of multifamily-zoned land. When the property went into bank receivership with Compass BBVA, Derek Graham, one of Hummer’s associate brokers, was awarded the listing. Hummer presented the opportunity to Hunt Cos., a long-time client based in El Paso, Texas, and it pounced. But the property generated two other purchase offers. To ensure full integrity and prevent allegations of “insider dealing,” Hummer asked the other bidders to send their final offers directly to BBVA Compass’ asset manager instead of Graham.

When Hunt Cos.’s $2.75 million offer was accepted, Hummer grabbed the spatula. “During the due diligence period, Hunt Cos. provided flip price points for the lots, which allowed us to market the opportunity to several key builder clients via Steinborn’s residential brokerage division, Steinborn & Associates Real Estate, and secure simultaneous contracts when Hunt Cos. closed with Compass BBVA,” he explains.

The instant flip of 88 percent of the lots greatly enhanced Hunt Cos.’s internal rate of return and allowed them to hold the multifamily land in anticipation of growth in the area. Plus, Compass BBVA was able to get the asset off its books, and the builders were able to purchase the lots at a reasonable price, Hummer says. “Of course, there is a financial benefit to representing all sides,” he adds. “But the real satisfaction comes from a job well done.”

Rich Rosfelder is associate editor of Commercial Investment Real Estate.

Rich Rosfelder

Rich Rosfelder is vice president of strategic communications for CCIM Institute.

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