Is 2007 pricing back for good?

October 27th, 2010  ::  Posted by CRE Console

Triangle PlazaCRE Console is certainly not breaking this story, but we did a double-take today on two deals which were announced.

1. REIT to buy office complex from Buck for $97 million
Chicago Daily Real Estate reported that Commonwealth REIT (fka HRPT Properties Trust) has agreed to pay The John Buck Company $97 million for Triangle Plaza, a 630,000 square foot office complex near O’Hare Airport.

At roughly $97 million, the price would be about $154 per square foot for the 631,445-square-foot complex. The price is about $5 million more than the $92.15 million Buck paid for the complex in 2006.

National City TowerOn an NOI of $7.6 million, this price equates to a 7.83% cap rate. Originally, Eastdil was whispering a 7%, or a price of $109 million. While this price did not come to fruition, a $5 million capital gain on a deal acquired at the peak of the market, is a feat unto itself.

2. Louisville Deal Pushes the Limits
Today’s Wall Street Journal reported that KBS Realty Advisors has agreed to pay about $115 million for National City Tower, a 38-story office building in Downtown Louisville, Ky. Meridian Realty Investments paid $95 million for it in 2005.

Meridian then did what was in vogue at the time, and immediately syndicated the deal under a TIC structure, bringing the total capitalization of the property up to $114 million.

A TIC sponsored at the height of the market breaking even (maybe not after all sponsor and brokerage fees are paid…) in 2010 is a rarity, but combine that with KBS Realty venturing into a true secondary market like Louisville to pay this price will be a surprise to many.

One thing to note is that both buyers have a lower cost of capital relative to other investors, as was recently noted by Joel Ross in his recent blog post titled, Moody’s vs Green St. The Value Battle. They’re Both Wrong:

…REITs are the main buyers, and based on specific deals I have seen, they are way over paying just because they need to spend all that capital they just raised, and their cost of capital is well below the ordinary real estate buyer capital cost today.

Ross goes on to say, “To say a trophy building in Manhattan is indicative of anything is equal to saying a 100 room hotel in serious distress in Omaha is indicative of anything. Neither is indicative of much beyond itself.”

While we would tend to agree with his point, with KBS Realty’s deal in Louisville, it could serve as an indication that prices have stabilized for core assets, even in secondary markets.

3 Responses to “Is 2007 pricing back for good?”

  1. Joshua says:

    The REIT deals going down really make one scratch their head. KBS has a great track record. But the dtla deal (bought from Hines) and this deal make little sense. From what I can tell, they need some stabilized, core assets to achieve a yield that beats out treasuries. Their last couple deals do that and are the types of deals that you assume will provide stabilized holds and returns. That being said, they have a huge amount of cash, much more than they were investing previously, to place. You can see that they are buying more stuff outside of what used to be their MO to place money. I dont think these are bad deals per se, but I dont think they are very good either. All things considered, they should achieve a 4% cash flow for their investors and they should be happy, until the 10 year explodes.

    That is to say nothing of the TIC investor who got lucky as one can be. This is why i will never recommend or invest in a TIC (but I will sponsor one). The sponsor makes their money up front, usually a whole 100 bps spread. Cash in pocket. Then they take an asset management fee off the top when they are some of the worst managers I have ever encountered. They run these things into the ground cause they dont have any money in the deal or the ability to fund capital calls like necessary. I have never seen a TIC deal make the investors money. Ok, maybe a couple times, but only by the small, ethical guy, not the large corporation. All I have to say is – lucky.

    The chicago deal is more interesting. What is the back story? Did they add value via leasing? Did they simply get a deal from a Seller that didn’t know better than to get a 6% CAP in the height of the market? That deal, on the surface, says to me that they bought it right or managed it right. Cause to sell at a 7.83% CAP and make $5M seems to show that someone made a good deal. To call back the last post – this is how buying below market deals can make you money. That is a $300+ PSF to build project. And the leases apparently are not unrealistic due to the low cost PSF. This deal probably wont make any rich on reversion, but it should provide solid cash flows. Anyway, much more interesting story in that deal. Post what you about it, will you?

  2. CRE Console says:

    Joshua, after researching background on the Triangle Plaza deal further, it appears there was certainly a value-add play, which John Buck Company was able to execute. John Buck Company was a minority partner with Starwood Capital Group, when they bought it for $98 million in 1998. It appears they exercised a purchase option, taking Starwood out of the deal, but the price of $92.15 million was not a pre-agreed price, as Broad Street Advisors took the deal to market for Starwood Capital, before the option was exercised.

    At the time Buck bought out Starwood’s interest, Triangle Plaza was about 81% leased, with several sizable leases rolling. In addition, to leasing over 60,000 sf of new space, Buck was able to renew tenants including Verizon Business Services for 41,000 sq. ft. and Regus Group for 36,000 sq. ft. in 2008.

    Considering the cap rate of 7.8% paid by Commonwealth, we’re guessing the reason for some of the discount is because of the major tenant’s credit, Wilson Sporting Goods, isn’t considered investment grade. Also, from the comments posted on Crain’s article, it sounds like there is some deferred capex for Commonwealth to deal with post closing.

  3. Joshua says:

    interesting. thanks for the update.

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