Commercial Property News - November 2008 - (Page 19)

SINKING FEELING 80% 60% 40% 20% 0% -20% -40% -60% -80% '08 -100% '07 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar (year-over-year office-property sales volume changes) *excludes entity-level transactions Source: Real Capital Analytics Inc. tower at 740 S.Olive St.in Downtown Los Angeles. It paid $56.5 million, $3.5 million over the listed price.The property is participating in the Department of Housing and Urban Development’s Section 8 voucher program but was able to tap bridge financing. Given the huge demand for and tight supply of this product amid Downtown Los Angeles’ residential renaissance, the leasing risk is about as minimal as it gets for a multi-family property, noted Related of California president Bill Witte. The 12-story tower, entirely refurbished in 1979, boasts a 99 percent historical average occupancy,with annual turnover running in the single digits—not to mention the 100-strong waiting list. Perennial tenant demand and the property’s relative rarity pretty much assure its value retention throughout the economic cycle, he added. “We don’t see a lot of 300-plus-unit Section 8 projects become available.”And it does not hurt that Metro subway stations are a three-block walk to both the north and west. Witte’s team was particularly attracted to the asset’s impeccably stable income stream, as well as prospects for management-fee income as the firm brings in tax-credit investors next year. The firm is negotiating a new 20-year contract with HUD, slated to take effect when the current Section 8 arrangement expires next year. Related of California expects to refinance via an estimated $57 million in tax-exempt affordable-housing revenue bonds, along with $18 million in equity that qualifies for lowincome-housing tax credits. It plans to invest $9 million in improvements, probably including upgraded elevator systems,Witte added. multi-family sector presents the most attractive investment opportunities. A full half of the executives surveyed picked apartments, while fewer than one in five pointed to office properties in central business districts. For RedHill Realty Investors, that mostly means pursuing competitively priced, quality housApr May Jun Jul Aug ing in strategic infill locations with convenient access to transit systems. “We’re focusing on affordability; we’re not investing in properties with ‘over-the-top’ amenities requiring us to keep pushing the rents,” CEO Russell Dixon explained. At press time, RedHill was about to close on a near-in community in Los Angeles. Tapping attractive acquisition/rehabilitation debt that is still available from Fannie Mae and Freddie Mac, the buyer group negotiated a price factoring to a going-in cap rate above 5 percent, with plans to boost the yield via a repositioning program. insulate well-located medical facilities from economic ups and downs. RM Crowe and its investors are assembling a geographically diverse portfolio of such properties, all of them near magnetic anchors like major medical centers or research-oriented universities. The downside of such properties,Frammartino noted, is that market pricing does factor in the lower risk: “They can be expensive.” Hence, investments in solid development projects are pretty good bets, though such opportunities are “few and far between,” he said. Infill Value-Add Ventures While general office properties tend to carry higher risk profiles than do medical offices, savvy value-add players can mitigate the prospect of loss that comes with a tanking economy by targeting solid infill properties that they can improve while keeping tenants in place. “Leases are starting to look pretty good again, and it’s nice to get that monthly rent check,” Latimer quipped. Hence, the latest ING Clarion Lion Value Fund acquisition, purchased with operating partner Schnitzer West L.L.C.for $52 million,is 90 percent leased to tenants paying below-market rents.The low-risk value-add plan for the 262,000-squarefoot Crescent office complex in Denver’s preeminent Cherry Creek submarket is to make improvements with the tenants in place.When leases are scheduled to roll, decision makers will recognize the higher quality and pay the market rate,or they will opt to move and the property owners will seek to replace them, Latimer explained. Such value-add opportunities are attracting more attention today than was the case just months ago. Latimer concluded that the higher the perceived risk of the assets being marketed, the further values have fallen. t Healthcare Properties With aging U.S. residents providing an evergrowing customer base for medical office tenants, it should come as no surprise that many investors see these and related healthcare properties as exceptionally stable income-producing assets. Several real estate investment firms, such as RM Crowe, now focus on the sector. As that firm’s chief investment officer, Dodd Crutcher, said, high tenant-retention rates and long-term leases with triple-net rent structures Finding the Middle Ground Close-In Apartments As Related’s strategy also illustrates,reasonably priced,close-in apartment properties in large metropolitan markets generally are excellent hedges against recession.Indeed,a just-completed survey of commercial real estate professionals by law firm DLA Piper found a clear consensus that the While declining tenant demand is certainly making office property investments more risky, quite a few investors today are targeting the relatively safe and attractive returns they expect in buying performing mezzanine debt. As Townsend Group principal Anthony Frammartino noted, mezzanine yields have risen with the additional demand from borrowers for secondary financing, as senior lenders have become stingier in the crunched credit environment. Yields that had been in the low teens and even single digits in recent years are now typically in the mid-teens—and occasionally upper teens with riskier ventures. Big institutional advisor Shorenstein Properties L.L.C. has been an active buyer of performing mezzanine debt that is secured by interests in trophy towers. Younan Properties Inc. has been acquiring mezzanine pieces and other subordinate debt in select markets. And now regional players like Federal Capital Partners in Washington, D.C., and NBS Real Estate Capital in Portland, Ore., are actively scouting performing mezzanine purchase opportunities. With yields to buyers now frequently far higher than the original coupon rates, investors in some cases can secure quite attractive risk-adjusted returns by tapping sellers that prefer to get these assets off their books, noted NBS Real Estate CEO Rance Gregory. Investors need to consider not just the discount to principal balance but also how the original coupon rate compares with rates now prevailing in the market—and overall leverage as well—Gregory stressed. The firm’s Morrison Street Fund III L.P. has already acquired secondary debt at pricing ranging from 25 percent of outstanding balance for certain subperforming slices to 90 percent for performing mezzanine loans that are tied to solid properties, he added. It is a matter of keeping the risks in line with the returns, Gregory continued. Morrison Street fund managers would consider buying existing secondary debt on office properties only if near-term lease expirations are minimal and only if they can buy at a discount that factors to below replacement cost. www.cpnonline.com • November 2008 • COMMERCIAL PROPERTY NEWS 19 http://www.cpnonline.com

Table of Contents Feed for the Digital Edition of Commercial Property News - November 2008

CPN - November 2008 Contents Starting Line Seniors Housing Data/Analysis Conferences Through the Fog CPN’s Top Cities for Investment & Corporate Relocation Finance International Sustainability CPN-Nielsen Claritas Special Report

Commercial Property News - November 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.