Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/143044
Te prepayment penalty was extremely high, making it economically unfeasible to prepay the loan. Te buyer will have to carry the current loan for another fve years, and then refnance in a market where interest rates most likely will be higher than they are today. "We're getting paid for that risk with a higher than market cap rate," says Grummons. Te property closed in May at an 11 percent cap rate. Activity Pockets Persist Drilling down to smaller markets, there is both activity and interest that varies on a case-by-case basis. "We have seen a steady, slow increase in activity of ofce investment sales over the past year," says Justin A. Beck, CCIM, CPM, president of the Beck Property Co. in Pensacola, Fla. What is drawing outside investors to smaller markets such as Pensacola is that the area has a good story to tell, he adds. For example, Navy Federal Credit Union announced in April that it is planning a $200 million expansion at its Beulah campus that will add 1,500 new jobs by the end of 2015 and potentially an additional 4,700 jobs by 2020. "We think that there are some really nice pockets of activity and growth in this region, and that's where the majority of these sales have taken place," Beck says. Tat economic activity has piqued the interest of private investors, mainly high-net-worth investors or small private funds, from southern Florida as well as California and the northeastern U.S. For the most part, those outside investors are pursuing stable properties and are getting at least 50 to 100 basis points — even 150 basis points more — by going into a smaller market like Pensacola, Beck notes. At the same time, buyers are looking for easy-to-manage properties, mainly buildings with larger and fewer tenants. Local buyers are primarily focusing on value-add opportunities. In the Pensacola region, there is not a tremendous amount of vacancy. So with a building that has some vacancy, "buyers have a pretty easy path in front of them, because the lease-up is not that difcult," Beck says. Buyers also are fnding opportunities with properties that have leases coming due. During the recession, landlords made some very aggressive deals to fll vacancies. "Now those leases are coming up, so there is opportunity for the value-add investor to go in and renew and get a little more of a market rate renewal," he says. For example, Beck represented a buyer late last year on a $2 million purchase of a 28,000-sf ofce property in Pensacola. Te building was 100 percent occupied, but sold at an 11 percent cap rate, in part because the property had several lease renewals coming up. By improving management and renewing leases at higher rents, the owner expects to increase cash fow by 20 percent within the frst year, Beck notes. Tere are a lot of quality properties in tertiary markets that have strong local economies, Grummons agrees. Cities such as Omaha; Des Moines, Iowa; Tulsa, Okla.; and Wichita, Kan., all have metros with populations of more than a half-million people and solid economies where unemployment is below the national average. "But, there just aren't bidders for these properties, and that is stunning to me, because they are good properties and good markets," he adds. Beth Mattson-Teig is a real estate business writer based in Minneapolis. YOY Volume Percentage Change 300% 100% -100% '01 '02 '03 '04 '05 '06 '07 '08 '09 9 '10 '11 '12 '13 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Average Capitalization Rate 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 Source: Real Capital Analytics CCIM.com July | August | 2013 29