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/649656
26 March | April | 2016 Commercial Investment Real Estate 2 6 Mar Mar Mar Mar ch ch ch ch | A | A | A | A pri pri pr pri l | l | l | | 20 20 0 20 20 16 16 16 16 16 6 Com Com Com Com Com Com Com Com Com C m mer mer mer mer mer mer mer me r er me r mer cia cia ia ia cia cia ci c i a cia a cia c i l I l I l I l I l I l I I l I l I l nve nve nve nve ve nve nve n ve e stm stm stm stm stm stm stm stm stm stm stm m t m ent ent ent ent ent ent ent ent ent t ent e Re Re Re Re Re Re Re Re Re Re Re R e Re R e al al al al al al al al Est Est Est Est Est Est Est Est Es Est Est Est s Es Es Es ate ate ate ate ate e ate ate ate ate at ate at t at t a t at a O f ce tenants are tired of the same four walls. T ey want new space, new amenities, new creature comforts. They need a new vibe to attract new workers. So with a still-weak development pipeline, office owners and investors are step- ping in to f ll the gap, creating "like new" space options for today's tenants. A laundry list of factors — ranging from little or no new construction to a quest for higher yield in a very competi- tive investment market — is fueling a spike in renovation and repositioning projects in many metros. On one side, existing landlords are work- ing to reposition properties to be more relevant in a market that is seeing dramatic shif s in what tenants want and need in amenities and features. T ese include a wish list of on-site bike lockers, roof op decks, and energy ef cient lighting. On the other side, there has been a surge in opportunistic investing. Capitalization rate compression among stabilized properties has sparked inter- est in more challenging rehab projects as a means to achieve higher yields. "We see areas in many sub- markets that are ripe to modern- ize buildings, provide a new face- lif , and consider going to creative of ce," says William A. Shopof , CCIM, president and CEO of Shopof Realty Investments LP in Irvine, Calif. T e f rm is pursuing value-add of ce projects as small as 75,000 square feet to more than 300,000 sf in California, Minne- sota, and Texas. "Generally speaking, there is probably more opportunity in secondary and tertiary mar- kets," Shopof says. T ose mar- kets of er more attractive yields compared to most primary mar- kets. Shopof also targets cities with good employment growth and other economic drivers that support the healthy demand for repositioned space. The newly renovated prop- erties are providing tenants a welcome alternative in a mar- ket where construction is still at historically low levels. T e U.S. of ce market saw a net gain of 68.8 million sf of space in 2015, which is well of pre-recession levels and still about 7 percent below the 10-year average of 73.7 msf in annual new inven- tory, according to CoStar. Opportunities Persist The dist ressed assets t hat emerged during and af er the recession provided ample inven- tory for value-add investors. Despite the fact that the of ce market recovery is well under way, with vacancies improv- ing to 11.0 percent at year-end, according to CoStar, there are still bargains in many metros. TerraCap is one firm that has continued to accelerate its value-add investment strategy in the past f ve years with acqui- sitions throughout Florida. "We were able to go in and buy at the bottom of the market, and we continue to buy as the market is on the upswing," says Albert S. Livingston, CCIM, director of asset management at TerraCap Management Corp. in Bonita Springs, Fla. TerraCap's strategy has been to acquire office properties at prices that are well below replacement cost, which allows them to put in signif cant capital to reposition a property and still have a relatively low cost basis to of er competitive rents. "We're not afraid to buy empty build- ings or buildings with single- digit occupancy, and go in do the work to make them competitive in that market and then lease them up," says Livingston. For example, TerraCap pur- chased a 160,000-sf of ce build- ing in Maitland, Fla., last year that was 25 percent occupied. In addition to making updates, such as completely renovat- ing the lobby and replacing the chillers, TerraCap increased the parking ratios to better serve the tenant demand for more densely populated buildings. At the time of purchase, the parking ratio was 3.5 stalls per 1,000 sf. Ter- raCap recently completed a new Tenants: Are you ready to see your new offi ce space? UPPERS FIXER