How to Get Double-Digit Returns
The days of buying distressed office buildings are over (leave them for the fairy tale princes), but that doesn't mean you can't still rake in double-digit returns. We searched the country for tips on acquiring office product in a peak market without sacrificing profit.
HOUSTON: $250M for Value-Add Opportunities
Last week, PMRG and The Roseview Group announced a new $250M fund to acquire and reposition office properties in primary and secondary US markets. It aims to acquire office assets below replacement cost and upgrade the buildings for total investment of $15M to $65M per asset. The goal: mid-teens returns. PMRG EVP of investments John Dailey is confident they’ll be able to find big returns even in highly competitive cities. He says tenants' flight to quality is leaving a great deal of product in need of updating or repositioning in order to maintain occupancy or re-tenant. This fund will look for buildings that need capital improvement or modernization or have leasing problems. They’ve already purchased one building in Houston, a Class-B facility in the popular Greenway Plaza submarket.
DALLAS: Doubling Down on Below-Market Rents
Velocis is known for its impressive returns (twice this year it’s sold Texas buildings for 30% IRR), and principal Mike Lewis tells us he’s going to market soon with a few properties and anticipates similar returns. His team has also been targeting assets leased at below-market occupancy, below-market rents, or in need of creative repositioning. He says there were a significant number of leases signed five to seven years ago at old market rates, when landlords were leasing for occupancy rather than value. That means many existing buildings have rents significantly below replacement cost rates. Mid last year, Velocis purchased a Dallas office building at about $12/SF NNN. It added fresh capital to the asset, and now leases have doubled to $24.50/SF NNN.
CHICAGO: Don't Forget Conversions
While IRR senior managing director Eric Enloe is seeing the strongest potential for double-digit returns in value-add deals (there’s no way you’ll find them in trophy office, with staggering pricing like 300 N LaSalle’s $850M sale to Irvine Co), turnaround plays aren't without risk and will take significant capital investment. Another viable option is conversion, especially older Loop office buildings becoming hotels like The Prime Group’s Residence Inn by Marriott project at 11 S LaSalle. The cash-flow potential is there, and taking office supply off the market will help reduce the city CBD's high teens vacancy rate, Eric says.