CREJ

February 2015 — Retail Properties Quarterly —

Page 9

hen working at Trammell

Crow Co. in the late 1990s,

I led a group undertaking

single-tenant, retail and

build-to-suits all over the

United States. We developed many

projects throughout the country

and even outside of the contiguous

U.S., including Alaska and Puerto

Rico. We would

build the same

building with the

same lease for all

of our clients in

different markets.

I always found it

interesting how

many almost iden-

tical properties we

could sell, but the

price would vary

somewhat dramat-

ically.

We built an

OfficeMax in

Ponce, Puerto

Rico, and the lease was in English.

However, all the underlying docu-

ments were in Spanish. I have to

admit, relying on a local lawyer

to interpret and approve all of the

underlying documents that were in

Spanish was daunting. The location,

language issue and the fact that

you could not do 1031 exchanges in

a U.S. territory at the time, pushed

the cap rate and we were able sell

the property up 100 basis points

higher than what the same lease

and building prototype sold for in

similar locations in the continental

U.S. This was in spite of proven high

sales figures for retailers like Office-

Max in Puerto Rico. I decided after

that deal to always factor in some

of the more intangible factors that

influence real estate investors.

Since 2002, we have been invest-

ing in and developing properties

in Colorado and California. I am

amazed at the special connection

these two markets have and the

benefits that Colorado gains from

California investors’ infatuation

with our real estate.

Many elements go into property

valuations. Factors include the

quality of the improvements and

the location, quality and length of

the income stream, and, maybe

most important, the amount of the

income stream.

Colorado real estate generally

gives California investors a slightly

higher return, which, without a

doubt, is a factor. However, the

mountain resort image of our state

and the lifestyle, along with a lot of

direct flights are big differentiators

that should not be overlooked.

In my experience, Kansas City,

Missouri, from a cap rate perspec-

tive, is penalized for being flat, Min-

neapolis for being cold, and Cleve-

land for, well, being Cleveland.

We are blessed with beautiful

mountains, great weather and a

healthy lifestyle within which Cali-

fornians connect.

Of course, as Coloradans we

would like to pat ourselves on the

back and say this infatuation exists

because of the vibrant economy and

quality communities that we have

created. One might argue we have

had little to do with it, but rather

the landscape, proximity to Califor-

nia and weather are blessings we

are fortunate enough to have.

We have an image created by the

physical beauty, weather and life-

style that attract real estate capital

from other parts of the country, but

especially from California.

Most Californians are proud that

they live in a state with beautiful

mountains, beaches and very pleas-

ant weather. The massive metroplex

stretching from Ventura County

north of Los Angeles, to the Mexi-

can border in San Diego is one of

greatest economic engines in the

history of the world. The Bay Area

in the north is not as large, but

extremely significant. Add it all up

and that is a lot of real estate worth

a lot of money.

Real estate prices in these mar-

kets are high with low cap rates.

I found that when an owner of a

small apartment building in Los

Angeles sells his property for a

4 cap, often the joy of selling is

tainted by the fact that in order to

buy something else in California,

it’s going to command the same

crazy cap rate. To get an acceptable

return, he would have to aggressive-

ly raise rents and drive net operat-

ing incomes up.

Many owners decide to look out-

side California for better returns.

This is where the Colorado con-

nection seems to flourish. Over

and over again when selling retail

assets, buyers from California step

up to the plate and close on deals

over local investors. Comments like,

“I have always taken my kids skiing

in Vail, so I would love to own prop-

erty there,” or “Colorado is such a

beautiful place,” are anecdotal com-

ments I hear.

What I have not heard is, “I

want to own real estate in Colo-

rado because of the legalization of

marijuana.” Actually, I have heard

statements to the contrary. And our

neighbor to the west, Utah, is gain-

ing more investor interest because

of some of the high-profile deci-

sions and events that may negative-

ly affect Colorado’s image.

In my experience, sometimes not

many sophisticated economic met-

rics like demographics and employ-

ment growth are being applied.

It is an image and a connection

that Colorado has with California.

These are investors buying assets

under $5 million, and they are not

institutional in nature. However,

they are not short on real estate

savvy and typically manage assets

in a competitive California market-

place to get to where they are. They

also have a lot of money to place

when they sell even the smallest of

assets.

If you own smaller retail assets,

especially single-tenant, triple-net

assets, you should make the Cali-

fornia connection when you go to

sell. In addition, we should all care

about the image and perception of

our state.

California dreamin’ for Colorado cap rates

Market Driver

Greg Ham

Chief operating

officer, co-founder,

Cadence Capital

Investments,

Greenwood Village

This strip mall was also completed as part of the project with Sprouts, which sold to an international company, represented by a

California broker.

Sprouts grocery store, part of a project completed at South Broadway and East Belleview Avenue, is a prime example of California

capital investing in Colorado properties.