Office Properties

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July 2015 — Office Properties Quarterly — Page 3
Investor Market
T here is a new breed of office
investors in Colorado who previ-
ously were not involved in real
estate investing. Unfettered by
preconceptions of a building’s
history or reputation, this new invest-
ing group is repositioning and repur-
posing seemingly mundane suburban
commodity office buildings into cash
generators through a combination
of tenant responsiveness, innovative
redesign and hands-on attention to
detail.
Oil and gas people in trades, indi-
viduals flush with cash from selling
successful nonreal estate businesses
and young syndicators in their 30s
are buying office investments, and
showing tangible signs of success in a
product type often spurned as undif-
ferentiated.We welcome their energy
and insight.
These folks are accustomed to gen-
erating strong incomes from their
core businesses, but have pivoted to
real estate investment, in general,
and suburban office, in particular, as
not only an alternative investment
hedge, but also as a new challenge.
Once a successful entrepreneur sells
his business, often he is moving on to
a new chapter in his life and looking
for a new challenge. By investing in a
building that requires adding value,
which can be a challenge, the inves-
tor also improves the building and
the market.
Let’s look at four examples of this
trend. One undifferentiated commod-
ity suburban office building in the
north metro Denver market bounced
along at 65 percent occupancy for
years, despite sophisticated owner-
ship and manage-
ment as part of a
large investment
portfolio. The first-
time buyer recently
sold his engineering
business and was
flush with cash.
He chose to buy
this three-story,
45,000-square-foot
brick building as
an investment.
He then made the
decision to move
into a small suite
in the building, which allowed him to
learn the systems, build relationships
with the existing tenants and create
a buzz, all of which paid off because
the building now sports 90 percent
occupancy and cash flows nicely.
Another individual, who was suc-
cessful with his technology firm, used
his excess cash to purchase 1960s
and 1970s vintage office properties,
which were long considered unsal-
vageable by the more jaded Denver
real estate ownership community.
The two buildings challenged the bro-
ker because of the outdated systems,
look and historical occupancy. But the
new owner brought a fresh perspec-
tive, design savviness and focus that
are not typical of Denver “real estate”
guys. One of the buildings is now 100
percent occupied, while the other will
benefit from a spec suite program of
finishes not redone since the ’60s. A
combination of tenant interaction,
self-leasing and attention to detail
has been very successful for the
investor.
A third example is investors who
followed a more traditional real
estate syndication model and have
been in real estate their whole lives.
The difference here from the tradi-
tional ownership model is that the
principals are in their 30s, offer a
youthful millennial eye for redesign,
and emphasize a tenant relation-
ship focus. This group transformed
a perennially underoccupied, undis-
tinguished, two-story, 50,000-sf brick
building into a building with a strong
common area design, full modern
amenities and green design elements.
The building already sold for a profit,
and I predict this group will duplicate
these results on another building it
purchased down the street.
Just last month, we sold a large,
tired, 60,000-sf building to a user who
will occupy a small suite.We are con-
fident this young female owner will
use the design transformation, her
eye for tenant customer service and
energy to make herself as success-
ful in real estate as she was with her
core cosmetic business.
It’s well documented that the indus-
trial real estate market was turned
on its head by the demand created by
the Denver County marijuana boom.
This spilled industrial demand into
the suburbs, and made it increasingly
hard for any investor who is new
to real estate to acquire industrial
investments that make sense. Many
industrial properties are trading at
prices per sf well above office.
Retail properties have been sell-
ing well-above replacement cost for
some time, and high occupancies
preclude value-add opportunities. The
rental house and fix-and-flip market
is long gone, leaving suburban office
investing fertile ground for these new
value-add investors.
Many sophisticated Denver real
estate groups won’t touch office, but
this new breed of atypical real estate
investor is finding traction with the
product type. Oil and gas groups can
take advantage of 1031 exchange
rules, allowing a capital gains defer-
ment of their oil and gas real estate
holdings, so they’re moving into office
investing. Also we’ve seen technology
firm founders, who sell their busi-
nesses and are newly flush with cash,
move into office investments. These
bright individuals offer a fresh per-
spective and are innovating how to
own, redesign and manage buildings.
Although not necessarily new to
real estate, we’re also seeing a trend
of young, energetic and creative
real estate syndicators snapping up
unstabilized buildings, remodeling
them in a modern style, and filling
them quickly with young companies
looking for new design, style and
amenities.
The strong market improvement
made these new investors look like
expert veterans, and we’ll have to
wait and see if a market downturn
will shake out this group, to which
most of us who have weathered mul-
tiple cycles can attest. But we feel this
new perspective on real estate invest-
ing offers is a refreshing trend that
will improve and differentiate what
was once considered a commoditized
product type.We welcome them to
the club.s
John Becker
Senior vice
president, Fuller
Real Estate,
Littleton