CREJ - Office Properties Quarterly - July 2015
There is a new breed of office investors in Colorado who previously were not involved in real estate investing. Unfettered by preconceptions of a building’s - history or reputation, this new investing group is repositioning and repurposing 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, individuals 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 undifferentiated. We welcome their energy and insight. These folks are accustomed to generating 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 investor also improves the building and the market. Let’s look at four examples of this trend. One undifferentiated commodity suburban office building in the north metro Denver market bounced along at 65 percent occupancy for years, despite sophisticated ownership and management as part of a large investment portfolio. The firsttime 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 successful with his technology firm, used his excess cash to purchase 1960s and 1970s vintage office properties, which were long considered unsalvageable by the more jaded Denver real estate ownership community. The two buildings challenged the broker because of the outdated systems, look and historical occupancy. But the new owner brought a fresh perspective, 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 traditional ownership model is that the principals are in their 30s, offer a youthful millennial eye for redesign, and emphasize a tenant relationship focus. This group transformed a perennially underoccupied, undistinguished, 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 confident this young female owner will use the design transformation, her eye for tenant customer service and energy to make herself as successful in real estate as she was with her core cosmetic business. It’s well documented that the industrial 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 selling 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 deferment 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 businesses and are newly flush with cash, move into office investments. These bright individuals offer a fresh perspective 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 multiple cycles can attest. But we feel this new perspective on real estate investing offers is a refreshing trend that will improve and differentiate what was once considered a commoditized product type. We welcome them to the club.