Office building deals on the upswing in the region
Updated 12:55 pm, Wednesday, July 31, 2013
The commercial real estate market is starting to experience an upswing in office building sales in the region, but real estate brokers are far from celebrating a return to pre-economic crash levels when sales in 2007 were triple the number recorded in 2012.
In the past month, there have been reports of at least three office complexes sold -- one in Milford at 185 Plains Road for $5.25 million, another at 40 Richards Avenue in Norwalk for $16.5 million, and a third at 4 Research Drive in Shelton for $8.5 million.
But brokers like Gene Pride, of CBRE in Stamford, are saying that lenders are being careful about who receives a loan.
"For buildings that have really high vacancies, financing is hard to obtain," said Pride, who represented the seller of the Milford Place Corporate Center to Total Mortgage Services. "But it's gradually improving. Most people are saying that it's better than it was three years ago."
Through June 30, there were 11 transactions of $3 million or more valued at $127.07 million in Fairfield and New Haven counties, compared with 10 transactions of $84.98 million for the first six months of 2012.
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There has been a steady increase since 2009, when only five sales were done. Last year, there were 21 sales in the two counties, though that's less than a third of the 64 recorded in 2007.
When a buyer plans to occupy a building, it can change a lender's approach, Pride said, noting that Total Mortgage Services will move its headquarters from 326 W. Main St., to the 143,802-square-foot, three-story building and occupy 30 percent of complex on Mill Plains Road.
The fact that there were 74 investors from 11 states and one foreign country interested in the Milford property also indicates that the market is improving. The high interest level was even more satisfying for Pride and fellow CBRE agents Tim Fegan and Dave Hansen because the building is only about 30 percent occupied.
"This offering created a remarkable amount of interest from regional and national buyers that could take advantage of this opportunity to create substantial value by repositioning a high quality asset," Pride said.
`A good deal'
"It had sold before for $17 million, and we got it for $5.25 million, so we got a good deal on it," he said. "Without my going into the building, it would have been difficult to obtain financing. Commercial lending is based on the cash flow of the building."
The acquisition relieves Walsh of the headache of finding sufficient space for continued expansion of his business without forcing 140 employees to move to another community.
"We're definitely looking to grow," Walsh said, noting that Total Mortgage just opened retail offices in Ridgefield and Fairfield and plans to open one soon in Phoenix, Ariz.
Estimating that Total Mortgage will occupy 35,000 square feet when it moves from the 20,000 square feet it occupies now in the third quarter, Walsh said the new space will allow him to add staff and improve efficiency.
"My assistant is working in what used to be a service closet," he said.
In Norwalk, The Davis Cos., a Boston-based real estate investment, development and management firm, saw the potential in an under-occupied 147,000-square-foot office building at 40 Richards Ave., and purchased it from Mack-Cali Realty, for $16.5 million.
The building, which is 64 percent occupied, was acquired at a significant discount to the replacement cost, according to Davis Cos. Tenants include Media Horizons, First Niagara, HQ Global Workspaces, Trenwick America Reinsurance and Connecticut Business Systems.
"We have been targeting opportunities to acquire well located, high quality office properties, which are underperforming, and we are very excited about our recent acquisition of 40 Richards Ave.," said Steve Rice, regional director of acquisitions for The Davis Cos. "Our low investment basis will allow us to offer very attractive rental rates and tenant improvement packages to potential tenants, and our capital improvement plan should significantly enhance the building's appeal. We believe we will be able to increase the property's occupancy over the next few years."
`Very attractive rates'
Davis Cos., which has a regional office at 200 Connecticut Ave. in Norwalk, plans to upgrade the cafe, landscaping and bathrooms, add a gym and complete other improvements.
Matthew Keefe, a principal of the HK Group in Westport, represented Mack-Cali in the sale and is familiar with the Norwalk market and Davis Cos.' place in it, noting its Connecticut Avenue property is 90 percent leased.
Based on the Boston company's success there, it should be able to offer attractive rents, he said.
"Our low investment basis will allow us to offer very attractive rental rates and tenant improvement packages, and the capital improvement program should enhance the building's tenant appeal," Rice said, estimating improvements to cost $1 million. Davis Cos. will have shuttle service to and from the Norwalk train station.
The company will continue to make acquisitions, he said.
"As the economy continues to improve and leasing velocity picks up, there should be more opportunities to acquire under-performing properties with a plan to make capital improvementss and lease-up the vacant space," Rice said.
New Rochelle, N.Y.-based Rugby Realty's $8.5 million purchase of Shelton's Reservoir Corporate Center-- a 157,776-square-foot Class A office building on seven acres-- brings to five Rugby's properties in eastern Fairfield County. The Shelton property complements the Fairfield Metro Center, a 1- million-square-foot, mixed-use development in Fairfield, said Maurice Ades, Rugby Realty's managing partner.
NGKF Capital Markets represented both the seller and the buyer in the sale of the Reservoir Center, which was in foreclosure.
Commercial sites in Greater Stamford are also growing in popularity among investors.
"We're seeing capital coming in from other areas," Jose Cruz, senior managing director of Holliday Fenoglio Fowler, said at a recent panel discussion on the region's commercial real estate market. "Investors are looking for yields."
Interest rates rising
But interest rates on loans to make those building purchases are starting to inch upward, although they are still at the low end, said Brett Wilderman, a principal in Darien-based Forstone Capital, a boutique real estate investment firm.
"Forty-five days ago, they were in mid-4s. Now they're in the mid-5s. But 10 years ago I'd be thrilled to get 5.5 percent for a 10-year term," he said. "Banks were managing portfolio issues four or five years ago. I think they've cleaned up those issues. They want to do deals."
Banks want to do deals with buyers of office buildings, but those wanting to acquire properties with a healthy tenant occupancy will have a better chance of obtaining funding, according to Rick Zaremski, senior vice president at First County Bank in Stamford.
"Typically, it's a building with 80 percent occupancy or more and multiple tenants instead of a single tenant. That takes some risk out of the deal," he said. "You want longer-term leases in place, and you don't want them rolling over at the same time. A owner-occupied building is different than something done as an investment because you (as a bank) are looking at the strength of the owner."
Zaremski said First County was lending throughout the financial crisis, but he has noticed a pickup in the office building market.
"The office market is slower than some sectors," he said, "but there has been activity."