12/09/2009

Brokers Pitch Vacant Buildings to End-Users

With many opportunistic real estate investors on the sidelines, brokers are increasingly pitching empty or mostly vacant office properties to end-users.

Companies looking to relocate can be enticed by the drop in property values, brokers said. Also, businesses can qualify for low-cost government loans and tax incentives that make acquisitions more affordable.

Companies can now take over larger and higher-quality space while paying prices that are significantly below the replacement cost, said Guy Ponticiello, a Jones Lang LaSalle broker who has seen an upswing in interest from end-users.

He is marketing a vacant office/data center complex in suburban Memphis that is drawing interest from potential occupants. The seller, Harrah's Entertainment, spent roughly $50 million buying and renovating the 285,000-square-foot complex before deciding to consolidate its operations in Las Vegas. The complex, in Cordova, Tenn., will be auctioned online next week.

Last month, Ponticiello brokered the $2 million online sale of a two-building complex in Dayton, Ohio, to a joint venture between a private investor and United Food and Commercial Workers International Union. The union will occupy one building, while the private investor leases the other.

Brokers are also marketing buildings to existing tenants. In some instances, occupants have been willing to buy multi-tenant properties and become the landlord of the space they don't use. For example, an unidentified occupant has agreed to buy Union Square 1&2, a 326,000-sf office complex in San Antonio, for about $40 million from a Griffin Capital partnership, according to market players. CB Richard Ellis is the broker.

End-users have traditionally accounted for less than 10% of office purchases. When prices soared during the bull market, the share declined because purchases became uneconomical for occupants. In 2007, end-users were the buyers in just 4.4% of the 4,420 transactions, down from a 6.3% share in 2006, according to Real Capital Analytics, which tracks transactions of at least $5 million.

But since the market collapsed, heaping losses on high-yield investors, the proportion of purchases by end-users has grown - to 8.3% of 1,597 purchases last year and to 10.8% of 435 deals so far this year. Of course, since overall transaction volume has plunged, the number of purchases by end-users has also fallen.

In order to indentify potential end-users, brokers collect data on large employers near listed properties, focusing on companies with maturing leases.

Often, local or state governments offer tax breaks to companies that buy properties they intend to occupy. Also, some companies can qualify for Small Business Administration loans that can enable them to finance as much as 90% of the purchase price - a level of leverage no longer available to high-yield investors.

United Midwest Savings Bank of DeGraff, Ohio, has recently seen a doubling of requests for small-balance commercial mortgages backed by the federal government, said John Tonjes, an executive vice president at the bank's Midwest Business Capital division, which funds loans sourced by brokerage Horizon West Partners of Salt Lake City.

The surge partly reflects the fact that fewer lenders are writing such loans, but also indicates that companies are positioning themselves for an economic rebound, Tonjes said. "We are seeing more and more businesses that are actually growing through this environment," he added.

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