Tuesday, November 1, 2016

Sales of 'Zombie' Office Buildings Hit 10-Year High

They’re out there. Thousands of them milling about in markets like Detroit, Northern New Jersey, Dallas/Fort Worth, Chicago and Washington DC.

Zombie buildings that is -- empty or nearly lifeless office buildings that are still standing, creating dead zones that drain the vitality out of otherwise commercially viable areas. And just like in movies, TV shows and video games, these zombies are being hunted; not by apocalypse survivors but by real estate investors.

Nationally, CoStar data counts 1,814 office buildings that are larger than 25,000 square feet and 90% or more empty. Office buildings delivered in 2015 and 2016, those which are still lease-up stage, were excluded.

The remaining horde of mostly vacant office buildings total about 162 million square feet and account for 2.09% of the nation’s total office inventory. On average, they account for 18.7% of the vacant office space in the U.S.

Although some of these mostly empty buildings are victims of derred maintenance, many are in perfectly good shape but may have recently lost a major or full-building tenant.

George A. Romero, the director of the groundbreaking "Living Dead" films that popularized the notion of zombies (lifeless but living creatures) referred to his creatures blue-collar monsters. The same could be said of zombie office buildings. More than 84% of the empty office buildings in the U.S. are Class B or lower.

At the local market level, empty office buildings are more prevalent in certain markets than in others. In Detroit, they account for nearly one-third of the office vacancy and account for about 4.3% of total office inventory. In Northern New Jersey, they make up more than 28% of vacant office space 4.4% of total inventory.

You don’t see many of them in New York and San Francisco. In those two markets they make up less than three-tenths of a percent of total inventory and account for just 4% or less of total vacant office space.

Far from instilling fear, these mostly empty office buildings have been attracting investors in droves. More than $2.5 billion of these properties have sold so far this year. That is more than the amount sold in the two previous years combined -and much more by a wide margin than any of the past 10 years, according to CoStar data.

The average sale price per square foot has skyrocketed in the last two years, increasing from an average of about $79 per square foot in the third quarter of 2014, to more than $163 per square foot in the third quarter of this year.

The sale prices these office buildings are commanding in today's market is about 75% of what investors are paying on average for all office properties nationally.

That, of course remains the source of the strong appeal these empty buildings hold for risk-tolerant investors who see opportunity picking up these properties at a 25% discouunt from the going market value and building up their value through lease up and/or re-use and redevelopment.

Empty buildings have been included in some notable deals recently, oftentimes they are bundled into portfolios.

4550 S. 44th Place, Bldg 17, in Phoenix was included in Workspace Property Trust’s purchase of 108 buildings in five markets from Liberty Property Trust for $969 million. The Dubai-based global investment firm partnered with Safanad Ltd. and Square Mile Capital on the purchase.

With about 6.4 million square feet of empty office buildings located outside major markets, Workspace is comfortable taking on close-in suburban vacancy.

“The type of product we’re looking for are well-located properties close-in to the city, in communities with a 24/7 lifestyle (with) lots of food and retail options, and good public and highway transportation infrastructure,” Roger Thomas, president and COO of Workspace told CoStar. “What we’re not looking for are those one-off assets, the corporate headquarters white elephants that are far flung out in the middle of nowhere, where you have to drive 10 minutes just to find lunch.”

Last month, Rubenstein Partners picked up Stonebridge II, a 143,705-square-foot empty office building as part of its $265 million purchase of Sanctuary Park in suburban Atlanta.

"The Class-A property is generally regarded as the top office park in North Fulton and we are thrilled to complete the acquisition of this asset. We believe Verizon’s departure created an opportunity for the joint venture to acquire an asset with a strong historical performance as well as control the best large block of available Class-A space in a submarket that is lacking in the same," said Taylor Smith of Rubenstein Partners.

Smith added that the firm also plans to carry out renovations at the park to reposition the asset as a leading destination for prospective tenants.

A consortium of developers led by Akridge and Western Development paid $50 million for the vacant 609,265-square-foot building at 2100 2nd St. in Southwest Washington, DC, that once housed the U.S. Coast Guard. They plan to redevelop the site into an expansive mixed-use project dubbed Riverpoint.

In August, Onyx Equities LLC and PCCP LLC have acquired the 387,000-square-foot Kemble Plaza I office building at 340 Mount Kemble Ave. in Morristown, NJ for $7.6 million.

"Both PCCP and Onyx have a strong record when it comes to executing on value-add transactions in New Jersey," noted John Randall, managing director with PCCP, a real estate finance firm focused on commercial debt and equity investments. "We are acquiring a high quality asset at essentially land cost and we will ultimately offer prospective tenants the highest quality product and a Morristown address at very competitive rental rates."

And more zombie office buildings are likely to be hunted down. About 43.3 million square feet of empty office buildings are listed for sale - the highest total in 10 years.


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