MarkDaMan
Aug 3, 2007, 3:32 PM
Outside investors eye second-tier Portland
Daily Journal of Commerce
by Kennedy Smith
08/03/2007
Portland is up for sale.
In the last few months, two major real estate transactions have signaled a change in the city, where outside investors that have historically gravitated toward larger West Coast cities like Los Angeles and Seattle are beginning to see Portland as a viable moneymaker.
In July, 19 stories of the 30-story KOIN Center were sold for $108 million to California investment group CommonWealth Partners. Then just a couple of weeks later, development firm Gerding Edlen sold Brewery Blocks 1, 4 and 5 – a total of 660,000 square feet – to buyers represented by New York’s JPMorgan Asset Management. The price tag: a whopping $291.6 million.
David Hill, vice president of investment at Grubb & Ellis, whose firm was not part of either deal, says the transactions indicate Portland is priming itself to eventually transition from a second-tier market to a first-rate investment hub.
“We’re in an environment where people are trading real estate more,” he says. “As you have an appreciating market versus a flat one, there are going to be more people looking at their investments and saying, ‘We can get something for trade.’ A lot of the larger local owners have held real estate for so long. ... But now that we’re getting some outside groups more inclined to invest, it’s looking more desirable to sell.”
DJC: The Brewery Blocks sale and the KOIN Tower sale were two huge transactions. One of the interesting things is that both of the owners sold to out-of-state investors. What implications does that have for Portland?
David Hill: There are a couple things going on. There’s so much demand for investment real estate right now nationally that national companies are reaching outside the normal, premium markets like Washington, D.C., New York and Los Angeles. Portland has shown to be of very strong interest, and there’s high demand to invest here.
DJC: What happened to Portland that has made it so desirable?
Hill: There seems to be a trend of investing on the coasts. In real estate, a lot of the money is concentrated on the East and West Coast. When you look there, there are only so many opportunities to invest money. These other markets are becoming very expensive. As expensive Portland looks right now, it’s a deal relative to some of the other markets.
But also, the trends in Portland are positive. We’ve got strong land-use, good transportation programs; job growth has been better than most areas. Even when our economy wasn’t doing great a few years back, we still had in-migration. Portland is in a lot of top 10 lists for green, biking, all that stuff. So it’s a good story.
The other thing is the office market is very tight right now. The micro-factors – supply, demand, absorption – all those rates tell a very strong story about the opportunity for rent growth, appreciation and making good money on your investment.
DJC: You said the out-of-state demand for investment is hot right now. Why is that?
Hill: As we came out of the dot-com crash and the stock market problems in early 2000, institutions started putting more and more money into real estate as a more tangible asset. Even though their allocations aren’t huge relative to everything else they’ve invested in, I think a lot of the groups even doubled what they’re spending on real estate, so there’s that much more money being spent.
At the same time, the economy has caught momentum, so the investments made in real estate over the last five years for the most part have been very successful. They continue to perform well. More money wants to get in. It’s a cycle of ever-increasing demand for real estate.
DJC: For the development companies that have sold these large amounts of property, what does it mean for them? Are they pooling money to build elsewhere?
Hill: Everything is cyclical, so there are some people that say pricing is very good right now – let’s cash in and take advantage of that right now. For the most part, though, I think they’re going to reinvest it.
A group like Gerding Edlen, they’re developers. That’s what they do; that’s what they like to do. Now they’re going to have more money that they can put into new projects, create new opportunities. Because they’ve had a successful investment, there’s probably going to be even more people that want to work with them and groups like them to invest in real estate and make money themselves.
DJC: Are there any disadvantages selling something like the Brewery Blocks, which so define Portland, that to sell them to outside investors might reflect badly on the developer?
Hill: I think it’s a non-issue. People buy the real estate in order to make money. To be successful they need to keep the real estate looking nice. They need to attract tenants to the property, so they’re going to be very motivated to make a property like the Brewery Blocks even better.
They have so much invested, they really need it to perform. It’s possible that they’ll feel a little more pressure to maybe increase rents over time, but whether they want increases, the market ultimately decides what the rents should be.
I think it’s positive because there’s more money coming into this market and frees up money for Gerding Edlen to go out and do more projects. People on the street, in the businesses, would rarely have a sense of a change of ownership.
DJC: Did it come as a surprise at all to the commercial real estate community?
Hill: It was interesting when we heard they were going to sell it, a bit of a surprise. But it didn’t take long at all to say that makes sense. They’ve taken it from start to finish. The market for real estate and even this type of real estate is probably as hot as it can be. Sure it could be hotter, but it seems to be good timing. Ultimately developers want to have access to the equity in order to do another development.
DJC: What is the benefit to the out-of-state investor to buy the Brewery Blocks or KOIN Tower?
Hill: Well, it’s about getting returns for their investors. Much of the money is pension fund money. They can either put it in stocks or bonds or real estate. So, the benefit is that they think they’ve acquired an asset that will perform well in the long term.
DJC: So these aren’t short-term investments?
Hill: Not with the Brewery Blocks. It’s what you would consider a core property. It’s operating at a very high level. It’s more of a guaranteed investment. In the long run they may get a lower return, but there’s more certainty there. We have seen a lot of sales in this market recently, a lot of activity have been groups that would buy and hold for three to five years and sell them. The Brewery Blocks is not likely that kind of investment.
DJC: What’s the motivation to hold onto something for a shorter period of time?
Hill: Some groups are focused on what we call value-add opportunities, a higher yield. They’re just looking to purchase, have something on that property occur that will spike the price and then sell that. That way they can show a high return over a narrow period. If you buy because there’s vacancy, you get it leased and it’s worth a lot more. If you sell that right away you’re showing a high return on that money. If you then hold it for another five years, you even the return out over that time.
There are groups that are out there looking for that value-add opportunity with a higher return over a three- to five-year period. And then there are groups, like the one that bought the Brewery Blocks, they buy with a longer-term perspective.
DJC: What are examples of value-add investments here in Portland?
Hill: The U.S. Bancorp Tower that sold in 2004 for something like $165 million and sold in 2006 for ($286 million). They went in there, got the space leased, the market got hotter and they were able to sell it.
DJC: Is there ever a chance that Portland would become a first-tier
market?
Hill: Certainly. It’s not three to five years out. It could be 10 to 20 years. In fact, we’re in the process of selling the Port of Portland headquarters building. It would be a value-add kind of investment. There are a lot of people pursuing the investment, and one investor said to me, “We think Portland is great now, the trends are great.”
We also believe that it’s very possible that with all the start-up companies and organic growth, it’s not that far-fetched to think that something big could grow out of these companies and create the Googles, the big companies, that can develop out of the kind of activity going on in the market and all of a sudden have a couple of big corporate drivers. Portland at this point, growth is generally smaller, organic. It’s not big, corporate America. I think that’s going to limit it being a top-tier market. But something may develop out of here long-term.
DJC: So we’ve talked about Portland getting more into the national scope. Are we anywhere near being in a global investment market?
Hill: No. If you’re bringing money overseas, that’s a stretch to begin with. If you think about having money here in the U.S. and you have money to invest, you buy an office building in Paris or London.
That’s easy to justify. When you start naming second-tier cities in countries that people don’t know much about, it’s much harder. You’re typically doing it with other people’s money too.
DJC: Can you think of properties here in Portland that would be great candidates for outside investors?
Hill: Any piece of real estate has opportunities. The biggest challenge is getting willing sellers. If I knew some willing sellers, to answer your question, I’d be sitting down with them right now. There’s really nothing that stands out as an opportunity.
http://www.djcoregon.com/viewStory.cfm?recid=29877&userID=1
Daily Journal of Commerce
by Kennedy Smith
08/03/2007
Portland is up for sale.
In the last few months, two major real estate transactions have signaled a change in the city, where outside investors that have historically gravitated toward larger West Coast cities like Los Angeles and Seattle are beginning to see Portland as a viable moneymaker.
In July, 19 stories of the 30-story KOIN Center were sold for $108 million to California investment group CommonWealth Partners. Then just a couple of weeks later, development firm Gerding Edlen sold Brewery Blocks 1, 4 and 5 – a total of 660,000 square feet – to buyers represented by New York’s JPMorgan Asset Management. The price tag: a whopping $291.6 million.
David Hill, vice president of investment at Grubb & Ellis, whose firm was not part of either deal, says the transactions indicate Portland is priming itself to eventually transition from a second-tier market to a first-rate investment hub.
“We’re in an environment where people are trading real estate more,” he says. “As you have an appreciating market versus a flat one, there are going to be more people looking at their investments and saying, ‘We can get something for trade.’ A lot of the larger local owners have held real estate for so long. ... But now that we’re getting some outside groups more inclined to invest, it’s looking more desirable to sell.”
DJC: The Brewery Blocks sale and the KOIN Tower sale were two huge transactions. One of the interesting things is that both of the owners sold to out-of-state investors. What implications does that have for Portland?
David Hill: There are a couple things going on. There’s so much demand for investment real estate right now nationally that national companies are reaching outside the normal, premium markets like Washington, D.C., New York and Los Angeles. Portland has shown to be of very strong interest, and there’s high demand to invest here.
DJC: What happened to Portland that has made it so desirable?
Hill: There seems to be a trend of investing on the coasts. In real estate, a lot of the money is concentrated on the East and West Coast. When you look there, there are only so many opportunities to invest money. These other markets are becoming very expensive. As expensive Portland looks right now, it’s a deal relative to some of the other markets.
But also, the trends in Portland are positive. We’ve got strong land-use, good transportation programs; job growth has been better than most areas. Even when our economy wasn’t doing great a few years back, we still had in-migration. Portland is in a lot of top 10 lists for green, biking, all that stuff. So it’s a good story.
The other thing is the office market is very tight right now. The micro-factors – supply, demand, absorption – all those rates tell a very strong story about the opportunity for rent growth, appreciation and making good money on your investment.
DJC: You said the out-of-state demand for investment is hot right now. Why is that?
Hill: As we came out of the dot-com crash and the stock market problems in early 2000, institutions started putting more and more money into real estate as a more tangible asset. Even though their allocations aren’t huge relative to everything else they’ve invested in, I think a lot of the groups even doubled what they’re spending on real estate, so there’s that much more money being spent.
At the same time, the economy has caught momentum, so the investments made in real estate over the last five years for the most part have been very successful. They continue to perform well. More money wants to get in. It’s a cycle of ever-increasing demand for real estate.
DJC: For the development companies that have sold these large amounts of property, what does it mean for them? Are they pooling money to build elsewhere?
Hill: Everything is cyclical, so there are some people that say pricing is very good right now – let’s cash in and take advantage of that right now. For the most part, though, I think they’re going to reinvest it.
A group like Gerding Edlen, they’re developers. That’s what they do; that’s what they like to do. Now they’re going to have more money that they can put into new projects, create new opportunities. Because they’ve had a successful investment, there’s probably going to be even more people that want to work with them and groups like them to invest in real estate and make money themselves.
DJC: Are there any disadvantages selling something like the Brewery Blocks, which so define Portland, that to sell them to outside investors might reflect badly on the developer?
Hill: I think it’s a non-issue. People buy the real estate in order to make money. To be successful they need to keep the real estate looking nice. They need to attract tenants to the property, so they’re going to be very motivated to make a property like the Brewery Blocks even better.
They have so much invested, they really need it to perform. It’s possible that they’ll feel a little more pressure to maybe increase rents over time, but whether they want increases, the market ultimately decides what the rents should be.
I think it’s positive because there’s more money coming into this market and frees up money for Gerding Edlen to go out and do more projects. People on the street, in the businesses, would rarely have a sense of a change of ownership.
DJC: Did it come as a surprise at all to the commercial real estate community?
Hill: It was interesting when we heard they were going to sell it, a bit of a surprise. But it didn’t take long at all to say that makes sense. They’ve taken it from start to finish. The market for real estate and even this type of real estate is probably as hot as it can be. Sure it could be hotter, but it seems to be good timing. Ultimately developers want to have access to the equity in order to do another development.
DJC: What is the benefit to the out-of-state investor to buy the Brewery Blocks or KOIN Tower?
Hill: Well, it’s about getting returns for their investors. Much of the money is pension fund money. They can either put it in stocks or bonds or real estate. So, the benefit is that they think they’ve acquired an asset that will perform well in the long term.
DJC: So these aren’t short-term investments?
Hill: Not with the Brewery Blocks. It’s what you would consider a core property. It’s operating at a very high level. It’s more of a guaranteed investment. In the long run they may get a lower return, but there’s more certainty there. We have seen a lot of sales in this market recently, a lot of activity have been groups that would buy and hold for three to five years and sell them. The Brewery Blocks is not likely that kind of investment.
DJC: What’s the motivation to hold onto something for a shorter period of time?
Hill: Some groups are focused on what we call value-add opportunities, a higher yield. They’re just looking to purchase, have something on that property occur that will spike the price and then sell that. That way they can show a high return over a narrow period. If you buy because there’s vacancy, you get it leased and it’s worth a lot more. If you sell that right away you’re showing a high return on that money. If you then hold it for another five years, you even the return out over that time.
There are groups that are out there looking for that value-add opportunity with a higher return over a three- to five-year period. And then there are groups, like the one that bought the Brewery Blocks, they buy with a longer-term perspective.
DJC: What are examples of value-add investments here in Portland?
Hill: The U.S. Bancorp Tower that sold in 2004 for something like $165 million and sold in 2006 for ($286 million). They went in there, got the space leased, the market got hotter and they were able to sell it.
DJC: Is there ever a chance that Portland would become a first-tier
market?
Hill: Certainly. It’s not three to five years out. It could be 10 to 20 years. In fact, we’re in the process of selling the Port of Portland headquarters building. It would be a value-add kind of investment. There are a lot of people pursuing the investment, and one investor said to me, “We think Portland is great now, the trends are great.”
We also believe that it’s very possible that with all the start-up companies and organic growth, it’s not that far-fetched to think that something big could grow out of these companies and create the Googles, the big companies, that can develop out of the kind of activity going on in the market and all of a sudden have a couple of big corporate drivers. Portland at this point, growth is generally smaller, organic. It’s not big, corporate America. I think that’s going to limit it being a top-tier market. But something may develop out of here long-term.
DJC: So we’ve talked about Portland getting more into the national scope. Are we anywhere near being in a global investment market?
Hill: No. If you’re bringing money overseas, that’s a stretch to begin with. If you think about having money here in the U.S. and you have money to invest, you buy an office building in Paris or London.
That’s easy to justify. When you start naming second-tier cities in countries that people don’t know much about, it’s much harder. You’re typically doing it with other people’s money too.
DJC: Can you think of properties here in Portland that would be great candidates for outside investors?
Hill: Any piece of real estate has opportunities. The biggest challenge is getting willing sellers. If I knew some willing sellers, to answer your question, I’d be sitting down with them right now. There’s really nothing that stands out as an opportunity.
http://www.djcoregon.com/viewStory.cfm?recid=29877&userID=1