Commercial Investment Real Estate March/April 2016 | Page 28

O
f ce tenants are
tired of the same
four walls. T ey
want new space,
new amenities,
new creature comforts. They
need a new vibe to attract new
workers. So with a still-weak
development pipeline, office
owners and investors are step-
ping in to f ll the gap, creating
“like new” space options for
today’s tenants.
A laundry list of factors —
ranging from little or no new
construction to a quest for
higher yield in a very competi-
tive investment market — is
fueling a spike in renovation
and repositioning projects in
many metros. On one side,
existing landlords are work-
ing to reposition properties to
be more relevant in a market
that is seeing dramatic shif s in
what tenants want and need in
amenities and features. T ese
include a wish list of on-site
bike lockers, roof op decks, and
energy ef cient lighting.
On the other side, there has
been a surge in opportunistic
investing. Capitalization rate
compression among stabilized
properties has sparked inter-
est in more challenging rehab
projects as a means to achieve
higher yields.
“We see areas in many sub-
markets that are ripe to modern-
ize buildings, provide a new face-
lif , and consider going to creative
of ce,” says William A. Shopof ,
CCIM, president and CEO of
Shopof Realty Investments LP in
Irvine, Calif. T e f rm is pursuing
value-add of ce projects as small
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Tenants: Are you ready to
see your new offi ce space?
as 75,000 square feet to more than
300,000 sf in California, Minne-
sota, and Texas.
“Generally speaking, there
is probably more opportunity
in secondary and tertiary mar-
kets,” Shopof says. T ose mar-
kets of er more attractive yields
compared to most primary mar-
kets. Shopof also targets cities
with good employment growth
and other economic drivers that
support the healthy demand for
repositioned space.
The newly renovated prop-
erties are providing tenants a
welcome alternative in a mar-
ket where construction is still at
historically low levels. T e U.S.
of ce market saw a net gain of
68.8 million sf of space in 2015,
which is well of pre-recession
levels and still about 7 percent
below the 10-year average of
73.7 msf in annual new inven-
tory, according to CoStar.
Opportunities Persist
The distressed assets that
emerged during and af er the
recession provided ample inven-
tory for value-add investors.
Despite the fact that the of ce
market recovery is well under
way, with vacancies improv-
ing to 11.0 percent at year-end,
according to CoStar, there are
still bargains in many metros.
TerraCap is one firm that
has continued to accelerate its
value-add investment strategy
in the past f ve years with acqui-
sitions throughout Florida. “We
were able to go in and buy at the
bottom of the market, and we
continue to buy as the market is
on the upswing,” says Albert S.
Livingston, CCIM, director of
asset management at TerraCap
Management Corp. in Bonita
Springs, Fla.
TerraCap’s strategy has been
to acquire office properties
at prices that are well below
replacement cost, which allows
them to put in signif cant capital
to reposition a property and still
have a relatively low cost basis to
of er competitive rents. “We’re
not afraid to buy empty build-
ings or buildings with single-
digit occupancy, and go in do the
work to make them competitive
in that market and then lease
them up,” says Livingston.
For example, TerraCap pur-
chased a 160,000-sf of ce build-
ing in Maitland, Fla., last year
that was 25 percent occupied.
In addition to making updates,
such as completely renovat-
ing the lobby and replacing the
chillers, TerraCap increased the
parking ratios to better serve the
tenant demand for more densely
populated buildings. At the time
of purchase, the parking ratio
was 3.5 stalls per 1,000 sf. Ter-
raCap recently completed a new
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