Commercial Investment Real Estate March/April 2016 | Page 30

7%
6%
Offi ce Construction
5%
as a percentage of inventory
4%
3%
2%
Leased U/C as % of Inventory
Portland
0%
Austin
1%
Available U/C as % of Inventory
Source: CoStar
parking deck that now brings
parking more in line with the
current demand for 5/1,000 sf,
and the f rm is considering fur-
ther expansion that would raise
the level to 6/1,000 sf.
Arizona is also home to
value-add office plays. “There
are plenty of value-add oppor-
tunities still in the Phoenix and
Tucson markets,” agrees George
Larsen, CCIM, a principal at
Larsen Baker LLC in Tucson.
T e f rm focuses on value-add
repositioning opportunities with
a current portfolio of 2.5 million
sf of of ce and retail properties
in Tucson. Larsen Baker contin-
ues to f nd properties that are
in transition or bank-owned at
discounted prices.
In addition, there is ample
demand on the tenant side from
companies that are looking to
upgrade and provide space that
is appealing to workers. At the
same time, many tenants are still
price sensitive and reluctant to
pay the higher costs necessary
to support new construction. So,
there are def nitely opportunities
to buy and rehab properties that
f t into that bifurcated market,
Larsen says.
For example, Larsen Baker
bought a vacant, vandalized
bank-owned office/flex space
28
March | April | 2016
property near downtown Tuc-
son for $650,000 or $16 psf that
included 3.67 acres and nearly
40,000 sf in three buildings. T e
f rm spent about four times the
purchase price renovating the
buildings to create the Madera
Business Park, which is now 95
percent occupied, primarily by
government of ces.
Such projects generally
deliver a good return. Larsen
Baker prefers to buy proper-
ties at about $35 to $45 psf or
30 to 40 percent of replacement
cost and spends another $60 to
$70 psf on interior and exterior
renovations. “If we can lease the
renovated of ces for $15 psf net
rent, the investment value of the
of ce building should increase
to about $160 psf at stabilized
occupancy,” Larsen says. T at is
still well below the cost of new
construction, which in Tucson is
about $200 psf, he says.
Pressure to Compete
Some existing landlords also
are investing signif cant capi-
tal to both f ll empty space and
hold onto existing tenants. New
hol
York City is one market that is
Yor
buc
bucking the national construc-
tio
tion trend. The city has seen
inc
increased competition coming
from a wave of new multi-tenant
fro
of ce development. In particu-
lar, signif cant new development
is o
occurring on the west side of
Ma
Manhattan near Hudson Yards
where Related Cos. is building a
wh
3.3 msf of ce tower and Brook-
f eld
el is underway with a new 2.3
msf building.
Even with gross rents trend-
ing upward of $100 psf in the
new towers, those projects are
enticing tenants away from
older building stock, notably the
Midtown area where the average
age of a building is more than
50 years old, says Craig Evans,
CCIM, senior managing direc-
tor at Cushman & Wakef eld in
New York City.
Those aging buildings are
struggling to meet the demands
of today’s tenants, who want
more amenities and the infra-
structure that allows them to
U.S. Offi ce Supply/Demand Change (in msf)
14%
13%
150
12%
11%
100
10%
50
9%
8%
0
7%
(50)
05
06
07
08
09
Change in Demand (Y/Y)
Vacancy
10
12
15
11
13
14
Change in Supply (Y/Y)
Historical Average (2005–2014)
16
17
6%
Source: CoStar
Commercial Investment Real Estate