Guest post by Andrew Farbman, CEO, Farbman Group
The recent sale of 200 W. Monroe, a 23-story office tower located in The Loop in downtown Chicago, drives home a point that has become increasingly evident in recent months: Today’s real estate market is a great one for sellers. And, like any good sellers’ market, it is not a bad market for buyers, either.
An office building or other complicated piece of real estate is a living, breathing asset, and there are many variables that go into the valuation of such a property. The broader market context is one of the most important of those variables, which is why the majority of transactions getting done today involve buyers who seem to have a clear and mostly positive vision of where the global marketplace is headed. Job growth in the United States remains strong, and we continue to see certain categories of assets appreciating because they are irreplaceable (to the extent that replacing them would be a prohibitively expensive or impractical proposition).
Today we are seeing more money flowing into commercial real estate from an institutional perspective. On the debt side, lenders have more capital to deploy and are becoming more active. Additionally, with the strong performance of stock exchanges—an increase that has overly weighted most of the big endowments and life companies in public stock—there is a push to diversify in many portfolios. It is the “rising tide lifts all boats” principle in action: The increase in value of those assets has essentially led to a corresponding increase in the value of real estate assets as investors look to redeploy capital.
With that in mind, it is not hard to see why now is an opportune time to sell. What is important, however, is that it is also a good time to buy: buyers like it when there is still a little meat left on the bone—and today there are still quality investments to be made. Investors who took advantage of the once-in-a-lifetime buying opportunities in the depressed real estate market from 2008-2013 are likely happy with the strong returns that they are making, passing healthy properties on to others before the market has peaked—the essence of a win-win scenario.
While every property is different and every market has its own unique characteristics, a quick look at the recent history of 200 W. Monroe reveals some general insights about what factors are driving sales today. In this case, the new owner sees a chance to carry on some of the redevelopment that has already taken place at 200 W. Monroe, and to continue to reap the benefits of the increased occupancy (which has increased from the 70s into the low 90s since Farbman Group purchased the property in 2012).
Some of the specific tactics used to optimize asset capitalization at 200 W. Monroe include renovating the lobby and corridors and upgrading and building-out spaces to a more efficient and open layout. The property was able to absorb significant additional density because of its prime location. In the context of strong job growth, it is especially important to take advantage of any “low hanging fruit” and leverage opportunities for expansion with existing tenants that are seeing their needs change and evolve. Carefully review existing tenants before purchasing an asset to identify growth tenants and how/if those tenants can be accommodated.
What holds true in downtown Chicago does not necessarily apply elsewhere—the Midwest is hardly a monolith. Michigan’s investment sale market is starting to come back to life (as evidenced by the sale of Southfield Town Center, a $180 million deal that attracted national interest), and the disconnect in yield is shrinking between markets like southeast Michigan and The Loop in Chicago. With that said, Southeast Michigan is still more of a buyer’s market, with properties trading at about 200 to 400 basis points higher than in Chicago and, to some extent, Milwaukee.
Ohio is somewhere in the middle: Markets like Columbus are trading closer to the Chicago standard, while markets like Dayton and Cleveland are trading closer to Southeast Michigan. In general, however, we are seeing investors and investment opportunities coming back into all of those markets.
Risks and rewards
Going forward, analysis of suburban versus urban assets will feature prominently, as investors think critically about the very different infrastructure, density and co-tenancy needs and possibilities. Suburban does carry some additional risk, simply because there are fewer barriers to entry. Mixed-use will also be an active category, with young employees and Millennials clearly focused on staying urban. Markets to watch include Evanston, just north of Chicago, which offers the amenities of urbanity with suburban convenience.
Going forward, quality assets in virtually all categories will continue to see demand ratcheting up. With liquidity in the marketplace and significantly more interest when you take something to market, it is a great time to sell. Most buyers are healthy again, and most investors who were hurt by the slack in the economy have found their way back. Only two things can really change that dynamic: interest rates and fund flows. And while interest rates will eventually go up, the ongoing increase in fund flow will continue to keep prices high for some time. As price increases go, we are in the 7th inning—far better to sell now than to wait for the 9th inning, when the crowd starts to get restless.
Farbman Group is a full-service real estate firm handling all facets of real estate transactions. The firm manages more than 20 million square feet of office, retail, multi-family and industrial space across Southeast Michigan.