Insurance and Real Estate & Retail

Big sale finishes hot year: Firm buys 6 office buildings at Keystone at the Crossing; price lags other mega-deals

December 26, 2005

A record year for sales of local office properties is ending with a bang, as a half dozen buildings at Keystone at the Crossing change hands.

Philadelphia-based Berwind Property Group purchased a six-building portfolio, including the high-rise office towers at Keystone at the Crossing, from Teachers Insurance and Annuity Association.

The deal, which closed Dec. 22, includes buildings totaling about 1 million square feet at 8500, 8888, 8900, 8930, 9100 and 9200 Keystone Crossing, developed by locally based Duke Realty Corp. in the late 1980s. New York-based TIAA bought the buildings in 1997.

The price was not disclosed, but a Berwind official said it was less than $110 million.

The purchase keeps Berwind in the Keystone office submarket after selling 1.1 million square feet of office space at Precedent Office Park to locally based HDG Mansur Group in November for about $143 million.

"It's one of the strongest submarkets around," said Joe Neverauskas, senior vice president in Berwind's Chicago office, which oversees the company's Midwest holdings.

Plans for Keystone Crossing include enhancing the buildings' common areas and boosting occupancy, currently around 75 percent, Never- auskas said. Occupancy at the Precedent and at Duke's nearby Woodfield Crossing are in the mid-to-high-90-percent range.

Following the sale to TIAA, Duke continued to handle management and leasing of the Keystone Crossing buildings. That will change under Berwind's ownership, with the local office of St. Louis-based Colliers Turley Martin Tucker taking over management of the buildings and John Robinson of locally based Meridian Real Estate handling leasing, Neverauskas said.

Partly because of the relatively high vacancy rate, Berwind may have scored one of the biggest bargains of the year, local real estate experts said. Prices for other Class A properties have generally ranged from $130 to $203 per square foot in 2005. At $110 million, the TIAA portfolio would have sold at $110 per square foot.

Berwind plans to continue scouting Indianapolis for investments, Neverauskas said. The company's Midwest office oversees office and multifamily investments in Chicago; Cincinnati; Columbus, Ohio; Detroit; and Kansas City.

"We think that the pricing [in Indianapolis] is reasonable when compared to the replacement cost," he said. "We think the yields are competitive with other Midwestern cities."

Despite the timing of the Precedent sale and Keystone purchase, Neverauskas said the two deals came from separate Berwind funds and weren't part of a 1031 exchange, which allows investors to swap properties to avoid capital gains taxes under some circumstances.

Berwind's purchase reflects a year-long trend. Out-of-state investors are increasingly scouting second-tier markets like Indianapolis for prime properties, and paying big prices for them. Local investors, meanwhile, have stayed on the sidelines.

Nationally, institutional investors are competing for properties with real estate investment trusts, driving up prices here and in other Midwestern cities. Even as the prices paid set records here, they remain lower and provide higher yields than prices paid in major cities like Chicago and population centers on the coasts.

In another deal reflecting the trend, an out-of-state firm with an increasing presence in Indiana landed a 121,000-squarefoot office building vacant since Austin, Texas-based Inland Paperboard & Packaging Inc. moved its local offices to Texas in 2002. The three-story building, finished in 1988, is at 4030 Vincennes Road in Fortune Park, near Michigan Road and Interstate 465.

Sacramento-based Coastal Partners LLC closed on its purchase of the building Dec. 15. A price was not disclosed, but it was listed for $7.2 million, or about $59 per square foot, far less than a similarly outfitted, but occupied, Class A property might fetch.

"It has all the bells and whistles," said Coastal Partners CEO Brent Baumgarten of the former headquarters. The firm plans to add as many as 300 parking spaces on that or an adjacent site, but otherwise will make few changes beyond tenant improvements, he said.

The building went on the market about two years ago, but interest picked up recently as more potential tenants began eyeing the space for expansions, said Mike Semler, principal and vice president of the local office of Colliers Turley Martin Tucker, who marketed the property on behalf of Inland. Once the building went under contract earlier this year, several other potential buyers put in backup offers, he said.

Coastal Partners is working with "about five" potential tenants, each interested in the entire building, Baumgarten said. He declined to name them, but said the first one to come to the company with an acceptable deal will get the space.

The company, formerly known locally as Sierra Crest Equities, owns the Pan Am office building in downtown Indianapolis, as well as industrial and smaller office properties in central Indiana. The company recently boosted its local staff by hiring former CB Richard Ellis broker Tom Ott to oversee its operations here.
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