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Smaller sales keep office real estate market humming: A $38 million deal for 3-building complex in Carmel stands out in 2006, but it wouldn't have last year

November 13, 2006

A flurry of blockbuster office-building sales in central Indiana last year has led to fewer mega-deals in 2006.

A $38 million sale of a Carmel office complex on Nov. 1, for example, was among the top five such transactions so far this year, but it paled in comparison to the nine-figure deals that won headlines in 2005.

That's to be expected, real estate observers say, since so much office inventory changed hands recently. And given the new persquare-foot highs set in 2005, last year's buyers likely will have to wait to become sellers.

"It's going to be very difficult for them to sell at increased prices over what they paid," said Sam Smith, CEO of locally based Resource Commercial Real Estate LLC. "I think that will slow investment sales over the next couple of years. Those buildings have to appreciate, their bottom line has to improve in order to sell them."

Big-bucks buyers are still circling, though, drawn by low interest rates and the potential for strong returns. Real estate observers say prices in second-tier markets like Indianapolis are more affordable than those in the nation's biggest cities.

California-based Argus Realty Investors LP bought the three-building Meridian Plaza office park in Carmel for $38 million. The 305,138-square-foot complex, northeast of the intersection of 103rd and Meridian streets, is the company's first foray into the local market. But Argus officials hope it's not the last.

"We think Indianapolis is one of the stronger Midwest markets," said Chief Investment Officer Paul Gaines. "It's a market that we'll continue to look in and hopefully find some more product to purchase."

About a dozen groups made offers on Meridian Plaza, which was sold through a bid process, said broker John Merrill, a senior vice president in the local office of Los Angeles-based CB Richard Ellis. Merrill represented the seller, Hartford, Conn.-based Talcott Realty Investors.

The $123-per-square-foot purchase price is typical for the upscale Carmel market, said Tom Hadley, a principal with locally based Summit Realty Group.

"The demographics of Carmel are just strong and it's a more desirable area," he said.

But with 40 percent of office buildings in the Indianapolis area changing hands in the last 18 months, Merrill said, there aren't many potential sellers left. As a result, he said, it will be difficult to match last year's total sales volume.

"The problem isn't the buyers. They're a dime a dozen," concurred Smith, the commercial broker. "The challenge is that there isn't a lot of investment property that hasn't traded hands in the past few years."

Even with fewer marquee deals, a bevy of smaller transactions might push the total value of this year's sales past 2005's total, said Janice Hawkins Paine, vice president of investment properties at locally based NAI Olympia Partners.

According to Paine, 25 transactions totaling $461.2 million closed in the first nine months of this year-just $64.5 million less than the $525.7 million generated by 21 office sales in all of 2005.

And that's not counting the Meridian Plaza deal.

"It's been an unbelievably active investment market again this year," Paine said. "It's tough to set [2005] as the norm, but it looks like we could meet or exceed it in terms of pure activity."

Deals late in 2005 dominated the headlines based on their sheer size. In fact, office sales outpaced all other categories-retail, multifamily and industrial-to top IBJ's Big Deals list for 2005.

Locally based HDG Mansur wowed the market when it purchased the 1-millionsquare-foot Precedent Office Park just northeast of Interstate 465 and Keystone Avenue from Berwind Property Group for $143 million on behalf of a private investor. Berwind, in turn, bought six buildings at Keystone at the Crossing for $110 million.

And Wakefield, Mass.-based Franklin Street Properties set a new high-water mark for non-medical, Class A office space last year, paying more than $203 per square foot for One and Two River Crossing. The two buildings, totaling 210,000 square feet, are northeast of the Fashion Mall at Keystone, with visibility to I-465.

So far in 2006, apartment-complex sales are fetching the highest prices. Just one office sale has broken the $100 million mark: This summer, California-based Triple Net Properties paid $101 million for the two-building Anthem Blue Cross Blue Shield office complex at 220 Virginia Ave.
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