Office sales shatter records: National investors spend big in string of real estate deals

National buyers hungry for commercial properties have started focusing on second-tier markets like Indianapolis, a trend that’s resulting in quick sales at prices previously unheard of here.

One and Two River Crossing sold as a package in early July for $41.6 million, or $203 per square foot, setting a new high-water mark for Class A multitenant office space in the Indianapolis market.

Before the River Crossing sale, the sales record for suburban office space was $145 per square foot-a mark set only weeks earlier when Atlanta-based Wells REIT II purchased College Park Plaza for $26 million. The fivestory building was sold by Chicago-based LaSalle Partners Inc., which owned it on behalf of a state of Alaska pension fund.

Downtown, the 16-story, 625,000-squarefoot National City Center traded hands in May for more than $75 million, or upwards of $120 per square foot. The building likely would have fetched more, local experts said, but one of its largest tenants, Simon Property Group Inc., will be leaving behind 170,000 square feet when its new headquarters across the street is finished in fall 2006.

Although not a downtown record-Market Tower was said to have fetched close to $150 per square foot in its sale last year to HDG Mansur Group-National City Center’s sale will still likely be one of the largest commercial real estate deals of the year.

In all three of the recent cases, the buildings were on the market barely long enough for the ink on the fliers to dry and drew strong interest from potential bidders nationwide.

Neither the buyers nor the sellers confirmed the prices paid in the trio of transactions, but word of the chart-topping numbers quickly spread through the real estate community.

Among some local observers, the prices seem nearly unfathomable in an office market with 18-percent overall office vacancy and few near-term prospects for drastic increases in occupancy rates and rents.

National City Center drew some interest from one local potential buyer, but no local groups bid on the building because “nobody locally was going to bid that kind of number,” said John Merrill, first vice president of investment properties at the local office of Los Angelesbased CB Richard Ellis. CB Richard Ellis represented the sellers of National City Center and the River Crossing properties.

Much of the attractiveness of the recent sales had to do with the properties themselves, brokers and owners said. River Crossing and College Park Plaza are both less than 10 years old, are well-located in suburban growth areas and are nearly full with long-term tenants. National City Center, despite its upcoming vacancy, is in the heart of downtown and across the street from the Statehouse, which spurs demand for space.

But the national real estate market also played a big role. Investors such as pension funds remain skittish about plowing money into the stock market and are running out of attractive properties to buy in bigger cities. Such institutional investors are competing for properties with real estate investment trusts, publicly traded firms that are having an increasingly difficult time finding properties that will deliver dividends to shareholders. The competition is driving up prices.

Both groups are increasingly looking to second-tier markets such as Indianapolis, especially when well-leased, well-located properties become available. And even though two recent sales set records, the prices were lower and the yields higher than in major cities such as Chicago and population centers on the East and West coasts, local experts said. Yield is the expected cash flow from a property.

“People here are used to higher yields,” Merrill said. “We’re seeing an immigration in [national] investor interest from the primary markets on the coasts and in Chicago coming to our market for the yields. And people like our city once they get here.”

Recent sales are likely to spur more landlords to at least consider selling their Class A buildings. Locally based Lauth Property Group Inc. pulled two buildings at Intech Park off the market, but several people said they expect the properties to go back on the market later this year.

National real estate buyers aren’t yet flocking to Indianapolis like they are to bigger cities, but that gives the early arrivers a better chance of finding a property that fits their investment criteria, said Spencer Patton, vice president of acquisitions for Wells REIT II.

” We ‘ve a lwa y s looked at markets like Indianapolis,” Patton said. “We look at markets where we have some confidence in the long-term ability to produce job growth and that have specific assets we think will appeal to the type of tenants we go after, which are large, creditworthy tenants.”

Now that other national investors have joined the local bandwagon, they aren’t likely to jump off anytime soon, said Mark Vollbrecht, local senior vice president of Chicago-based Zeller Realty Corp., which owns Meridian Mark I and II and One Penn Mark in Carmel’s Meridian Street corridor.

“People here used to think they had a good secret,” he said. “It’s not a secret anymore.”

When Zeller made its first local purchase six years ago, the 1.2-million-square-foot Castleton Office Park, one of the biggest concerns was whether institutional money from REITs or pension funds could be attracted to Indianapolis to give Zeller an eventual exit strategy, Vollbrecht said.

That fear proved groundless. Zeller purchased the park for $49.5 million six years ago and sold 1.1 million square feet of it in December for $68.5 million to a fund affiliated with Toronto-based Brascan Corp. The remaining 100,000 square feet was sold to local owner-occupants.

“Indianapolis has good product and a vibrant downtown,” Vollbrecht said. “And the data available about the market is superior to what was here five years ago. … When institutions can get data like that, it’s easier to get their money into the market.”

Other investors like the city for its relative stability when prices go sky-high or bottom out in larger cities.

“In this last downturn in the market [in 2001], we didn’t see the sharp declines in the Midwest that we saw in parts of the East,” said Tim McCain, vice president of asset development for Massachusettsbased New Boston Fund. “Indianapolis has been one of the more stable markets in the Midwest.”

New Boston Fund this spring sold Northeast Business Center, a 521,000-square-foot office/flex complex along Interstate 69, to Lake Forest, Ill.-based Westminster Funds for a price pegged at $26.5 million. The firm still owns nearly 1 million square feet of local office space in the Castleton/Keystone area, including Allison Pointe, Castle Creek Corporate Park and Haverstick I and II.

The One and Two River Crossing buildings that fetched a record price were developed by PK Partners LLC and Gibraltar Properties Inc., both locally based. FSP Investments LLC, an affiliate of Franklin Street Properties Corp. based in a suburb of Boston, purchased the two buildings. The 121,480-square-foot One River Crossing was completed in 1999, with the 83,000-square-foot Two River Crossing following two years later.

PK and Gibraltar didn’t develop the buildings with a predetermined time frame for selling them, but now the timing “just seemed right,” said PK principal Keith Fried. The two companies next plan to build a 46,000-square-foot office building on a 2-1/2-acre site nearby.

The office portion of National City Center-the Hyatt Regency Indianapolis is under separate ownership-had been owned since 2001 by Virginia-based Harbor Group International. Suburban-Boston-based HRPT Properties Trust, a publicly traded real estate investment trust, is the new owner.

Before the River Crossing and College Park sales, the average price for Class A suburban properties was in the $120- to $125-per-square-foot range, local experts said. Few downtown towers have traded hands in recent years, making comparisons difficult. First Indiana Plaza sold for about $90 per square foot in 2002, when it was about 70-percent occupied, after fetching $123 per square foot in 1997. One Indiana Square, then less than half full, sold for about $38 per square foot in 2001.