Vol. 22, Number 2 page 2 : < previous page (p1)
Falcon has recently opened an office in San Francisco in partnership with Urban Realty Company, Inc. This alliance will provide Falcon with a greater depth of knowledge and investment opportunities in the San Francisco, Los Angeles, Seattle, and Portland markets. We felt it was important to have an office in San Francisco, rather than in San Diego where our West Coast office had previously been, because of San Francisco’s central location and since we consider that city to be one of the best markets on the West Coast. The local economy is continuing to grow, as is the entire state of California, which has remarkably turned a huge budget deficit into a significant surplus. Among the very strong local economic statistics, unemployment in San Francisco fell to 5.4% in the second quarter of the year, while home prices in the Bay Area shot up by 30% year-over-year.
The first property that we are recommending from our new office in San Francisco is 925 Market Street. This property is a 2-story brick and timber building containing 7,490 square feet located at the edge of the Union Square retail district in the rapidly improving Mid-Market submarket. There has been tremendous activity in this area with an influx of technology tenants including Twitter, Dolby, Square, Yammer, Uber and One King’s Lane. The property is also within one block of Westfield San Francisco Centre, anchored by Nordstrom and Bloomingdale’s, and between two significant retail projects currently under construction. Once both of these projects are completed the Union Square retail district will be expanded down Market Street and will include 925 Market Street.
925 Market Street is currently vacant, but is positioned to take advantage of the demand for creative office space from technology tenants. Once the in-process retail projects are completed, the property can be converted to a retail use, taking advantage of the transition to higher Union Square retail rents.
At a purchase price of $4.75 million, the property is projected to produce an unleveraged IRR of 14.8% or a leveraged IRR of 21.5%. In Falcon’s view, once the property has been leased, it should be relatively easy to obtain very attractive financing. A detailed report on this property can be obtained from email@example.com.
Chicago is the third largest city in the United States and Falcon has one of its most important offices there. The city is benefitting as economic activity returns to the country’s heartland and the sharp drop in the price of natural gas sparks a revival in production across the region. The metropolitan Chicago area is a major economic center, with a total of 3.7 million jobs, a gain of 1.3% over the preceding year. The population base added over 424,000 persons from 2000 to 2012, for a gain of 4.6%, a trend that will likely continue due to the increasing popularity of urban lifestyles and Chicago’s very attractive and relatively low cost of living compared with other major cities. In addition, the S&P Case-Shiller home price index showed that single-family home prices have now increased in Chicago for six straight months, providing an important support to the local economy.
Falcon has identified an attractive investment opportunity in Chicago — 20 North Clark Street. This is a 35-story Class B+ office building that is strategically located at the northwest corner of Clark and Madison Streets in the heart of Chicago’s Central Loop submarket. It is diagonally across the street from the Mid-west headquarters of JP Morgan Chase. The building benefits from an outstanding central location, providing quick access to all of downtown Chicago’s premier entertainment, fine dining, and upscale shopping destinations. This is an opportunity to acquire an office tower that is currently 83% leased to 57 tenants. In Falcon’s view, this is a value-add opportunity where a focused leasing and marketing program could increase occupancy and rental rates, leading to a significant increase in the value of the property. We feel that current management has been ineffective, which should allow new ownership to quickly improve property performance.
20 North Clark Street contains 393,094 square feet (36,600 sq. meters) of space. An efficient building design features floor plates that are suitable for both single and multi-tenant use. The building has been retrofitted for energy efficiency and has received a LEED Gold rating. 45% of existing leases are set to expire over the next five years. The in-place rents are well below current market rates presenting an opportunity to increase rental rates by as much as 35% . The existing average triple net rent (NNN) is $13.31 PSF vs. market rental rate of $18.14 PSF. There is minimal exposure to any single tenant as the largest occupies only 6% of the total space. As of the end of the second quarter of 2013, the office market vacancy in Chicago was 13.9%, down from a cyclical high of 15.2% in 2010. Falcon projects a four-year holding period for this property, with an unleveraged IRR of 12.4% and a leveraged IRR of 18.0%. A complete report on this property can be obtained from firstname.lastname@example.org.
We believe that at the present time there is a unique buying opportunity in the US commercial real estate market. Quality properties, leased to highly rated tenants, can be acquired to provide a current yield of about 7% with IRR’s in the 12% to 15% range. Attractive investments can be found particularly in the office market, where properties can be purchased with capitalization rates of about 6%, and mortgage financing of 5%. We expect that these low borrowing rates will remain available through the end of 2013 and into the first quarter of 2014. But when the Fed begins to eliminate its current easing program, QE3, the availability of such opportunities will decline.
About Falcon Real Estate Investment Management, Ltd. — Falcon is a specialized U.S. real estate advisory and asset management firm that provides a full range of advisory services for non-U.S. investors. Falcon has four regional offices throughout the U.S. — New York, Chicago, Dallas and San Francisco — and these offices provide localized acquisition and asset management expertise. The firm has completed over $7 billion of transactions since its inception in 1991 and has provided real estate advisory services to institutional and private high net worth investors in all asset classes and in all major and secondary markets across the United States. For more information about Falcon, please visit our website at www.falconreal.com