It did not come as much of a surprise when GunnAllen Financial, Inc. finally closed its doors for business today. Regulators had been digging around the firm looking for net capitalization violations after Chairman John Sykes abruptly left at the end of the last year. With Sykes’ exit, the writing was on the wall that the firm’s future was in question and brokers began to leave the firm.
5002 West Waters Av
The real estate story behind GunnAllen is quite interesting. An affiliated entity purchased the building at 5002 West Waters in 2004 for $9.5m and leased the building to GunnAllen. The property had originally been owned by financially troubled Tropical Sportswear and the transaction was considered a distressed asset sale. A parking garage was added to the property and it was sold 2 years later at the top of the market for $7.4m, or $2.1m LESS than the original sale. A new lease agreement with GunnAllen was executed with the new owners.
GunnAllen management believed it would need the 117,000 sq ft property to accommodate its expansion plans. When the stock market imploded, the property became an albatross for the company, whose profits were heavily tied to the market. Management had been attempting to reduce costs associated with the build by either subleasing unused portions of the property or vacating the property entirely.
Regardless of the circumstances, Tampa will now have an estimated 400 additional unemployed people and 117,000 sq feet of office space on the market. The property will be a challenge to market. It is a Class A building, but the surrounding area is really better suited for light industrial or transportation, rather than an office fit for a white shoe law firm. There is a significant common area load on the building making it best suited for a single tenant, unless the price is at a significant discount to factor in the common area charge.
Excerpt from GlobeStreet.com (click for full article):
“Volume of single-tenant property sales has declined, to be sure; RCA reports $3 billion of single-tenant properties changing hands during the first half of this year, which equates to a 60% drop from the same period last year. For retail and industrial properties, transactions are down 70%; for office assets, transactions are down 50%.
But—and here’s the cup is half full point of view—single-tenant property sales accounted for nearly one-quarter of all retail, industrial and office sales during the first half of this year. That, RCA’s report notes, is “a significant rise over the 10-15% market share averaged over the past few years.”….”Sale-leaseback transactions, meanwhile, are down by about two-thirds. “Sale-leasebacks, which accounted for 30% of single-tenant property sales in 2007, have accounted for just 10% in 2009,” RCA reports.”
Comments: There is surprising activity in net lease property sales. I feel there are two reasons behind the movement:
1. Flight to quality – Many investors these days are asking for investment grade tenant properties with long term leases (+10 years) because of adverse economic conditions. These are tenants that are rated investment grade or higher by Moodys (Aaa to Baa3) or Standard & Poors (AAA to BBB). In a single tenant property, having a long-term investment grade tenant allows you relative financial transparency with the tenant, which theoretically has a sound financial outlook and balance sheet to back the lease.
2. Demographic shift – We are entering a period in which boomer investors wish to reduce their work load and seek more “hands free” investment strategies that allow them to indulge their time in areas of interest while they are still healthy enough to enjoy them. Boomer’s that have owned real estate are more likely to investigate net lease investments, because they perceive that a net lease investment is relatively management free (which they are, when compared to multi-tenant properties).
An eye opening report came out today from Richard Parkus of Deutsche Bank Securites stating that the U.S. urban commercial real estate markets probably will not recover until 2017. He goes on to compare the current state with the early 1990’s. I am curious how he reconciles the level of inventory on the market today as compared to 18 years ago. Annecdotally, Tampa never experienced the speculative commercial build out this decade as it did in the late 80’s and early 90’s . The softness in this market is due to demand issues and not over-supply, as was the case 2 decades ago. (read more about Real Estate Market)
CMBS defaults continue to increase. Not surprisingly, the 2006 and 2007 vintages faired the worst resulting from the most aggressive underwriting standards in the go-go peak of the market. For those unfamiliar with these instruments, they account for roughly 25% of the total debt on US commercial property. The instruments are used primarily for very large commercial deals, packaged to provide some diversity and sold in to the debt markets. Costar is reporting that Q1 2009 reported defaults rose to 2.25% from 1.62% in Q4 2008. These markets remain locked, reflecting the lack of confidence investors have for the stability of the assets backing the notes. (More info on CMBS defaults)
Recent Comments