Bold Decisions
Archstone-Smith was also one of the first companies to see that, with demand outstripping supply, getting a deal done in a desirable market would require a bit more boldness. Other companies have since come to the same conclusion. Palmer’s office has had several recent deals where buyers closed earlier than they would have in the past. That included a purchase by BlackRock (formerly SSR Realty) of a property that was just 57 percent leased. “There’s too much money chasing too few quality deals,” says Palmer.
Paul Daneshrad, CEO of StarPoint Properties in Los Angeles, explains that, as much of the country slipped into a rental recession in recent years, the stable Southern California rental market became a magnet for investors. Buyers now have to accept more lease-up risk or get left out of the game. “But this is a good job market, with few rental concessions and not a lot of new supply coming on line,” he says. “It’s really not that risky.”
The trend has also hit hot markets outside California. “I closed a 10-unit townhouse development in Bend, Ore., that had zero tenants,” says Mike Baron, senior advisor for Sperry Van Ness in Bend. “But the property was 100 percent occupied in four months. Market conditions must be right for buyers, sellers, and lenders to go along with this.” Brokers report similar situations on the East Coast. In Atlanta, competition is “so tough that buyers are willing to take on lease-up risk to get a better deal,” says Jeff Enyon of Sperry Van Ness’s Atlanta office.
As contrary as it sounds, low lease-up does have its advantages. “I have seen property come out of the ground as apartments only to be bought as a condo conversion before completion,” says Enyon. “Then, of course, not having leases is good.”
–Charles Wardell is a freelance writer in Vineyard Haven, Mass.
