The Dichotomy of Investment Real Estate

A dichotomy is the best way to describe the current state of investment real estate in early 2011. Leased class A properties in great locations are getting top prices as cap rates compress, sometimes to or even beyond 2006-2007 levels. At the same time, a few distressed properties are selling, mostly at rock-bottom prices. In between these extremes, little is transacting because of the continued lock-down of the lending markets.

The mega deals that grab the commercial real estate headlines and our so-called “recovery” are most often in the 24-hour coastal cities of New York, Washington, D.C., Seattle and San Francisco, and occasionally in an oil-rich Houston. First-tier cities have seen price run-ups toward the prices of a few years ago. But these big cities have been picked over of properties that sellers will part with, and the markets have gotten overheated (read: over-priced). As a result, investors are now turning their attention to second tier and even some growing third tier cities (like Charleston). The question is – will their lenders (and the CMBS market) follow? So far they have, but it is generally for some of the best of market assets – or best of credits, or both.

Charleston’s investment real estate climate has followed suit, with a number of single-tenant deals and the occasional sale of a multi-tenant asset.

Single-Tenant Net Leased

The blockbuster deal of 2011 thus far is the sale of the trophy asset, the TBC single-tenant net leased warehouse in Summerville at about $49 million to the insurer USAA that sought credit, a long lease term, contractual rent steps and a below market rent. Another mega deal was the ATD office facility in Mt. Pleasant that sold in February to a New York buyer at a local record $426/SF, again seeking the credit and the lease term. Other examples include the CVS drugstore and adjacent shops downtown on George Street near the College of Charleston in March; the free-standing net-leased Bi-Lo in Mt. Pleasant that Cole bought in May; and, another drugstore, the Walgreens on Ashley River Road, that also sold in March to a New York buyer.

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