As the summer draws to a close, we are transitioning into what has historically been the most active time of the year in the investment sales arena. As in football and basketball games, the second half always provides the most exciting, talked-about moments of the year. In 2012, what we’re likely to see is a continuation of what is an already deeply fragmented market along the three asset categories I call Trophies, Tweeners, and Traumas.
Trophies are typically newer vintage or highly renovated assets with credit tenancies and average remaining lease terms of five years or more. The Trophies designation can also be earned with an exceptional location. Today, investors consider Legacy, Preston Center, and Uptown/Turtle Creek the Trophy locales. Assets in this category are pricing at a premium and trading well.
Traumas are assets suffering poor occupancy due to foreclosure or capital investment neglect. These assets are in high demand right now as they offer an attractive opportunity to multiply invested equity and can be purchased at a very attractive cost per square foot—often a third of what they traded for in the last cycle and oftentimes at a mere fraction of their replacement cost.
As the name suggests, Tweeners are everything in between. These assets have occupancies between 60 percent and 80 percent and may have near-term rollover exposure. Tweeners are also typically located in secondary submarkets. This category of asset has not been trading efficiently, as it doesn’t provide the sexiness of a Trophy or the thrill of a Trauma. To trade these assets, sellers have to offer buyers attractive yields.
If you’re an owner who’s contemplating a sale toward the end of this year, pair your Trophies and Traumas. These assets have the highest probability of execution, as they fit the largest number of investment vehicles active in the market today.
If you have a Tweener, my advice is to hang on to it, nurture it, and consider your strategies to transform it, if possible. This may sound counterintuitive, but in some instances, you may be better off neglecting a Tweener into a Trauma when you consider that additional investment capital in the form of TIs and leasing commissions will not translate into value at the point of sale.
John Alvarado is senior vice president within CBRE’s Investment Properties Institutional Group in Dallas and Houston. Contact him at [email protected].
