March 17, 2008

PF's Seek Core Office


Expect pension funds to target core office investments, as overbuilding and high construction costs make long-term core strategies more appetizing. Open-ended fund strategies practiced by PF advisers like Intercontinental Real Estate Corp. and Henderson Global Investors are particularly attractive right now for PFs as the dominating theme of conservative investing in 2008 fits with their long-term investment strategies. However, the medical office segment follows a different path in 2008 as all investors covet the property type backed by strong demand and immunity to an economic slump. Expect advisers that do value-added and development plays, such as Harrison Street Capital, to find more attractive opportunities for medical office deals right now.

Traditional office investors are looking more conservatively at the market with long-term strategies for core-value properties. While Intercontinental has a track record of conservative leveraging with a longterm and value-oriented focus, the more conservative business model practiced by open-ended funds is especially attractive for PFs, which have the money and time to invest through an entire cycle — especially with fears brewing over being in the middle of a recession and the U.S. real estate market moving toward a correction after the last several years of phenomenal growth and performance.

Expect investors to think twice about the risk involved in high-leveraged, short-term strategies for traditional office plays right now. One segment of the office market where PFs and their advisers are more willing to take a bit more risk is with medical office. Backed by demographic demands like a growing senior population and booming medical technology allowing for procedures outside a hospital setting, this segment of the office sector is more immune to economic volatility. Expect investors like Harrison Street to take advantage of opportunities in the market with value-added medical office deals that create value quickly and see shorter holds than what the rest of the office sector is seeing right now. The strength of the property type is even pushing some development while medical office also gets attention from core investors because of its strong fundamentals.

Intercontinental Real Estate Corp. is investing its fifth real estate fund, US Real Estate Investment Fund, and has seen several office deals close during the first quarter. Most recently, the PF adviser acquired Lakeside Commons, a 514,000 s.f., Class A office complex in Atlanta for $102.8M, with 48% leveraging with assumed debt. The two-office complex is currently 97% leased and served as an entrance into the Atlanta market for the PF adviser. The discretionary, open-ended fund invests across all property types and has a primary strategic focus on core and core-plus investments, but it can also make value-added plays on a select basis. The fund launched January 2007 has seen 14 acquisitions with approximately $500M invested. Intercontinental, where Paul Nasser is CFO and chief operating officer, looks for long-term investments underwritten at 10 years and focuses on quality, income-generating properties. While diversified across various property types, the PF adviser sees about 60% of its investments going towards office properties and the rest divided evenly between the remaining main food groups, with some specialty properties in the mix. Six of its 14 deals closed so far for the fund were office acquisitions. The targeted equity raise for the fund is currently set at $1B but, with no set lifespan, that size may grow. Leveraging set at 50% plays to the overall conservative nature of the fund. Other recent office deals for the fund this year include the core-plus acquisitions of the 295,700 s.f. Lock Drive Technology Park flex/office portfolio in Marlborough, Mass., and the 151,000 s.f. two-building, Class A Northpoint Center in Austin. Those two buys were leased in the low 90s at acquisition.

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