A Flipper's Paradise

An insatiable demand for commercial real estate is prompting investors to put new acquisitions back on the selling block — a practice known as flipping. An analysis by Real Capital Analytics shows that during the 12-month period ending Sept. 30, flipping activity was responsible for a full 10.4% of all central business district (CBD) office sales.

That means 137 million sq. ft. of downtown office space was flipped nationally during that 12-month stretch — an amount roughly double that of Boston's total CBD inventory. Meanwhile, flippers accounted for 9.5% of all suburban office transactions during the same period.

“Many investors have seen their investments rise in value so much faster than they anticipated,” says Dan Fasulo, director of market analysis at Manhattan-based Real Capital Analytics. “As a result, they have become what you may call unintentional flippers.”

The net result was one blockbuster month for property sales. Real Capital Analytics reports that commercial real estate transactions achieved a record volume of $28.5 billion in September, an $8.8 billion increase over September 2004. Real Capital tracks sales above $5 million in the apartment, office, industrial and retail markets.

Fasulo theorizes that many buyers are investing on the basis of strengthening fundamentals, while sellers are capitalizing on heavy investor demand. The national office vacancy rate, which is hovering near a three-year low, registered 15.6% at mid-year, down from 17.8% a year ago, according to Grubb & Ellis.

The downward tick is even being felt in markets like San Francisco, where office vacancies were stuck above 20% just three years ago. Vacancy was still rather high at 17.9% by the end of the second quarter, but that isn't stopping investors from aggressively bidding up prices on San Francisco office properties.

One recent example of this trend was September's $1.05 billion sale of Bank of America Tower. A joint venture between Shorenstein Realty Services, private investors Mark Karasick, David Werner and IPC REIT bought the 52-story trophy property in downtown San Francisco last year for $900 million. At that time, the price tag was viewed as steep for San Francisco's recovering office market.

With roughly one year of ownership under their belt, however, investors in the Bank of America Tower decided last summer to put the property back on the market. Several buyers were interested, an auction ensued and the sale price was pushed above the $1 billion mark. That $700 per sq. ft. deal now stands as the most expensive large-scale flip of a San Francisco commercial property.

“Prices have been high for a long time. That makes the opportunity to sell that much more attractive,” says John Falco, principal at San Francisco-based real estate consulting firm Kingsley & Associates.

He remembers 10 years ago when many pension fund managers were accused of holding on to commercial property assets for too long. The typical hold period used to range from six to eight years, if not longer. The buoyant sales market isn't likely to simmer down anytime soon, according to sources.

Falco says that the mindset among investors as far as hold periods are concerned has made a 180-degree turn in recent years, especially when immediate payoffs can be so lucrative. “Nowadays these fund managers can lock in a strong return with a much shorter hold period,” says Falco. “To many managers, this is just too good an opportunity to pass by.”

(12-month period ending Sept. 30, 2005)

Buyers have quickly became sellers. In a 12-month period ending Sept. 30, the Los Angeles suburban office market, for example, experienced nearly a 40% turnover of inventory. Analysts expect the flipping activity to continue.

Market/Property Class Inventory Turnover Rate Inventory Sold (millions sq. ft.)
Orlando/CBD office 45.3% 2.84
Los Angeles/suburban office 39.2% 18.08
Los Angeles/retail 20.3% 11.9
Las Vegas/apartment 16.5% 25,945 units
Austin/Industrial 13.9% 4.6
Source: Real Capital Analytics, Integra Realty Resources

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