Big sale of Bank of America building in Troy may trigger out-of-town cash rush
Deal may spur more interest from flippers. By KIRK PINHO
The $74 million sale of the Bank of America building in Troy amounted to $175 per square foot. One of the region’s largest office building sales in recent memory to a New York City buyer may trigger fresh interest from large institutional real estate investors looking for a quick payday. Coming off Sol Gutman’s $74 million purchase of the Bank of America building in Troy last week, experts say the approximately $175-per-square-foot purchase price is enough to make out-of-state buyers that concentrate on what are known as value-add properties take a serious look at the Detroit market. Such properties are generally those struggling to attract or retain tenants or in need of capital expenditures to make them more attractive to potential tenants.
Two years ago, the Bank of America building at 2600 W. Big Beaver Road was a prime example: Only about 60 percent leased, with its namesake and largest tenant shrinking its footprint in the 422,000-square-foot property. Then New York City-based Sovereign Partners LLC purchased it from the bank, which was consolidating its office space, for just $35 million and, earlier this month, sold it to Gutman for more than twice that. Put simply: A textbook flip, with a gross profit of 111 percent, although that doesn’t include costs Sovereign incurred to lease up and improve the property, or carrying costs like taxes, maintenance and insurance.
“This will be an important transaction in that others will point to it when they are trying to sell a value-add property to say, ‘Yes, you can be successful here; you can buy this, put your expertise to work to lease it up, sell it and it will work out,'” said Jeffrey Shell, executive vice president of Los Angeles-based CBRE Inc.’s Corporate Capital Markets group in Grosse Pointe, who sold the building to Gutman along with Amie Sweeney, vice president in the same group.
Jeffrey Shell: Deal bodes well for Troy, other areas. One Oakland County office expert was quick to praise the sale and property.
“Total home run,” said Matt Farrell, CEO of the Bingham Farms-based real estate company Core Partners LLC. “It’s a phenomenal piece of brick and mortar on Big Beaver, a truly Class A property with significant amenities and service with a covered garage, cafeteria. You couldn’t reproduce that building today for anything less than $250 a square foot, plus. From that aspect, it looks like a strong buy for those looking to put capital and liquidity in brick and mortar.”
Dennis Bernard, president of Southfield-based Bernard Financial Group, said the deal will help attract money from the coasts and internationally to the market.
“You’re gonna see New York money and, a lot of times, that New York money is representing international money,” he said. “It bodes well not just for Troy, but other areas, whether it’s the Detroit CBD, Southfield or the I-275 corridor.”
One of the reasons out-of-state investors are looking in Detroit and in other “interior” markets is because of declining capitalization rates, a measure of investment return, in other major cities along the coasts, said Barry Swatsenbarg, senior vice president of investment and loan sale advisory in the Southfield office of Colliers International Inc.
Amie Sweeney: Still a gap despite high sale prices.
“The yield that investors are receiving from acquisitions in coastal markets that have been highly sought after has been compressed. Therefore, if they are trying to fulfill similar yields or returns, they start expanding their geographic footprint,” he said.
Since 2013, no other office building in Wayne, Oakland or Macomb counties larger than 200,000 square feet has sold for as much per square foot, according to data from CoStar Group Inc., a Washington, D.C.-based real estate information service.
However, last year, Southfield-based Redico LLC paid $166 per square foot ($81.5 million) for the 491,000-square-foot 150 West Jefferson skyscraper downtown.
“I would say that as big as $175 per square foot is to locals, it still represents a very wide gap between that sale comp and replacement cost, whereas in other markets, that gap is either closing or it’s gone,” Sweeney said.
Other large, well-known Oakland County office properties have sold to New York investors in recent years, but nowhere near the price per square foot paid by Gutman.
Travelers Towers I and Travelers Towers II in Southfield sold in 2013 for $25.1 million to New York City-based Time Equities Inc. when the buildings totaling 790,000 square feet were only about half full.
Francis Greenburger, chairman of the company, said they are now 80 to 85 percent occupied. But Time holds property for the long-term and has no intention of selling any time soon. Greenburger said his company has spent at least what it paid for the property on improvements in the last four years.
“We find suburban Detroit to be a favorable market,” he said, noting that his company has warehouse, industrial and retail property across the region. It just closed on a $23.5 million purchase of the Clinton Valley Mall Shopping Center in Sterling Heights from Farmington Hills-based Ramco-Gershenson Properties Trust (NYSE: RPT).
But other institutional investors still view Detroit and its suburbs with a leary eye, Greenburger said.
“The market is known for cyclicality and obviously when Detroit itself was going through its fiscal problems, that was a negative. Between market cyclicality and its reputational challenges, it’s still challenging to this day in terms of interesting financial institutions. There are some, but it’s not a market that everybody sees favorably.”
And perhaps Southfield’s most recognizable office complex, the 2.2 million-square-foot Southfield Town Center, sold three years ago to New York City-based 601W Cos. for $177.5 million.
Michael Silberberg, principal of 601W, told Crain’s at the time that the company expected to own the buildings for 3-5 years, a period which was planned to include $50 million in renovations and increasing occupancies.
While the complex off The Lodge freeway has had some wins under 601W’s ownership attracting new tenants, such as Blue Cross Blue Shield of Michigan, a few large ones have fled, notably for downtown Detroit, where both Microsoft Corp. and Fifth Third Bank Eastern Michigan have taken space in Dan Gilbert-owned buildings.
In addition, Ally Financial had considered taking a large block of space — at least 200,000 square feet — in the office complex two years ago but opted to become a key tenant in what was then One Detroit Center, now Ally Detroit Center, also owned by Gilbert.