What’s the best—and quickest—way to make a profit in a slowly recovering real estate market?
Look no further than the upscale industrial building at Anaheim’s 4663 La Palma Ave. for a good case study in the art of flipping a commercial building.
Irvine-based Sares-Regis Group and its investors likely made close to $20 million on the distribution center in a matter of months. They bought the property at a steep discount last year, leased it up to a long-term tenant, and last month sold it for $42 million.
“We executed our strategy perfectly,” said Larry Lukanish, Sares-Regis senior vice president.
It’s the largest industrial sale seen in Orange County so far this year. It’s also the latest— and one of the more profitable examples—of local investors taking advantage of the improving market by flipping commercial buildings bought on the cheap in the past couple of years.
“Flips have become a lot more prevalent, especially in the industrial sector,” said Jeff Cole, executive director at the Irvine office of Cushman & Wakefield Inc.
Newport Beach-developer Western Realco LLC was one of the first area companies to pull off a profitable flip. It made nearly $4 million last year on the $12.3 million sale of a Fullerton industrial building—a one-time facility of Chicago-based cardboard box maker Smurfit-Stone Container Corp.—that it bought in bankruptcy court in 2009.
Within months Western Realco sold the building to South Coast Transportation & Distribution Inc., which moved its headquarters from Carson to the site.
35 Tesla X 2
Another quick flip came in the office sector last month when flat-screen TV marketer Vizio Inc. bought a three-story office building near its Irvine headquarters for $7.5 million.
Irvine-based Owen Group had purchased the building for $6.3 million in a foreclosure sale just a few months earlier.
Expect to see more flips, said Cole, one of the area’s more active investment brokers.
A number of area industrial and office buildings bought near the nadir of pricing for local commercial real estate are on the market again. So are several properties outside the county but owned by investors here.
El Segundo’s Highridge Properties, Dallas-based Lincoln Properties Inc., and Aliso Viejo’s CT Realty Investors are among property owners said to be exploring deals that could bring quick profits on recently bought buildings in the area.
“People who bought in 2008 and 2009, which looks like it was the bottom, can do very well selling now,” said Cole.
Even buildings bought under the right circumstances in 2010, or as recently as this year, can make a sizeable profit.
Sares-Regis bought the 281,548-square-foot La Palma distribution center in Anaheim—one-time home to Galleria Inc., an importer of lawn and garden furniture—in mid-2010 in a lender-driven sale.
CoStar Group Inc. listed that deal closing at $25 million, while Business Journal records show Sares-Regis paying a special servicer $20 million for the then-empty building.
Either way, it was reported to be the county’s largest industrial sale of 2010.
Big Tenant
Four months after it bought the building back it found a long-term tenant in Straub Distributing Co., which handles beer and other beverages for Anheuser-Busch InBev SA NV.
Straub signed a 15-year lease for the warehouse and distribution building in a deal valued at $37.5 million.
New York-based drug maker Pfizer Inc. bought the fully leased building last month from Sares-Regis. It paid close to $150 per square foot—close to what some area offices have been selling for—and sees the buy as an investment rather than any potential addition to its distribution system.
“As a result of both the limited supply and capital’s strong appetite for stable, leased assets today, this was a highly competitive offering,” said Darla Longo, a vice chairman and industrial specialist with the Ontario office of brokerage CB Richard Ellis Group Inc., which represented both the buyers and seller in the Anaheim deal.
Sares-Regis and its investment partners followed a similar playbook late last year, when they flipped a 391,000 square foot industrial building in Redlands for $17.6 million to KTR Property Trust.
It had bought the property from an institutional investor for $11.5 million in late 2009 in a distressed sale, according to Cushman’s Cole, whose team worked on both sales.
CT in IE
CT Realty also is working in the Inland Empire as part of an investment group said to be looking to make close to a $50 million profit on the flip of a recently leased industrial facility.
CT Realty Investors and its three partners—Addison, Texas-based Behringer Harvard, San Diego-based Westcore Properties, and PCCP LLC, a private equity firm in El Segundo—bought the 1.4 million square foot Cajon Distribution Center in San Bernardino late last year for a reported $50 million.
The building was empty at the time of the sale, but within six months the new owners announced they’d landed Hewlett-Packard Co. to take over all of the two-building property.
The fully leased building now is being marketed for sale between $85 million and $100 million, according to sources.
Inland Empire industrial sale prices are said to be going up because of rising tenant demand, increased port traffic, and higher rents in the area since the start of 2010, according to brokers.
OC hasn’t seen the same movement in rents, but flippers here still can make off with some good deals as long as they can fill the buildings they’re looking to flip.
Among larger office deals said to be on the block, Highridge Partners recently put its 3 MacArthur Place office building in Santa Ana up for sale.
Market watchers are expecting the roughly 247,000-square-foot building to trade hands in the $60 million or higher range, or close to $250 per square foot, if a deal is made.
Highridge paid about $31 million, or about $125 per square foot, for the building in late 2009.
The building’s previous owner, New York-based Tishman Speyer Properties LP, paid about $83 million for 3 MacArthur near the peak of the market, in mid-2007.
The building was about 75% full at the time of the last sale and was expected to lose a few tenants. Since the deal, Highridge has put about $1 million worth of renovations into the building and has struck a couple large deals to bring 3 MacArthur’s occupancy up to about 85%.
Another building to keep an eye on is Lincoln Properties’ Griffin Towers complex in Santa Ana, which sold in early 2010 for a reported $90 million. The twin 14-story towers, which total 547,230 square feet, last traded hands for about $164 per square foot.
