Hertz Investment Group LLC has completed its acquisition of five Memphis office buildings, marking the firm’s return to the Bluff City and focus shift to secondary and tertiary markets.
The Santa Monica, Calif.-based real estate investment company purchased Forum I, Forum II & III, Falls Building, and Toyota Center from Orlando, Fla.-based Parkway Properties Inc. as part of a $147.5 million, 15-property portfolio sale that also includes properties in Richmond, Va., and Jackson, Miss.
The CB Richard Ellis Memphis’ Private Capital Group of Johnny Lamberson, Frank Quinn and Terry Radford were the brokers of record in the sale of the Memphis and Jackson assets.
The five Memphis office buildings total about 670,000 square feet and $52 million of Hertz’s $147.5 million total acquisition price. Three of the five assets are stabilized, while two are value-add properties, said Judah Hertz, Hertz namesake, chairman and CEO.
“The Forum I, II and III are 92 or 93 percent occupied – we bought them basically because they’re core assets,” Hertz said. “On the other hand, the Falls Building and the Toyota Center are not stabilized properties, but I like to buy historic type of properties, which both of those buildings are. Those are what you would call value-add properties and we have been very successful in re-leasing these properties and getting them to stabilized occupancies.”
The latest figures released from Parkway at the beginning of March indicated that Toyota Center and Garage was 87.4 percent occupied and Falls Building was 71 percent occupied.
Recent activity in Toyota Center includes Sullivan Branding’s 10,000-square-foot lease on the sixth floor and LRK Inc.’s 22,000-square-foot consolidation on the fifth floor. But since Extra Space Storage’s (formerly Storage USA Inc.) sublease of the majority of Toyota doesn’t expire until 2015, Hertz is limited as to what it can do until then.
“There’s really not much I can do for three years, but we’re going to be looking for tenants,” Hertz said. “We usually do tenant improvements and we’re very good at finding tenants for these types of properties.”
Hertz specializes in the acquisition, marketing and management of properties throughout the country, ranging from high-rise office buildings to luxury hotels to multifamily properties. The Parkway purchase brings Hertz’s portfolio to 12 million square feet.
Past markets of Hertz include top-tier cities like Los Angeles, Miami and New York. But in recent times, the firm has concentrated its capital on product in more minor markets like Memphis.
“We used to have a lot of buildings in Los Angeles and as the demand for those buildings went up and prices went up tremendously, we decided to sell and buy in markets that are more secondary markets and tertiary type of markets,” Hertz said. “And so we switched to places like Indianapolis; St. Louis; Columbus, Ohio; and Cincinnati – I like these kinds of cities. We’ve always been in Louisiana, but now we’re in Mississippi and we just entered Richmond, Va., at the same time with this purchase from Parkway.”
Hertz has a history in Memphis, having bought and rehabilitated the Claridge House and the William Len Apartments Downtown. Yet Forum I, II & III; Falls Building and Toyota Center will be repositioned under a different strategy from those past restorations, Hertz said.
“We bought those buildings when they were unstablized, stabilized them, and then at that time, we sold them,” Hertz said. “But these buildings that we’re buying in Memphis are for long-term holds.”
Hertz even had One Commerce Square under contract in 2007, but backed out of the purchase due to the tower’s amount of “dark spaces.”
“We were in a real hurry at that time to do a 1031 exchange on a lot of properties, but after analyzing what happened at One Commerce, realized that it wasn’t the way they presented it, represented it to be,” Hertz said. “I think the price could have been $30 million and it ended up selling for $10 (million), so I think I did the right thing by backing out of that property.”
Hertz also feels confident about his decision not to pull the trigger on buying the Morgan Keegan Tower, due to the recent buy-out of the building’s namesake tenant, Morgan Keegan & Co. Inc., by St. Petersburg, Fla.-based Raymond James Financial.
The 337,000-square-foot Morgan Tower is the only remaining asset Parkway has in Memphis.
“I like the Morgan Keegan Tower, but the problem is it’s a building that’s really in flux now,” Hertz said. “Nobody’s going to really know how many square feet Morgan Keegan is going to be left with at that building.”