Blackhawk Corporate Center II

PHOENIX-In recent weeks, Valley Schools Trust paid $3.5 million to acquire the 36,724-square-foot Blackhawk Corporate Center II through Auction.com. The buyer plans to use the building, acquired from LNR Partners LLC, both for its own use and for cash flow purposes.

According to Cassidy Turley executive vice president Eric Wichterman, the building was specifically marketed to owner-users until it went to auction. Valley Schools Trust plans to occupy approximately 25% of the facility at 3050 W. Agua Fwy., with the remainder to be leased out. Wichterman teamed with Cassidy Turley colleagues Mike Coover (executive vice president); Mart Stratz (vice president); Tyler Wilson (vice president and Scott Baumgarten (associate vice president) in representing LNR. Mike Sayre with Cushman & Wakefield represented the buyer.

“The owner makes money, lives rent-free and makes money in the whole grand scheme of things,” says Wichterman. “The building cash flows even at 60% occupancy, plus they can control their own destinies and not worry about a landlord.”

Nor is Valley Schools Trust alone in its strategy of owning rather than renting. Wichterman, and Brent Pearlstein, vice president at ORION Investment Real Estate, tell GlobeSt.com that the owner-buyers of office buildings has been prevalent throughout the metro region for several years, especially since the downturn.

Wichterman points out that in 2012, owner/users purchased 1.6 million square feet of office space, which was 14% of the total office sales. This year, he goes on to say, 15% of total office space sold is going to the owner-users. This is a jump from 2007, during which 5% of office space sold ended up with owner-users.

“A lot of this was fueled by the SBA’s owner-occupied financing that’s out there,” adds Pearlstein, who was not involved with the Blackhawk Corporate Center transaction, but who recently closed an owner-buyer office deal. “You have all-time low interest rates favorable to the owner-user. Companies are saying they like to buy buildings below replacement costs, with low, fixed interest rates, and the ability to grow in their buildings.”

Furthermore, even with low asking office rents in the Phoenix metro, ownership costs have trended even lower.  ”At $50 per square foot, they’re in there for almost nothing,” Pearlstein says. “And they’d have to pay expenses, as tenants, anyway if they rented.”

Wichterman notes other advantages to the owner-buyer, such as overall positive upside and tax advantages of depreciation. Furthermore, banks have been more comfortable lending to owner-users than to investors. “They were reluctant to lend for several years, but not to someone who would buy a building and lease 100% of it,” Wichterman explains. “That looked much better than someone buying a building that was losing money or was only 20% occupied.”

Though owner-buyers have been active in the market, that trend could be changing. Pearlstein and Wichterman say that the rise in interest rates could put an end to the low cost of owning versus leasing. Furthermore, Pearlstein adds, the inventory of available, smaller office buildings, especially those in distress like Blackhawk Corporate Center II, is shrinking.

Wichterman also says that office vacancy, in general, is starting to tighten in the Phoenix area, which is leading to higher rents. This, in turn, could signal the return of the office-buying investor, rather than the office-buying owner. Given all of this, “the window will soon close on opportunities for owner-buyers,” Wichterman says.