Root: u201cI think the upside from a product-type perspective is definitely in the office sector.u201d

LONG BEACH, CA—According to Parallel Capital Partners, office properties may be the next big investment wave. In a recent story, reported that the commercial real estate investment firm acquired Shoreline Square, a 383-652-square-foot office tower on the water in Long Beach, CA. The building was the firm’s second Southern California acquisition in the last month; the former also an office property the firm purchased for $72 million in San Diego. With so many investors focusing on multifamily and now industrial properties, we sat down with Parallel Capital Partners CEO Matt Root to discuss his interest in the office market and in Southern California. Here is what we discovered: Parallel has made two major acquisitions in the Southern California market in the past month. Why are you so bullish on Southern California?

Matt Root: Looking bigger picture: the impacts to the capital market continue to shape the recovery and the growth landscape in the markets that we are looking at. You know, the market is doing fairly well, really due to improvements in key fundamentals, low interest rates and what I would say is better underwriting standards. The world is starving for yield, and so the search for yield has really resulted in significant capital being deployed in real estate—especially in the gateway cities. Those markets (San Francisco, New York, Chicago, DC, L.A.) have really priced out already. The fierce competition for product in those gateway cities has really forced capital to invest in a more diverse range of US locations, primarily secondary markets. Our focus has been best of class assets in secondary markets, and we are focusing on Dallas, Orange County, Long Beach and Phoenix. These are recovering markets that are really exhibiting improving economic data, job growth and positive recovery sentiment. And, that is something I really want to stress here because the recovery sentiment has really changed and it is sparking an appreciation in capital values for high-quality space. The confidence and improved enthusiasm that we have seen for commercial real estate really confirms that the fundamentals are improving and competitive yields are being achieved, and you still have the opportunity to lock in extremely low interest rates that are very accretive on the acquisition front, ahead of the true recovery cycle that we think is taking place in these markets over the next 12 to 18 months. Are you, then, focusing on secondary markets all along the West Coast and it is a just a coincidence that you have had two pretty sizable back-to-back transactions in Southern California, or is Southern California a specific focus for you?

Root: We are looking in markets throughout the West Coast. We are active in Honolulu, San Diego, Orange County, L.A., Dallas and we have looked in Seattle, although we haven’t bought anything there yet. We are focused on best of class assets in recovering, secondary markets that exhibit three things: improving economic fundamentals, long-term job formation and a reputation for a high quality of life. And, Long Beach and San Diego both embody those key metrics. So many investors are gravitating toward multifamily and industrial properties, but you really seem to be focused on office properties. Why is that?

Root: I think the multifamily and the industrial markets are extremely efficient, especially in Southern California, and when I say efficient, I mean efficiently valued. In this recovery, I think the upside from a product-type perspective is definitely in the office sector. The values have lagged in the office sector, and I think that is due primarily to the economic recovery and jobs. As the job recovery continues to improve, I think we are going to see increased demand in the office side, and we think that is a sector that is undervalued, and we can make pretty good hay over the next two to three years. Have you had trouble occupying these properties?

Root: Fortunately, that has not been an issue. Everything that we have acquired has been very well occupied, and we look at drivers in these micro-markets that we think are going to effectuate demand over the long term. For example, Long Beach is such an interesting case study because it is such a dominant maritime center. It is really transforming into one of Southern California’s most diversified, waterfront, urban destinations to live work and play. When I interviewed one of the CEOs in the building, he said that it was really about apartments. His employees can rent in Downtown Long Beach for $2 a foot. In West L.A., that would be $4 to $5 a foot. And, they can buy a condo on the waterfront here for $250 to $300 a foot. To do that in West L.A. would $600 to $1000 a foot. It was really interesting and it really brought it all home in terms of the big picture. When you look at the amount of residential development in Downtown Long Beach—a new tower was just announced and the Ratkovich Co. is building right next to Shoreline Square—you are seeing a fair amount of investment and a renaissance in Downtown Long Beach that I think will translate to an increased demand for office over the long haul. We acquired Shoreline Square at one of the lowest discount-to-replacement costs in the nation. Building waterfront CBD office towers costs $600 a foot, and we bought this for less than half that. We look those compelling metrics and the look at the demand drivers in these local economies, and fortunately we have been able to maintain occupancy. Now what you are seeing is pressure on rental rates going forward, slowly, but we are starting to see a pick up there, so we are enthusiastic about the future.