NEWPORT BEACH, CA—GlobeSt.com recently spoke with Buchanan Street Partners‘ CEO Robert Brunswick about the many changes his firm is undergoing. Earlier this week in Part 1 of the interview, Brunswick spoke about the firm’s new focus and how it reflects on the changing commercial real estate industry. In Part 2, he discusses the firm’s new hires (Chris Herthel, SVP in the Newport Beach office, to source equity and debt opportunities in the firm’s target markets; Tom Lam, assistant VP of institutional portfolio management, who will work directly with Herthel; Mark Reese, VP of debt investments; associate Charlie Farmer, who will be responsible for equity investments and asset management; associate Lisa Lacayo, who will manage investor services; and Katie Schulte, marketing coordinator and executive assistant), its restricted transaction with its parent company and its recent rare Orange County purchase of the six-building WorkScapes creative-office campus from Hackman Capital Partners for $14.5 million.
GlobeSt.com: Tell us about the recent structural changes you’ve made to your firm.
Brunswick: We restructured our transaction with TCW, which bought us in 2007, to retain majority control of our company. It gives us certain entrepreneurial latitude that we didn’t have when we were owned by an international bank. It’s allowing us to create and create our new platform with little more freedom.
GlobeSt.com: What about the new hires?
Brunswick: We’ve hired six new people. These new team-member hires affirm not only the evolving market opportunity, but our commitment to investing in our greatest asset, our human capital.
GlobeSt.com: What was the impetus behind the WorkScapes campus purchase here at 20321-20371 Irvine Ave. in Newport Beach?
Brunswick: We are laser focused on finding investments that we believe have excellent basis, which we want to be meaningfully below replacement cost. We want assets that have been somewhat underappreciated, and we want to be only in markets we characterize as improving demographic fundamentals. We are actively investing in Phoenix, Houston, Denver and the Inland Empire. So, WorkScapes is a bit of an anomaly, even though it’s in our backyard. We have found that Orange County has been very difficult to buy in. There’s so much capital coming to Orange County—it’s one of the top 10 locations in the country for capital—and there’s great pressure/expectation for significant rent growth, which really makes it very difficult to have the math add up when you’re looking to make a value-add investment here. You’re making a lot of betting on trending rents.
With that being said, we found WorkScapes gave us a great basis. We found we were very comfortable with or without rental growth, so we could make a nice return for our investors. We purchased it at $175 per foot and at 80% occupancy with close to 7% cap rate on just that 80%. We looked at the balance of the lease-up and we were confident we could complete it as our predictable goal. There will be a significant amount of capital going into the property for upgrades, and with that we believe we’ll be able to see some rent growth.
It’s interesting—from the day we put the property under contract, it took us almost a year to close, and we saw some nice rental growth, which was not underwritten, but appreciated. This property is smaller than what we’ve been buying in Phoenix and Houston, but it’s indicative of what we like to buy: small to medium-sized institutional properties that allow us to basically stabilize the asset and sell it to an institutional core buyer. We’re manufacturing product for ultimate consumption by core stable institutional investors that don’t want to take the value-add or fix-up risk.
We would love to buy more in Orange County—it’s a target market—but we find it’s very difficult to make the math work. We’re active in the Inland Empire and close to a nice contract in Phoenix in June—and we’re having fun again. When people ask me what I like about real estate, I say it’s that it enables me to utilize my entrepreneurial passions. I just happened to end up in the real estate business. We are creating and re-engineering the business to service a growing and high-net-worth institutional investor base as part of their portfolio.