Part 1 of 2

SAN DIEGO—Many times an attractive tenant mix can position a building as “the place to be” for some companies that will actually support higher economics, Parallel Capital Partners' CEO Matt Root tells GlobeSt.com. The San Diego-based firm recently acquired One North Central, a 20-story trophy office building in Downtown Phoenix for $93.8 million, and is poised to invest more than $1.5 million to renovate and upgrade the landmark property—including lobby modernizations, common-area upgrades, a new tenant lounge and spec suites.

We sat down with Root for an exclusive look at the firm's acquisition strategies. In Part 1, he discusses the key factors Parallel looks for when acquiring properties. In Part 2, he will discuss how the firm approaches value creation and repositioning efforts.

GlobeSt.com: What are some general factors that are fueling the commercial real estate boom?

Root: Commercial real estate continues to be one of the top alternative-asset classes as fixed-income yields remain historically low and equities continue to surge—furthering the advancement of commercial real state as a global asset class. The commercial real estate markets are being driven by tremendous liquidity, very attractive financing, credit spreads that are still on an historic basis quite wide, immense global capital flows to the US—an emergent multiplier effect in our markets—low rates, a lot of job growth and very limited supply.

GlobeSt.com: What attracts you to invest in the San Diego, Phoenix, Dallas, Orange County and Los Angeles markets?

Root: We are focused on best-of-class assets in non-tier-1 markets. The markets we invest in are long-term growth markets that have high barriers to entry for the development of new commercial buildings, a history of long-term job formation and a reputation for high quality of life.

GlobeSt.com: What key factors do you look for when acquiring a specific property?

Root: We are looking for high-quality buildings that are well positioned relative to the competitive set that can attract and retain best-of-class tenants and that are trading at a discount to historic value and replacement cost.

GlobeSt.com: Can you discuss Parallel's long-term strategy when investing in commercial real estate? Are there other markets you are looking at?

Root: Our investment strategy is a construct of our acquisition strategy and our capitalization strategy. Our acquisition strategy is focused on best-of-class assets in non-gateway cities. Our capitalization strategy is a construct of our equity strategy and our debt strategy. For value-added transactions—with shorter hold horizons, say two to three years—we typically joint venture with institutional co-investors to achieve high asymmetric returns. For core-yield transactions—with longer-term hold horizon, say seven to 10 years—we target more-stabilized assets that can be leveraged to produce attractive cash-on-cash returns for our own account. We are spending more and more time in Salt Lake City, Denver and Portland.

GlobeSt.com: Does tenant base play a big role when you are looking at an investment?

Root: Definitely. Tenant leases are the cornerstone of a property's cash flow. A high-quality property attracts a high-quality tenant. We target properties with attractive rent rolls, which would be a tenant base diversified by industry and size, so we are not exposed to any one industry or any single tenant event. The preferable tenant base would have in-place rents at or below market and a smooth rollover profile. May times an attractive tenant mix can position a building as “the place to be” for some companies that will actually support higher economics. The image of the building and its tenant base can often play a role in developing a tenant's brand, as well as in recruiting and retaining key employees.