Bascom, Harbor Plan $500M Capital Execution

Harbor Associates and the Bascom Group have formed another office joint venture to purchase value-add office deals throughout the Western US. The two companies have allocated $500 million in capital to deploy over the next two years, and has already made its first two purchases in Los Angeles and Del Mar. The two transactions totaled $37.5 million. This is not the first venture from the two companies. Over the last three years, the two companies executed $250 million in office transactions. This new strategy shows the companies’ bullishness on the office market and the region. We sat down with Paul Miszkowicz, a principal at Harbor Associates, for an exclusive interview to talk about their strategy.

GlobeSt.com: What was the impetus for this joint venture capital allocation in office?

Paul Miszkowicz: There is continued appetite from the Bascom guys to diversify into other product types and investment deals. They typically do $400 to $600 million a year in multifamily transaction volume, and I think there is a feeling that multifamily rents have gone up considerably for the last few years. Now, the market is at a point where you are buying properties at 4% or 5% cap rates and there is a lot of dialogue about affordability. There is a feeling and a sense that rent growth is potentially not going to happen at the same clip that has happened in previous years. That really drew Bascom to want to start an office venture. In office, it feels like there is still room to grow. We would love to be doing $50 million, $75 million, $100 million transactions, but we have found the most success in the $10 million to $35 million space, buying sub-institutional assets through off-market deals. We continue to find interesting niche situations, and our focus is really on continuing that effort and growing the company.

GlobeSt.com: Tell me about your strategy for this capital.

Miszkowicz: There are so many institutions creating $500 million funds or $1 billion funds. Justin and I worked at those shops, and we know how they think. In order to get that kind of money out in an efficient manner, you have to be putting out $20 million to $50 million equity checks, which translates to $60 to $150 million deals. We have been most successful going smaller or going into suburban office locations. We have been less successful with assets that are in popular submarkets and are broadly marketed. A lot of where we have been winning is working with local brokers that have a relationship with the seller. A fair amount of what we do is look at a lot of transactions and be thoughtful and honest about it. A lot of the institutional funds get pigeonholed into what they can chase. They will layout their strategy and the markets that they will go into. If you bring a property in Valencia into an office in New York, they’ll look at the map and pass on it regardless of the price. We are the opposite. We think there is a price for everything. We try to find disconnects in capital markets and processes from a marketing and leasing standpoint.

GlobeSt.com: What does your capital stack look like for the $500 million?

Miszkowicz: It business plan specific. The $500 million is the total cost of the transactions. We own a few assets all cash, but I would say we typically finance 60% to 70% leverage, and we receive capital from balance sheet lenders, life companies and our biggest borrowing bucket has been bridge lenders. That segment of the market has become very active and very competitive.

GlobeSt.com: Which geographic markets are you focusing in?

Miszkowicz: We will continue to work our bread and butter, which has been Southern California, where we are based geographically. We may also look to expand in Denver. We have one building there, and I think we will look to expand that portfolio as part of this new allocation of money. I think that we will look potentially to expand into the Salt Lake City market as well. We are targeting value-add returns. Our typical business plan is a three-to-five year hold, targeting mid- to upper-teens levered returns. We will go wherever we need to get those yields. We would love to buy in Playa Vista or Santa Monica, but our strategy is going into locations or markets that are off the radar of the larger institutions and capitalizing those transactions.

GlobeSt.com: This year, the office market has slowed somewhat throughout Southern California, and some experts have predicted falling rental rates. Why do you remain bullish in this space?

Miszkowicz: It is interesting. We go to real restate events or quarterly powwows, and they all talk about what inning we are in. From what we are seeing in our portfolio, tenant demand and tenant activity has been as strong as it has been in the three years that we have been running the company. That stretches from our Orange County portfolio to our Denver portfolio to our Los Angeles portfolio. Tenant activity is continuing to be robust and business leaders are continuing to make business decisions and grow their companies. People are getting nervous based on the duration of this economic recovery and they are looking for something to go wrong, but that is a disconnect from what we are seeing from our tenants, which is continued green-light expansion. It is an interesting time. People are pretty dim and grim about where we are at, but it feels like people have been that way for the last two years. I am not an economist and the data points that we have are from our existing portfolio, and it feels pretty good out there.