$50M Class A Office Buy Comes With Challenge, Promise

The Jackson, MS-based REIT acquired the 92%-leased Squaw Peak from developer, Southwest Property Ventures Group of Phoenix. The 7740 N. 16th St. property's challenge lies in a $34-million mortgage with Cigna Life Insurance Co., Marshall A. Loeb, Parkway's CFO, tells GlobeSt.com. With six years left on the mortgage term, the interest rate of 8.1% offsets the 9.7% cap rate that came with the sale, he explains. "It's something we can do over time to work this mortgage to market (rate)...that's how we will add value," he says.

Loeb says the promise clearly is positioning the asset, with a mortgage adjustment or burn-off, as a joint venture property. "The hurdle we need to do is work on that mortgage," he adds, noting a couple of Parkway's current JV partners have made some overtures about buying a piece of the prized property. "The real estate will last, the mortgage will go away."

Southwest Property Ventures started shopping for a buyer nearly three years ago, but pulled the listing when it became clear that American Express Co. was vacating one-third of the office space for a new North Phoenix campus. "To their credit, Southwest Property leased it back up in a challenging market," Loeb says.

Meanwhile, Parkway's team kept the asset, built in 1999 and 2000, on its wish list, eventually getting the deed with a top offer out of a field of several US institutional investors, says the seller's broker, Ann Gillespie, principal of Desco Southwest in Phoenix, part of the St. Louis-based Desco Group. "Parkway was looking at it when it was not on the market," says Gillespie, who brokered the sale along with her husband, Bruce, also a Desco principal.

Southwest Property again brought the office development to market in March after occupancy climbed above 90%. Escrow came in April; the closing was yesterday. Loeb says several months were lost over the loan assumption. Parkway paid $46.9 million, including the $34-million assumption, and laid out $2.7 million for closing costs to take the all-in number to $49.6 million or $173 per sf. Parkway used an existing line of credit and proceeds from equity issued in the second quarter to close the deal.

Loeb says about 15% of the leases roll each year. The longest lease is in place through 2011. All pacts have five- to seven-year terms. "This year basically is put to bed, but we have some hurdles next year," he says. There is one unfinished deal for 2004--less than 5,000 sf and due in November. The tenant roster includes Aetna, URS Greiner Woodward, Chubb, MetLife, ING and Fidelity National Title. Parkway will manage the property and outsource leasing. The quoted rent is $22.50 per sf.

Parkway's last Phoenix purchase was May 2002 in back-to-back transactions for the Viad Corporate Center, now a JV holding at 1850 N. Central in the CBD, and the Park on Camelback at 4455 E. Camelback Rd. The new purchase takes the REIT to 870,000 sf in the metro...and it's on the lookout for more. Phoenix now shapes up as Parkway's fourth-largest market in a 62-property office portfolio, totaling 11.6 million sf in 11 states.