$9.3 Mil Office Building Sale Marks Partnership Split

PHOENIX-In a partnership split, Greenwich, CT-based Starwood Capital Group has sold its interest in an uptown office building for $9.3 million to Scottsdale Property Management.

Two years ago, the partners had paid $2.3 million for the three-story building at 2120 N. Central Ave., pumping $4 million into upgrades and setting into motion a concerted leasing effort. The 87,900-sf building in the city’s midtown is now 93% occupied and solely in the hands of its one-time leasing agent. The price equates to about $104 per sf.

The city’s midtown area is among the Valley’s poorest performing submarkets. A Central Avenue address is no longer coveted as office tenants flock to 24th Street and Camelback, downtown, north Scottsdale and other suburbs. The midtown vacancy rate is pushing 16% although a considerable amount of space is on a sublease basis. In comparison, the Valley’s overall office vacancy rate is about 10%.

“Midtown is a little unstable right now, but like everything else it will go through a pendulum and change,” Gary Jestadt, a principal with Scottsdale Property Management, tells GlobeSt.com. “If it goes like everything else it will cycle.”

Scottsdale Property Management is securing long-term leases with sound tenants, who should ensure strong returns even if the area continues to remains in the dumps for the next few years, he says. The city has renewed a lease for six years and an environmental engineering firm, SWCA, is relocating its offices from Flagstaff to the building, also signing a long-term lease, he says. Other high-tech firms have signed leases for as long as 10 years, he says. “We are a smaller building amongst a lot of high-rise stuff,” Jestadt says. “We are going to be in pretty good shape.”

High-tech firms are attracted to the building, which is just north of the intersection of McDowell Road and Central Avenue, because of its connectivity to the fiber optic loop that runs through the Valley, Jestadt says. The building is wired for fiber optic, an amenity that could not be reproduced in a new building for what Scottsdale Property Management has paid, he says. “It looks like that at least for the foreseeable future that any building that has fiber optic will have an additional perk that they can offer,” he says.

In 1997, in a $100 million plus deal, Starwood Capital had purchased the Valley portfolio of Scottsdale Property Management. As part of the deal, Scottsdale Property Management retained minority interest in each of the buildings and got the contract to lease and manage the properties. Last month, Starwood had awarded leasing and management contracts to the Phoenix office of CB Richard Ellis.

The shift in management duties represents a move by Scottsdale Property Management to streamline operations, which had become cumbersome because of the large staff needed to maintain the management of large multi-tenant buildings, Jestadt says.

“We are trying to simplify the management side a little bit more than we have in the past,” he says. “We are trying to trim the management requirements.” To that end, Scottsdale Property Management is looking to purchase other single-tenant, triple-net, office properties in the Valley, he says.