PHOENIX—There are still value-add properties on the market, according to Steve Jaffe, who has recently been promoted to chief investment officer and principal of BH Properties, a Los Angeles-based real estate investment firm that focuses primarily on troubled assets in the retail, multi-family, office and industrial sectors. With the 100th and highest valued asset acquired to date on the books, BH Properties is making shifts in the firm's buying strategy. Jaffe talks to GlobeSt.com about the latest acquisition and the firm's plans for the future.
GlobeSt.com: The Plaza at Squaw Peak located in Phoenix is the highest valued asset acquired by BH Properties to date. You paid $25 million for the 428,000-square-foot office complex. What factors helped facilitate the shift to buying a higher-valued property? Does your recent promotion play into this shift?
Jaffe: Squaw Peak brings us to our 100th property in our portfolio, a true milestone for our firm. For the past few years, we have been very active in the Phoenix market primarily buying multifamily and retail. With the spike in pricing for apartments, we have focused more time on acquiring other asset classes. The Phoenix B class office market is very appealing to us as a 'value-add' play. We had looked at a number of other higher priced assets in the second half of 2014 in Phoenix and elsewhere, but didn't find the right asset that would be a good match for our portfolio until The Plaza at Squaw Peak. Historically, our purchases have hovered in the $4-8 million range so the higher price point is a new focus for us. My new position is designed to focus on these larger, often relationship driven, types of deals. While we will continue to look at properties priced in the $4-8 million range, the larger value-add deals allow us to deploy a great deal of capital, while minimizing the stress on our asset management team. The combination of acquiring our 100th property along with our plan to go after higher valued acquisitions puts us in another category as a firm in regards to our acquisition goals.
GlobeSt.com: What about this property made it a desirable addition to the firm's portfolio?
Jaffe: The Plaza at Squaw Peak was appealing for a few reasons. There was significant vacancy at the property in a market that is primed for an uptick in activity. Our basis is fairly low so we believe that we can offer a fantastic alternative office space with classic architecture, streams and fountains running throughout the property, and lots of open space. The size of the land parcel creates yet another option, perhaps a multifamily option as an exit.
GlobeSt.com: What are your plans for the development of The Plaza at Squaw Peak?
Jaffe: Plans have not been solidified yet, but with all our properties we try to look at the asset from all angles. Right now, we are looking to see what immediate upgrades may be appropriate and to evaluate our leasing plans in light of our possible exit strategies. We have engaged a new leasing team, Noble Devine and Mayer at Cushman & Wakefield, and have hit the ground running to fill vacancy.
GlobeSt.com: BH Properties is known for repositioning distressed real estate. Where are you seeing the best value-add opportunities in today's recovering market?
Jaffe: Value-add is a challenge these days. There's simply too much money chasing everything, including value-add. The low hanging fruit is long gone. We have shifted from apartments to other asset classes. This is not to say that there aren't opportunities in the value-add apartment sector but not at the level we traditionally have looked for in the market. This pushes us to the higher risk/reward type of assets, like office and retail. I expect those two products to be our main focus moving forward.
GlobeSt.com: Going into 2015, how will the market differ from 2014?
Jaffe: I expect that we will see a continued optimism, with interest rates remaining static. This will fuel the aggressive buying pushed along by flight capital. There will be deals that won't make traditional sense, but will serve the buyer's needs as they are motivated by different goals. I think the auction platforms will continue to grow, but may be tested if the deal flow tapers off from the servicers, as they try to reach out to more traditional sellers to use the platforms. Pricing will continue to climb faster than the rents that should typically drive value. All in all, it will be tougher to find value-add in primary and secondary markets.
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