“We are especially pleased with the attractive acquisition basis being $60 per square foot below the prior peak sale and over $140 per square foot below estimated replacement cost,” says Brian Walker, a partner at Pendulum and in the acquisition. “Current market fundamentals are strong, as asking rents have increased for 14 consecutive quarters and the vacancy rate has decreased by 270 basis points since Q2 2014.”

We spoke with Hayes about the transaction, what it says about the Orange County office market and other trends in the market.

GlobeSt.com: What was unique about this particular acquisition?
Hayes: The acquisition demonstrates a different tactic for a value-driven investor. The principals at Pendulum are known for their ability to generate opportunistic returns in short periods of time through their ability to execute on complex repositioning of assets. 5 Peters Canyon is more of a financial value add—almost a “mid-term” strategy. The mix of solid credit leases ranging from 7 or more years made the hold period too long for high-octane capital, but not long enough for true “core” capital. The result was an asset that priced attractively from a price-per-square-foot standpoint with solid cash flow through the middle of the hold period—in an incredible location.
GlobeSt.com: Does this deal represent a trend of some kind in the Orange County office market?
Hayes: This strategy represents a trend that investors are seeking some safety in this environment, but not too much. Pendulum believes they will be able to generate outsized returns with profiles with solid protection to the downside.

GlobeSt.com: Are you focused on acquisitions in Orange County or are there other markets you are considering?

Hayes: We are focused on acquisitions in Southern California's major markets, including L.A., Orange County, San Diego and the Inland Empire. We currently asset manage product in San Francisco and Hawaii, which are markets we expect will be targets for our team as we grow.

GlobeSt.com: Do you anticipate seeing more creative and unusual strategies applied to value-add investments as the competition for these properties heats up?

Hayes: No one knows for sure “what inning we are in” of the real estate cycle. Everyone knows we have had a long recovery from the bottom, and in many instances peak rents and peak values have returned or been exceeded. Times like these require extreme caution and creativity, although we are optimistic that there are always smart plays to make despite where the pendulum is on its arc.

IRVINE, CA—Pendulum Property Partners' recent acquisition of 5 Peters Canyon is more of a financial value add—almost a “mid-term” strategy—with solid cash flow through the middle of the hold period in an incredible location, the firm's managing partner Kevin Hayes tells GlobeSt.com. The acquisition of the 156,305-square-foot office building for $41.7 million from K.C. Scheipe and Adam Edwards, managing directors at Eastdil Secured here, represents the first acquisition for Pendulum, a fully integrated real estate firm that opened seven months ago.

The three-story, class-A property is located directly between the Market Place and the District, two of Orange County's notable lifestyle retail centers. It is also at the desirable intersection of Jamboree Rd. and the 261 Toll Road junction, providing convenient transportation access and high visibility.

Hayes says the firm is “continually looking at opportunities and carefully picking our spots in this investing climate. This acquisition is designed to be a longer-term strategic hold for our firm with solid cash flows throughout. We believe over the life of our hold period in Irvine will only continue to strengthen and the nearby development of Tustin Legacy will transform the county landscape for the better.”

In addition to its attractive location, 5 Peters Canyon boasts an above-market surface-parking ratio of 4.6 per 1,000 square feet, which appeals to large corporate users. In addition, the property's tenant mix includes Medata Inc., Black & Veatch Corp., TRI Pointe Homes and Starwood Hotel & Resorts, with only 5% rollover before 2021.

“We are especially pleased with the attractive acquisition basis being $60 per square foot below the prior peak sale and over $140 per square foot below estimated replacement cost,” says Brian Walker, a partner at Pendulum and in the acquisition. “Current market fundamentals are strong, as asking rents have increased for 14 consecutive quarters and the vacancy rate has decreased by 270 basis points since Q2 2014.”

We spoke with Hayes about the transaction, what it says about the Orange County office market and other trends in the market.