Las Vegas Office Investments See Healthy Appreciation
MCA Realty sells an office asset in a submarket of Las Vegas for more than double the original purchase price.
“The pricing appreciation has largely been a product of the reduction in the supply-demand imbalance in the office sector,” Tyler Mattox, principal at MCA Realty, tells GlobeSt.com. “Vacancy at quarters end was about 15%, and while this is still relatively high, it is about 50% below vacancies from only a few years ago. Further, Las Vegas has significant vacancy concentrated in some buildings and submarkets like the East and Central East that have significant functional obsolescence, so this dynamic skews the statistics a bit as well.”
On this asset, MCA recognized the value of the property’s substantial parking, and decided to market the property to call center tenants that are looking for ample parking. “Our plan was to renovate the exterior of the building with a new paint scheme and improved landscaping as well as some select aesthetic upgrades,” adds Mattox. “We also demolished the improvements that were left over from the former defunct ITT operation to create a clean slate in the interior Our goal was to appeal to call centers and similar back office users who needed the +- 8:1 parking ratio that this building provided. In hindsight we underestimated the amount of additional tenant improvements that were needed after our initial renovation, but overall the project was a successful one for us.”
The property traded hands for $6.98 million, more than double the original $3.15 purchase price MCA paid in 2016. While the firm received strong interest in the deal, Mattox says that office, in general, is not as highly sought after as other asset classes, like industrial. “Because the asset was a bit unique, and office is still perceived as a riskier asset class than industrial, the sales process was lengthier than would have been the case with a similarly priced industrial asset,” he says. “However, the cap rate was also 100-150 basis points higher than an industrial asset with similar tenant credit and lease term would command. Buyers are being rewarded with yield in office assets today, and in this case the sales price for a fully improved 8:1 parked call center was still well below its replacement cost.”
Investor interest has only increased in Las Vegas, putting upward pressure on pricing. As a result, Mattox says that it is hard to say if the firm could duplicate this same investment in today’s market. “We purchased this property from a lender who foreclosed on the asset,” he says. “The former owners were unable to re-tenant the building when ITT Technical Institute ceased operations, and that created some of the opportunity for us.”
While this was a particularly good find, however, Mattox says there are still opportunities in the market today. “The level of distress in the office sector is below what it was when we purchased the asset in 2016,” he explains. “I think similar investment opportunities are still there, but we are more selective in the acquisition of office assets versus industrial assets given that the volatility in the sector is still high on a relative basis, and the asset class is very capital intensive. Construction costs continue to escalate and this dynamic will also weigh on the office sector.”
For that reason, MCA remains bullish on the Las Vegas market and will be a long-term player for the foreseeable future. “We plan to invest in Las Vegas for the long haul. We are currently in escrow on two industrial projects that will close in the first quarter of 2019 and are looking at several others,” says Mattox. “We do not have any office assets that we are actively pursuing today, but we continue to evaluate select properties. Relative to other western markets we still look favorably at Las Vegas, given that in many cases rents and sales prices are still below former market peaks, and the Las Vegas Strip and related convention business continues to be one of the most unique demand generators in any market we invest in.”