Word that El Paso County’s largest private real estate transaction of the year closed last week — just before the books closed on a miserable 2010 — offered an ember of optimism for the commercial real estate market.
Just don’t expect any sparks.
The 85,000-square-foot office building at St. Francis Medical Center, known as NorthCare, was purchased by Nashville-based Healthcare Realty Investment Trust for $19.4 million.
The sticker price alone might be enough to get the juices flowing for brokers in the area who have consistently described the Colorado Springs commercial real estate market as “nonexistent.”
When they make those sorts of remarks they’re referring to, for example, a 100,000-square-foot office building at the nexus of the Springs’ financial district that has been on the block for more than a year at $7.25 million. Some have estimated that it could be auctioned-off for as little as $3 million. (The story is on Page 1).
So was the St. Francis transaction a good deal for both parties? And could it be a sign of things to come in 2011?
According to real estate professionals in the area, the answer is yes on the first count and no on the second.
For starters, NorthCare had a lot going for it to attract such a princely sum. It’s attached to a hospital, and therefore a perfect location for medical offices; it’s new, and at 95-percent occupancy, it’s an income-producing property with a solid tenant roster. Also, the building was owned by an investment group headed by Mike Heritage, who had a good deal of equity in the building, which afforded him the luxury to sit on the property until the right deal came through.
It even has a sky-bridge.
“At $228 per square foot this is a good buy, but it’s not a steal. The owner probably made a reasonable return, and the REIT got exactly what it wanted in a part of town that’s growing,” said Cascade Commercial Group owner Ted Link, who specializes in medical office space. “So long as the hospital doesn’t turn its lights off, this is a smart buy at a fair price, and it shows that capitalism still works.”
By saying that capitalism still works, Link might be referring to the solipsistic nature of commercial real estate brokers when it comes to wheeling and dealing.
But if you’re trying to sell umbrellas on the street corner, it doesn’t matter how fancy your product is. If it’s not raining, you’re not going to see a lot of cash.
Similarly, brokers can talk to you all day about how slick a property is. But it takes two motivated parties to close a transaction, and, as we all know, it’s the buyers who have been conspicuously absent in the present market.
Jim Zorman, who owns the London Real Estate Group, which represented the seller in the transaction, knows how fortunate he was to find the other piece of the puzzle.
“It’s one of the newer, Class A buildings in the region, but (the buyer) wasn’t looking strictly at the market or replacement value,” he said. “With the ready-made tenants in a perfect location, they saw it as an investment building with great potential for investment return.”
It’s also a region that the out-of-state REIT was comfortable with, as it already owns two other medical office spaces across the street from Memorial North.
It’s a joyous occasion when buyers and sellers come together to close the circle on a capitalistic union, so why can’t this be the start of a new trend for 2011?
As Link explains, the medical office market is too unique to serve as a barometer for the broader markets.
“Doctors don’t move that often because patients don’t like it,” he said. “Plus, it’s expensive to complete the tenant finishes, so once they move they’re not looking to do it all over again.”
This means that the medical office space sector may see the occasional eye-popping deal, but empty medical buildings can find themselves “sucking wind” for a good deal of time in the interim, as Link puts it.
That’s like a thirsty man finding an ice cold bottle of water in the middle of the desert and downing the whole thing at once.
Feels good. Now what?
Jonathan Easley can be reached at firstname.lastname@example.org or 719-329-5235. Find him on Facebook or Twitter.