The purchase of the Hearst Tower in uptown by a Florida real estate investment trust suggests larger, institutional investors are ready to take a chance on Charlotte.
Orlando-based Parkway Properties Inc. paid $250 million for the Hearst Tower, which had been owned by Bank of America, the real estate firm announced this week. The bank will lease back 322,000 square feet, nearly a third of the Hearst Tower’s office space, through March 2022 as part of the deal.
Parkway Properties has said it plans to become a leading owner of high-quality office properties in higher-growth markets in the Sunbelt.
National investors have primarily been investing in what are called “gateway” cities: major metropolitan areas near coasts, such as New York and San Francisco. Local brokers have said for many months that investors have been eyeing the Queen City.
But some real estate professionals have said firms were wary because of the local economy’s dependence on the big banks.
That may no longer be the case.
“You’re not buying this building if you don’t believe in Bank of America,” said Rhea DeJesus Greene, senior leasing agent with Trinity Partners. Greene markets Bank of America Plaza, Independence Center and 525 North Tryon in uptown.
“Most institutional buyers were not willing to make a bet on Charlotte, given our high exposure to financial institutions,” she said. “However, what this proves is that if the real estate fundamentals are there – location, quality and long-term credit tenants – then it is still a desirable investment.
“Hearst Tower is an iconic building with an A-plus location, and that sells.”
The bank had been marketing the 46-story building since February as part of its effort to streamline its operations. “The pending acquisition of Hearst Tower is a significant positive step as we continue to transform the company,” Parkway Properties CEO Jim Heistand said in a statement. “It is a compelling real estate opportunity – a trophy building with a stable tenant base, in a submarket with improving fundamentals, at an attractive basis.”
By the numbers
The deal is being financed primarily by a $200 million investment by private equity firm TPG into the Orlando-based real estate investment trust.
At $257 per square foot, the purchase price “represents a significant discount to estimated replacement cost,” Parkway said this week in a release announcing its first-quarter results.
The tower is 94 percent leased, and no material lease expirations are due until 2017, according to the company.
Hearst Tower is expected to generate cash net operating income of roughly $17.5 million during the first year of Parkway’s ownership.
New owner’s holdings
Parkway owns or has an interest in 43 office properties in 10 states with about 10 million square feet of leasable space. Charlotte properties include Oak Hill Business Park and Carmel Crossing.
Charlotte analyst Andrew Jenkins with Karnes, a local real estate research firm, said while uptown’s vacancy rate is relatively high at 11.3 percent, the Hearst Tower “is probably a safer investment for their money than some other things.”
“There’s not that much inventory,” he said. “A building like the Hearst Tower, with its beautiful architecture and being 95 percent occupied, is probably not a bad investment for them.”
The uptown commercial real estate market could also get a boost as more outside owners move in. Outside owners may market buildings more aggressively than the banks did, brokers say. The banks tend to fill their available space with vendors or hold space for their own employees.
“The buildings were there to serve the banks’ needs,” said David Dorsch, a senior vice president with Cassidy Turley. “The purpose was not to make money but to serve bankers.”
A new owner will also likely push for higher rents, he said.
“They are going to want to get them leased up,” Dorsch said. “It will shake things up a bit.”