Wells Real Estate Funds has spent most of its 18-year history flying under the radar — buying nondescript, single-tenant suburban office buildings. Now, the Atlanta-based privately held company is making its move.

Wells was the No. 1 acquirer of office properties in 2002, according to New York-based research firm Real Capital Analytics. And in November, it paid $345 million for the two-building, 949,000 sq. ft. Independence Square complex in Washington, D.C. Wells' acquisitions total more than $1.2 billion for 2002, and the company expects to spend an additional $2.4 billion by year-end 2003.

“We've shown our capability to do a major transaction such as this,” says David Steinwedell, chief investment officer at Wells. “Now, we will be seriously considered when big transactions come up in New York, Chicago, San Francisco” and other top-tier cities.

Independence Square is clearly a departure. It's a high-profile, two-building complex in southwest D.C., fully leased to NASA and the Office of the Controller of the Currency through 2012 and 2006 respectively. Yet it fits the company's strict investment criteria — highly credit-worthy tenants on long-term leases Bob White, president of Real Capital Analytics, says the Independence Square deal was impressive but also prudent. “It doesn't look like they overpaid,” White says, “although this is definitely the type of property that's commanding the broadest interest right now.”

The price works out to $364 per sq. ft., which compares to D.C.'s average of $274 per sq. ft.

The Independence Square deal caps an aggressive two-year run for Wells. In 2002 alone, Wells purchased 31 buildings, including Nokia's Americas headquarters near Dallas for $120 million and Internet Security Systems' Atlanta headquarters for $40.5 million.

The acquisition program began in early 2001, when Wells officials determined that Wells Real Estate Investment Trust, a privately held REIT created by Wells Real Estate Funds in 1998, needed to expand. It registered a $1.1 billion private stock offering with the Securities and Exchange Commission and began selling units to qualified investors at $10 per share. Minimum investments are $1,000. By March 2002, the REIT had sold the majority of the 2001 offering and registered for a new $3.3 billion offering.

The REIT tapped the investor market at the right time, raising in excess of $100 million per month through financial advisers. With cash in hand, Wells embarked on its current buying spree.

Steinwedell declined to project the expected return on the Independence Square purchase. Overall, the market has seen cap rates on recent purchases falling as competition for high-quality properties has increased. Now, Wells is completing more deals in the 8% range, compared with a 9% cap rate earlier in the year.

And while a weaker real estate market may drag down the number of attractive properties available for purchase, falling cap rates will work in Wells' favor, Steinwedell notes, since they will force owners to put more properties on the market.

“Our pool [of potential purchases] seems to be expanding,” he explains. “The market has responded dramatically to the slide in cap rates by increasing the supply out there.”