Jim Proehl, executive vice president of PM Realty Group's western division, says the Houston developer and property management firm will expand its presence on the West Coast. The company has undertaken many projects for third-party clients over the past 25 years, but now it wants a bigger stake, and will invest equity in theprojects. Proehl, who is based in Irvine, Calif., will play an active part in the expansion.
Since the development process generally requires a lead time of two to three years, the company hopes that by the time its West Coast projects are completed the economy will be back on track and generating sufficient demand for space. PM Realty manages a $25 billion portfolio of mostly industrial and office properties covering 25 million sq. ft. in 11 Western states. The portfolio includes some multifamily and retail properties of institutional clients.
NREI: What sort of properties does P Realty want to develop?
Proehl: We are mostly looking at office, medical office and maybe some industrial. If we find a multifamily site that makes sense, we will do that. What we're finding is that some groups that purchased land to do California condominium projects are having to get rid of the land at pretty good pricing [for buyers]. It might make sense to develop multifamily projects on that land.
NREI: Do you have specific targets for West Coast development?
Proehl: If we can put under contract two development projects this year, we'll be happy. The two projects are an 80,000 sq. ft. medical office development in Orange County and a 320,000 sq. ft. office building in Los Angeles, together estimated at $50 million to $75 million. We don't have a dollar target for acquisitions.
NREI: Are you also considering acquisitions?
Proehl: The acquisitions we're looking at are more value-added acquisitions, something on which we can create value with our development andexpertise. It might be a ground-up development, it might be a redevelopment where we might add on to a project or change the use of a project.
NREI: What pitfalls do you see in this expansion plan?
Proehl: Anytime you're doing development out here, one pitfall is what kind of resistance are you going to get from the neighborhood [the not in my backyard, or NIMBY, factor] depending on where you're developing. And you have to be cautious about pricing for construction materials. I don't think you're going to see housing take off anytime soon, so the cost of construction material will stay down. But that's something to be cautious of.
NREI: How is PM Realty planning to fund potential acquisitions?
Proehl: We will partner with one of our clients for a big chunk of the equity, and we will probably take on 60% to 65% debt. The cap rate depends on the quality of the project. I think cap rates are going up, more toward 7.5% to 8.5% on acquisitions, while prices are going to drop a little more. On development projects, the returns are going to be much higher because the risk is higher. There's still a lot of equity out there. Debt's a little harder to come by.