SVN Equities has spent most of its five-year existence scouring its home turf, California, for deals on business parks, retail centers and office buildings. But with yields narrowing due to intense competition, the Irvine, Calif.-based investment firm — a division of real estate services company Sperry Van Ness — has decided to start moving east.
Late last year, the company saw that a 1.86 million sq. ft. warehouse and distribution complex in Grand Rapids, Mich., was available and pounced, winning the deal for $49 million. “Right now, it's very hard to find properties in California that give better-than-market investment yields,” explains Burton Young, president of SVN Equities. “We've had to look outside of California to satisfy our investors' return requirements.”
SVN typically seeks annualized yields of 20% over three to five years on its acquisitions. The projected yield of the Grand Rapids portfolio is a 22% annualized return over three to four years. With the transaction — SVN's first acquisition outside of the western U.S. and its largest to date — the firm boosted its portfolio to approximately 4 million sq. ft. and more than 30 properties valued at $170 million.
The Grand Rapids deal will pay off, according to Bob White, president of New York-based research firm Real Capital Analytics. He notes that the $49 million price tag works out to about $26 per sq. ft., well below the nation's average of $39 per sq. ft. and the Midwest average of $30 to $33 per sq. ft.
In addition, SVN and its partner, Baltimore-based South Charles Investment Group, picked up 15 prime industrial properties with historic occupancies of 90% to 95%. The average price for industrial properties in California is $57 per sq. ft. “On a net basis, it was a pretty nice buy,” says White.
More deals beyond SVN's Western base may follow. The company says it plans to spend $100 million for acquisitions in 2003, up 30% from the $70 million it spent last year. At any given time, the firm has up to $50 million available to spend through institutional partners such as Bank of America and GMAC, and private partnerships, which help fund smaller deals, says Young.
According to White, SVN's move to the Midwest will offer two big advantages. The market's lower prices will allow the company to make more investments and executing transactions may be easier because there is less competition in places such as Grand Rapids. “When you leave the core markets like Southern California, you don't run into the same amount of competition among other buyers,” says White. “Whereas a great industrial asset in California might command a dozen or 20 different offers, there wouldn't be nearly as many in some of these markets in the Midwest.”
With Sperry Van Ness also pursuing an aggressive national expansion into 28 states around the country, the young investment firm will continue to build its national portfolio on the tails of the brokerage entity, says Young. “Because we have the national presence now, it's enabled us to look outside of our own market with credibility.”