Widespread volatility in the credit and stock markets wasn’t enough to quash two significant commercial real estate deals.
Last night, Texas-based Behringer Harvard announced plans to buy listed office company IPC US REIT for $1.4 billion. IPC is a Canadian REIT that owns a 9.6 million sq. ft. portfolio of U.S. office buildings. Shortly after that deal was announced, Chicago-based real estate services firm Jones Lang LaSalle bought Los Angeles-based investment sales outfit Zietsman Realty Partners, Inc. for an undisclosed sum.
Both deals crossed the wires after the Dow Jones Industrial Average fell by 1.5% (almost crashing below 13,000) for the day as investors dropped shares on fears of added sub-prime mortgage defaults and tightening credit standards.
Behringer Harvard will assume $800 million of IPC US REIT debt. The remaining $600 million of the purchase price will be funded with equity, making the deal 57% loan-to-value ( LTV). Given that many buyers routinely saddled up with 80% to 90% LTV financing on deals in recent years, this portfolio sale likely reflects the conservative underwriting parameters spawned by the credit crunch. The deal also shows that while the real estate capital markets may have been shaken, they haven’t completely shut down.
Jason Mattox, executive vice president at Behringer Harvard, says that the turbulent credit markets won’t make it any easier to close deals. But he believes that lenders still view “good, solid real estate assets” as safe bets.
“We’ve been looking at this transaction for a while,” he says. “It enables [Behringer Harvard] to enter new markets while gaining new assets in some markets we’re already in,” he says. Mattox says that Behringer Harvard’s REIT I, the unlisted vehicle that will buy IPC US REIT, targets 55% of the purchase price of a new acquisition in debt. The Behringer Harvard REIT I will have a $3.9 billion office portfolio once the deal is closed by early November.
“The leveraged buyer doesn’t have the same power that they once had with lenders,” says John Kriz, a managing director at Manhattan-based Moody’s Investors Service. “This is a re-pricing of risk. The laws of cyclicality simply haven’t been repealed.”
For Jones Lang LaSalle, which like any services firm is vulnerable to cyclical shifts in transaction volume, the Zietsman deal potentially offers several benefits. By acquiring this three-year-old boutique finance shop, Jones Lang LaSalle will shore up its presence in the West Coast real estate capital markets. The deal should also give Jones Lang LaSalle the chance to compete more heavily in Los Angeles-based CB Richard Ellis’ backyard.
Incidentally, CB Richard Ellis attempted to buy Zietsman Realty Partners earlier this year, which indicates that the boutique firm holds strategic value to both listed real estate services firms. A CB Richard Ellis spokesman declined to comment on whether the company made any attempt to buy Zietsman Realty Partners.
It’s clear why CB Richard Ellis might have done so, however. Michael Zietsman, formerly an investment banker at Lehman Brothers, has closed more than $8 billion of transactions during the past three years alone. Unlike most U.S.-based real estate services firms that count their home turf as a stronghold, Zietsman says that Jones Lang LaSalle is already dominant abroad.
“We have one of the most competitive teams out here,” he says, adding that Jones Lang LaSalle will now take a more “aggressive” approach to locking in large financing deals on the West Coast. In 2005, Zietsman represented Hines in the $143 million sale of the Union Bank Plaza in downtown Los Angeles. He expects to close more large transactions over the next few months.
Nor is Zietsman losing sleep over the deepening credit crunch. He believes that too many people are fixated on the residential debt markets, and their fears are spreading into healthier investment classes such as commercial real estate.
“The market remains fundamentally sound,” he says. “And I expect that many commercial real estate deals will not be affected by this credit market.”