Value add hunters find slim pickings

These are tough times for buyers seeking out value-add propositions.

Investors in search of big yields through the purchase and enhancement of properties needing a little TLC say they are having to look harder — and wider — for opportunities.

Tampa’s Meridian Development Group is one such investor.

Founded in 2000, Meridian Development has in recent years scored outsized returns betting on its ability to turn around the Crescent Business Center I and II in Brandon, the Meridian Concourse Center in Clearwater and a former Winn-Dixie distribution center in Sarasota, among other properties.

Most recently, Meridian Development last month parted with Meridian 589, an 11-building office complex near the Tampa International Airport, in a $35.8 million deal to Colorado-based Avistone.

The 252,730-square-foot property had followed a fairly typical trajectory for the company: It was purchased in 2017 from a bank that had foreclosed, for $18.5 million. At the time of the acquisition, the property was just 50% occupied.

Over the next few years, the company invested about $800,000 to add new roofs and heating, air conditioning and ventilation systems; an on-site café and conference space.

Meridian Development mounted an aggressive leasing campaign, too, to lure tenants as a lower-cost alternative to many offices in Tampa’s Westshore business district. When Meridian 589 sold, occupancy had risen to 80%.

“We were able to offer space at rental rates in the $19 per square foot range while our competition was in the mid-twenties,” says Steven Kossoff, Meridian Development’s managing director. “By the time we sold the property, rents had risen to about $23 per square foot. So our thesis was right.”

With the disposition, however, Meridian Development’s once robust portfolio of roughly 3 million square feet has been whittled down to a pair of Tampa office buildings containing 172,000 square feet.

At the time of the sale, Kossoff indicated he hoped to redeploy the Meridian 589 proceeds quickly.

But Meridian Development has since run smack into the dilemma many value-add investors are up against these days.

“It’s never been this hard to find decent properties,” Kossoff says. “There’s so much capital out there chasing deals. Every real estate investor has this problem now. We’ve sold and made a profit but now what do you do?”

Meridian Development’s problem is commonplace in an environment where interest rates have remained low and commercial real estate is increasingly viewed as an attractive asset class.

The COVID-19 hasn’t helped either. It’s pushed many investors from brick-and-mortar retail locations and hospitality projects into suburban office and especially flex and bulk industrial transactions.

Rick Brugge, an executive managing director at commercial real estate brokerage firm Cushman & Wakefield, says increased attention on Florida has made it more difficult to find value-add and “opportunistic” real estate.

Brugge, together with Vice Chair Mike Davis and the firm’s Rick Colon, Dominic Montazemi and Zachary Eicholtz, represented Meridian in the Meridian 589 sale.

Cushman & Wakefield also advised Avistone on the purchase and arranged for $30.1 million in acquisition financing for the buyer.

“Florida is hot right now, there’s a lot of capital either here already that wants to expand or that wants to be here because the population and job growth stories are strong,” Brugge says.

“At this point in our cycle, a lot of good real estate is occupied so it’s not trading at value-add or opportunistic levels but rather core or core-plus levels,” he adds. “In many cases, people have to adjust their expectations.”

For its part, Meridian Development has expanded its geographic parameters. Once almost solely focused on Florida, the company a few years ago began considering deals in the Carolinas. Today, Kossoff says the company is hunting as far north as Richmond, Va., for new properties.

It is also looking more into tertiary markets, and to smaller assets and single-tenant buildings as never before, Kossoff says.

“We just have to keep digging a little deeper,” he adds. “We’re feeling some pressure to re-invest capital but we also know that we have to stay disciplined.”

Longer term, Kossoff says he’s not overly concerned about finding new product to spruce up and re-sell.

“I’m confident we’ll find something to invest in soon,” he says. “We’re looking at new buildings and new opportunities every week.”