FEBRUARY 2, 2017by David Dykes
Above: RealOps’ Paul Sparks, Kyle Putnam, and Reggie Bell
Low vacancy rates and high asking rates mark a transitional time in Greenville’s center city, as new developments blossom and established properties change hands
Paul Sparks, Kyle Putnam, and Reggie Bell had their eyes on greater heights.
And they realized that goal when the RealOp Investments trio stepped up in Greenville’s commercial real estate market with the purchase of the 15-story Bank of America building downtown.
An ownership group, including Greenville-based RealOp, a real estate private equity firm, bought the tower for about $22.5 million. RealOp will be the operating partner.
“We all can see long term that Greenville is a growth market,” said Putnam, RealOp’s chief investment officer. “There is a lot of opportunity.”
Importantly, “We’re investing in our local market,” he said.
301 projects downtown
Downtown is booming. City data show 301 projects are under construction, completed or planned in or near downtown as of Jan. 18.
Included are renovations of the Peace Center and Piazza Bergamo; construction of the Children’s Museum of the Upstate, NEXT Innovation Center, Aloft Hotel, RiverPlace, and the ONE building; redevelopment of the Greenville News office building; and the planned federal courthouse.
Greenville’s success has generated several accolades for Main Street, including being named one of America’s Greatest Main Streets by Travel + Leisure magazine.
But downtown towers, including the Wells Fargo center and the Liberty Square towers, are also changing hands — and with the sales come promises of tenant upgrades.
It’s an anomaly so much activity is occurring downtown at once, according to local real estate experts.
Activity, however, isn’t limited to the center city.
TWO Capital Partners LLC, a privately held Atlanta-based real estate investment company, said it has acquired a 560,000-square-foot suburban office portfolio known as Park East and Park Central in Greenville.
TWO said it acquired the portfolio from Terra Capital Partners LLC for $38.5 million.
The portfolio includes 12 buildings spread over the two office parks.
‘An aggressive mode of expansion’
A strengthening real estate market is aiding Greenville’s development picture, but underlying geographic and demographic changes are adding interesting variables to the equation, according to local experts and analysts.
“We have been on an aggressive mode of expansion in terms of where we can grow outside of Charleston,” Dan Doyle, vice president of development at the Charleston-based Beach Company, said during a CREW Upstate real estate panel discussion in Greenville last year.
“We want to target markets that have an in-migration of population so we have people that are moving to the area versus moving from,” he said. “A lot of that is fueled by job growth, which is prevalent throughout the Southeast right now.”
The region, he said, “is just a real focus for a place where people want to live, where they want to move their families to, where jobs want to relocate to.”
And Greenville falls in the middle of that map, Doyle said.
There is a key second component, he said. “When you look at the infrastructure that’s in place, to set up a great place to live and to work, Greenville checks that box — and then some. There are very few locations, in my opinion, that can compete with the setting that you all have here in town.”
Main Street typically has been Greenville’s downtown development focus, but that focus is moving to other areas, “which is a very positive sign,” Doyle said.
Low risk, high returns
Investment activity in Greenville is escalating as more institutional investors enter the market looking for steady and secure cash flow investments, due partly to the shift of investors from saturated and competitive primary markets to secondary and tertiary markets, according to Colliers International researchers.
High occupancy and asking rental rates are in turn creating a lower-risk environment with opportunity for higher returns for local and out-of-market investors, the researchers said.
In its fourth-quarter 2016 research and forecast report, Colliers said increasing demand for a downtown Greenville office address has led to record-low vacancy rates in office buildings.
That could explain accelerated interest in buildings changing hands. But development also is moving off Main to adjacent areas east of Main Street and further into the West End, Colliers said.
“We were at record low vacancies a couple of quarters ago,” Brian Reed, research manager in Greenville for CBRE, said in a recent interview. “In a small market, a bit of little movement here or there happens every quarter.”
But the local reality is “vacancy rates are near records lows, asking rates are near record highs, and that’s a really compelling story,” he said.
In 2015, Greenville was one of the few U.S. markets that had 10 percent rent growth, Reed said. “That’s unheard of in our market,” he said.
“It sparks the attention of investors who are looking for product they can get a return on,” Reed said.
Some local rents are topping $30 a foot, said Steve Smith, CBRE’s managing director for South Carolina.
For tenants, new owners or investors generally undertake capital improvements, “which mean better space, better common areas, maybe some more new amenities that weren’t at the project beforehand,” Smith said.
It also means the work will be doled out locally and that’s good for the economy, he said.
The Interstate 385/I-85 market also is beginning to tighten and, to remain competitive, suburban office landlords will need to update entryways and amenities within their buildings, Colliers said.
Growing beyond Main Street
In recent months, mixed-use projects have dominated downtown development and pushed growth past Main Street.
Doyle’s firm is behind the Main + Stone and South Ridge projects in Greenville. Main + Stone is a 292-unit mixed-use development under construction in Greenville’s downtown submarket.
In addition to apartment homes, it will add 20,800 square feet of retail and commercial space in the North Main area.
South Ridge, a mixed-use residential and retail development at South Church Street and University Ridge, has 350 apartment units. The project also includes retail and commercial space, as well as a parking garage at the center of the property.
Since 2001, 6 percent of single-family and 70 percent of multifamily permits in Greenville County have been in the city of Greenville, J. Terrence Farris, a Clemson University associate professor, said at last year’s real estate forum.
Keeping investments local
William Harrison, a University of South Carolina real estate professor, said local ownership and local money are what likely will move commercial real estate in markets such as Greenville and Columbia rather than institutional investors who target major cities like New York, San Francisco, Los Angeles, Seattle, or Boston.
“It could be wealthy investors from Atlanta to see what’s going on in Greenville or wealthy investors in Charlotte to see what’s going on in Greenville,” he said. “But it’s not likely to be CalPERS Pension Fund [retirement for California state, school, and public agency members].”
Occasionally, institutional money will come to Greenville or Charleston, “but it’s not going to show up in terms of the quantities that are going to move the marketplace,” Harrison said. “It never will.”
For outside investors, the conventional wisdom is that they should team with local developers or others to co-invest, Harrison said.
“By having somebody local with skin in the game, your interests tend to be better cared for,” he said.
In larger deals, partnering with a national, institutional player offers enhanced ability to access redevelopment money for renovations and upgrades, he said.
“Some national lender or some source of Wall Street financing is going to be much more interested in funding an entity that has Bain Capital involvement in it … than a group of wealthy lawyers and docs [doctors] from Greenville, South Carolina,” Harrison said.
Recent commercial real estate transactions have had capitalization rates of about 6 percent, or the expected return based on the income the property is expected to generate, according to local real estate experts.
That’s akin in equities markets, Harrison said, to a P/E ratio — the ratio of a company’s share price to its per-share earnings.
Some investors use that ratio to buy and sell, he said. But in theory, the marketplace doesn’t really price on P/E ratios any more than the real estate market prices on cap rates, Harrison said.
‘Nothing’s dramatically changing’
For RealOp, Greenville isn’t the only South Carolina market in its sights. RealOp recently announced the purchase of Stephenson Center Office Park, a 105,000-square-foot office property in Columbia.
The property consists of three buildings located at 720 Gracern Road, about five minutes from downtown, I-20, and I-26 in the St. Andrews submarket. Stephenson Center was purchased for $7.75 million and is the firm’s fifth acquisition in Columbia in approximately 36 months.
“The purchase of Stephenson Park is directly in line with our acquisition strategy across the Southeast,” said Sparks, RealOp’s managing principal and president.
But the homegrown firm latched on to the Bank of America building and is considering certain renovations and exploring upgrades and additional amenities.
Transitioning from one local owner to another should give tenants “a comfort level that nothing’s dramatically changing,” Putnam said. “We’re right here in the market.”
Wells Fargo Center
Many capital improvements are planned, including for the main lobby, said David Feild, local market president for Colliers International, which will handle the center’s leasing and management.
New signage and lighting packages also are planned.
“There are a lot of plans that are going to be going forward,” Feild said. “The ownership really wants the message to be that this is new, this is a new owner that is very tenant-satisfaction driven, that this is an owner that is going to improve the asset, improve the property and thus improve the tenant experience.”
The center was renovated in 1996, 2004, and 2013/2014.
Liberty Square towers
The buildings at 55 and 75 Beattie Place total 445,612 square feet and have been 81 percent occupied. The tenant base is anchored by Resurgent Capital; Shellpoint Mortgage Servicing; Gallivan, White, & Boyd; Dority & Manning; and the Commerce Club, among others. One and Two Liberty Square were built in 1983 and 1986, respectively, and received multimillion-dollar renovations in 2006 and 2014.
Commonwealth Commercial Partners, a property management affiliate, will handle all aspects of the day-to-day asset and property management. CBRE will continue to handle the leasing and marketing.
The complex on Executive Center Drive and east of downtown Greenville consists of nine buildings totaling 400,000 square feet on approximately 34 acres.
Park Central is an approximately 160,000-square-foot park on 10 acres, consisting of three buildings at the intersection of North Pleasantburg Drive and Interstate 385.
“Our approach will be proactive, flexible and forward-thinking as we reintroduce the assets to the market,” said Sean O’Brien of TWO Capital Partners, which acquired the portfolio. “We plan to rebrand both parks, invest much-needed capital, and infuse modern technologies and new amenities to improve the overall work environment experience for tenants and employees.”
TWO plans to rebrand both parks, add amenities, and install upgrades. TWO will reintroduce Park East and Park Central to the market as Park 37 and Harbinger, respectively.
The office space was built from 1974-1998. TWO has immediate plans to modernize elevators, replace roofs and HVAC units, and return occupancy to market levels. It also anticipates generating significant returns for investors. TWO has engaged ASD | SKY, a multidisciplinary design firm, to provide interior, architectural, and graphic design solutions during the rebranding efforts.
Bank of America Building
Spruced up from a $4 million renovation, the Bank of America building, built in 1973, has 196,152 square feet of Class A office space with 14,283 square feet of ground-floor retail. Tenants include Bank of America, CBRE, IBM, Southern Management, NEXT on Main, The Iron Yard, and others. It is about 77 percent leased, officials from RealOp Investments, purchasers of the property, have said.
The largest block of available space in the building is on the top floor. The 12,488 square feet of available space has “sweeping views of downtown Greenville,” and the space is “extremely conducive to tech companies, who often require open, collaborative work environments,” according to marketing materials for the building.
“The development of ONE and the renovation of the Bank of America building has established ONE City Plaza as the new center of Greenville, and RealOp’s investment confirms this transformation,” said Robert Hughes, president of Hughes Development, a local firm that sold to the RealOp ownership group.