Cap Rate Prompts 200,000-SF Buy

HOUSTON-A high cap rate and low price per square foot prompted Hartman Income REIT to make its first buy of 2009, that of two class B office buildings in the northwest submarket. Koll Bren Schreiber Realty Advisors of Newport Beach, CA sold the assets, which totalled 199,899 square feet, for well above an 11 cap.

REIT president Allen R. Hartman tells both the 128,891-square-foot Northchase Center at 14550 Torrey Chase Blvd. and the 71,008-square-foot Cornerstone Plaza at 3707 Farm-to-Market 1960 West located one mile east are well-maintained assets, with occupancies between 90% and 92%. Tenants at Northchase Center include Valassis Communications, Inc., Frontline Group and Discount Tires, while Cornerstone Plaza has McDonald’s Corp. as well as other tenants.

Hartman acknowledges the portfolio is a somewhat unusual buy for the REIT, which focuses on office buildings and shopping centers with a value-add potential. The deal’s appeal involved the cap rate and price per square foot.

Though the actual purchase price was kept under wraps, “these were under contract about a year ago for about $78 per square foot,” Hartman says. Furthermore, Harris Central Appraisal District values the assets at between $50 per square foot and $60 per square foot. Hartman says the actual sales price was lower than last year’s contract and the assessed value.

Mark Lucescu of Lucescu Realty in Newport Beach, CA represented KBS. Hartman Income REIT was represented internally by Dave Wheeler. There is significant tenant roll on both buildings during the next couple of years, though Hartman says rents aren’t going to budge much from the $13-$14 per square foot they are now. “The upside is in the cap rate,” he says. “Hopefully we can hold this, and turn it around for a different cap rate during a different time and cycle in the market.”

Hartman goes on to say, however that the current time and cycle is a great time for buying, the best he’s seen in 15 or 20 years. Waiting for the market to bottom out was one reason why Hartman waited to buy; the other reason was the Real Estate Investment Trust needed more funding because of last year’s acquisition of six properties.

These days, the market is very close to bottoming out if not there already, and Hartman’s plan is to raise $50 million for more acquisitions. Furthermore, seller expectations are starting to come more in line with market reality. As a result, 2010 and 2011 will likely be quite active for Hartman Income REIT. “We’re looking at buying anywhere between $20 million and $30 million next year,” Hartman says.

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