Thursday, June 24, 2010

DEAL OF THE WEEK: New Logic in Vulcan Shift -

by Maura Webber Sadovi The Wall Street Journal June 23, 2010

Billionaire investor and Microsoft co-founder Paul G. Allen has spent roughly two decades and millions of dollars amassing real estate, primarily in Seattle.

But last year, Mr. Allen's Vulcan Inc. investment firm began intensifying its search for deals outside the Pacific Northwest, branching out into the beaten-down property markets of Southern California and Arizona.

Now that quest has yielded its first deal: Vulcan is paying $35 million in cash for an empty eight-story office building completed last year in downtown Tempe, Ariz. The transaction signals a two-pronged strategy change for Vulcan. The firm is both mixing more geographic diversity into its property portfolio and moving toward buying existing buildings rather than building from scratch, as the firm has typically done in the past.

Joanne West The Tempe, Ariz., office bought by Vulcan reflects a change in strategy, to acquiring rather than building.

"Historically, we haven't been a significant buyer of existing buildings," says Ada M. Healey, vice president of real estate at Vulcan, who heads up Vulcan's real-estate division and came to the firm in 2001 from ING Clarion Partners. Buying office buildings at some of today's lower prices makes more sense than new construction, because "there are not a lot of tenants who are willing to pay rents that will justify new buildings," she says.

Vulcan is known for ill-fated technology investments that fit into Mr. Allen's earlier vision of a "wired world." The firm lost enormous sums on investments in companies like Charter Communications Inc. But the firm also has invested large sums in real estate and a range of other asset classes.

Vulcan faces competition in its real-estate strategy because numerous other deep-pocketed investors have been chasing distressed real estate, while owners have resisted selling at today's discounted prices.

"We've taken a run at a couple other assets," Ms. Healey says. "There's a tremendous amount of capital in the market."

Mr. Allen, 57 years old, authorized the Tempe acquisition and took part in the decision to move into new markets such as Phoenix that Vulcan believes are poised for a rebound, Ms. Healey says. The Tempe Gateway building was built by Opus Corp.'s Opus West unit, which filed for bankruptcy protection last year. The sale was part of the bankruptcy process.

The 260,000-square-foot building is on a main artery of Tempe near a light rail stop and close to Arizona State University. The building squares with Vulcan's interest in urban infill locations close to public transportation, Ms. Healey says.

Vulcan, founded in 1986, is headed up by Mr. Allen's sister Jody Allen. Firm officials say Vulcan's real-estate portfolio is more than 95% leased and comprises more than $2 billion in assets in the Seattle area, where Mr. Allen is one of the city's largest property owners. Vulcan owns nearly 60 acres of land in the city's South Lake Union neighborhood. That also is where Vulcan scored one of its more recent real-estate wins: a deal to build a new headquarters complex for online retailer

Vulcan has also made some missteps. In the 1990s, Vulcan built and helped finance the Rose Garden arena in Portland, Ore., home to Mr. Allen's Portland Trail Blazers NBA basketball team. In 2004, the Vulcan affiliate that owned the arena filed for bankruptcy protection, and the Rose Garden was taken back by lenders, though Vulcan repurchased the arena in 2007. "There just weren't a lot of very wealthy people willing to buy skyboxes," says Randall Pozdena, managing director of ECONorthwest, an economic consultancy based in Eugene, Ore. A spokeswoman for Vulcan says the company treats the asset as a basketball asset, not real estate.

Betting on a Phoenix real-estate recovery is still something of a gamble. Tempe, part of the Phoenix metropolitan area and home to the corporate headquarters of U.S. Airways Group, has seen the vacancy rate of its Class-A office space soar to about 40% in the first quarter, including sublease space, from about 29% one year earlier, as the market has struggled to absorb newly constructed buildings, according to Cassidy Turley BRE Commercial, a real-estate-services firm in Phoenix.

Meanwhile, the average price paid for office space per square foot in Tempe fell to about $102 last year, from a peak of $265 in 2008, according to CoStar Group Inc., a real-estate-research firm. But Jim Fijan, an executive vice president with CB Richard Ellis who represented the group of lenders selling the Tempe building, said as many as eight local and national companies bid on the property. He estimates the building, acquired for about $135 a square foot, would cost about $225 a square foot to construct.

DEAL OF THE WEEK: New Logic in Vulcan Shift -

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