Where have all the tenants gone?

Long time passing

Where have all the tenants gone?

Long time ago

Where have all the tenants gone?

Covid struck them one by one

When will they ever lease?

When will they ever lease?

Where have all the State tenants gone?

To expensive buildings, the State has grown

Where have all the State Tenants gone?

Richards Boulevard and beyond

Where have all the State Tenants gone?

On Zoom, from their homes

When will they return?

  Will they ever return?

Office Buildings Stolen

There is a once-in-a-lifetime going-out-of-business sale happening in Sacramento. What used to be monuments of productivity and second homes for many – office buildings—have sold for pennies on the dollar, and many more are—or will be—on the sale rack, hoping not to chase the market down.

Sometimes a vacant office building is worth essentially nothing.  How can that be?  Why would a rational, unmedicated investor buy an office building? What would they pay?

When a broker presents an opportunity to “steal” an office building, the broker better be prepared to explain how the “steal” makes sense.  The investor needs to know where the tenants will come from, how long it will take, what the rent will be, and how much the investor will need to spend to make the deal happen.

Example: 

2525 Natomas Park Drive in South Natomas sold for $54 per square foot in December 2023. In comparison, houses in East Sacramento are selling for $1000 a foot.At $54 a foot, this purchase might pencil.  Of 100,000 SF, about 67,000 SF is available for lease.  How do you figure out the return on investment?

The cost PSF to lease the building up is:

• Time: 24 months                   $20 PSF in carrying costs
• Tenant Improvements:          $100 PSF
• Brokerage Commissions:      $10 PSF.
  • Total                         $130 PSF

The cost to lease the building will be about $130 per SF.  So, how does the deal pencil? Based on achievable rents, it only pencils because the investor got it dirt cheap.

The purchase price of $54 PSF plus the $130 PSF equals $184 a foot. If you assume rent is $2.00 ($24/year) a foot and building expenses are $10 PSF, The Net income amounts to $14 PSF.

What is the rate of return?  For a ballpark, divide the net income by the cost:  $14 divided by $184 = 7.6% return.  This calculation is overly simplistic, but it illustrates an office building owners’ dilemma.

More Screamin’ Deals:

11971 Foundation Place – Highway 50 – $57 PSF.

The building was vacant when purchased in August 2023 It is still 100% vacant now.

2868 Prospect Park Drive – Highway 50 – $75 PSF.

Historically, this building maintained high occupancy levels. When the Investor from the Bay Area bought it, it was relatively full. When the building was sold, it was nearly 100% vacant.

2800 Gateway Oaks Drive – South Natomas – $85 PSF

The right buyer came along!  Meditab Software, an owner-user.  While the deal has to make sense, a meaningful return on investment is not required!

3249 Quality Drive – Highway 50 – $87 PSF

Clutch, an owner-user, bought the building in December 2023.

2020 W. El Camino – South Natomas – $105 PSF

2020 W. El Camino is the nicest suburban office building in the Sacramento region.  It was primarily occupied by the State of California, who moved out last year.  This building cost over $500 PSF to build.

The investor can undercut market rents when they buy a building for 25 cents on the dollar.  This creates tough sledding for many office building owners. It is particularly perilous because lenders are not lending on office deals.

Coming to a Theater near you…………

Darth Vader implodes as the Dark Side circles the Renaissance Tower.