Importance of Tenant Underwriting Driven Home

CHICAGO-Many in the commercial real estate industry got a good chuckle when the bubble burst on giddy stock buyers, deflating values that had risen meteorically without rhyme or reason, as well as investor due diligence. However, many office owners and leasing agents can only laugh at their own miscalculations now, observes a top executive from the largest US office REIT.

While the telecom and dotcom implosions have wreaked havoc on office owners’ bottom lines, Equity Office Properties Trust senior vice president of real estate operations Matthew T. Gworek suggests a look in the mirror during an Asset Management Day panel discussion at the 95th annual Building Owners and Managers Association convention at McCormick Place. “We did not underwrite these tenants at all,” Gworek says.

“It doesn’t matter whose fault it was,” adds Lend Lease Real Estate Investments principal Howard Huang. “It was phantom demand.”

Rather than playing the “grave dancer” role chairman Samuel Zell starred in during the early 1990s, Equity Office Properties is focusing on operations in this downturn, Gworek reports.

“The market fundamentals are in the tank, but there’s more money than we’ve ever seen waiting on the sidelines,” he explains. “It’s a brutal market to compete in…We think it’s a wonderful time to be a seller.”

Indeed, Equity Office Properties plans to double its dispositions this year to $800 million, Gworek says. But more important numbers to the REIT’s management team are the net operating income figures for its 125 million sf of holdings. “Our biggest opportunity is not buying the next building cheap,” Gworek says. “It’s figuring out how to operate our portfolio better.”

However, Lend Lease vice president Gene Fuller says focusing on the property’s ultimate sales price is advisable. “The sales strategy and exit strategy is so important up front,” he says.

Opus North Corp. president and chief executive officer John M. Crocker Jr. says his design-build development company is shifting away from the office sector and into industrial property this year. That includes Best Buy’s $165-million build-to-suit in suburban Minneapolis as well as libraries and sports facilities. “We’ve seen a lot more users buying,” he notes.