Out-of-state investors spend millions on bulk real estate deals

The office building at 1401 N. Green Valley Parkway in Henderson, as seen Jan. 29, 2013. Southern California investor Ed Mustafa recently acquired this and six other nearby commercial buildings.

Buying commercial real estate in the Las Vegas Valley is risky business. Rents are low, vacancy rates are high, and landlords have to give months of free rent to sign tenants.

But some out-of-state investors just can’t get enough local buildings.

In recent months, they have snatched up bulk purchases of office buildings, shopping centers and fast-food restaurant properties.

Such deals typically are rare in Las Vegas, but prices are low and many people believe the real estate market will improve.

“There has been a red ‘X’ over Las Vegas as an investment location,” Panattoni Development Co. partner Doug Roberts said. “That’s going away fairly quickly.”

Buying in bulk is a quick and relatively cheap way to become a powerful landlord. And if the economy turns around, investors could net big profits with more tenants and higher rents.

But that’s a big “if.” Las Vegas currently has one of the worst commercial real estate markets in the country.

Investors are eyeing the valley largely because property is getting expensive in more-desirable markets. Buyers flooded New York, Los Angeles, Chicago and other top-flight cities during the recession to buy discounted properties, but now that prices are rising, investors are looking for deals in second-tier regions such as Las Vegas, RCG Economics principal John Restrepo said.

“At some point, those opportunities start petering out,” he said of the top markets.

National investment firms were behind most of the bulk deals. Those companies typically promise their investors a certain rate of return and often need to buy properties in higher-risk cities like Las Vegas to achieve it, Thomas and Mack Development Group President Rick Myers said.

What’s more, those firms oversee billions of dollars in investor capital and don’t acquire buildings one or two at a time. They buy in bulk.

“If big money comes in, why buy one building here and there?” Myers asked. “They’ll buy portfolios.”

The burst of deals started in late September when Houston’s Hines Interests, which controls almost $24 billion in assets, and Los Angeles’ Oaktree Capital Management, which manages $77 billion in assets, bought 32 office buildings in Summerlin for about $120 million from Chicago’s General Growth Properties. The buildings, which total 1.1 million square feet, were half-vacant at the time.

Three months later, Illinois-based Inland Diversified Real Estate Trust, which owns and operates $2.2 billion of real estate, acquired six shopping centers for almost $300 million from Las Vegas developer Terri Sturm’s company, Territory Inc. Inland bought a majority stake in the centers, which total 1.7 million square feet.

Also in December, Southern California investor Ed Mustafa, managing member of the Brentwood Cos., bought seven commercial buildings in Henderson for $23 million. His group has another $20 million to $30 million they want to spend on Las Vegas real estate, his broker and property manager James Wilmot said.

Click to enlarge photo

The Wendy’s restaurant at 500 N. Green Valley Parkway was one of 18 local fast food properties sold by Cedar Enterprises to two national real estate firms.

Then in January, franchisee Cedar Enterprises sold 18 Wendy’s restaurant buildings to two national real estate firms — Cole Real Estate Investments in Phoenix and National Retail Properties in Orlando, Fla. — for almost $24 million. Cole controls $12.4 billion of real estate nationwide. National Retail owns 1,500 properties in 47 states.

Another deal could be on the horizon.

Prologis, which owns industrial buildings around the world, wants to sell 1.5 million square feet of its Nevada holdings, people familiar with the matter said. That’s at least half of its state portfolio.

Many investors believe the local real estate market has hit bottom and is on the mend. Lenders are showing more interest in financing acquisitions here, said Kyle Nagy, of CommCap Advisors, a Henderson commercial mortgage brokerage firm.

But the investments are far from a sure thing. Office vacancy rates in the valley were the highest in the nation at 26 percent during the fourth quarter last year, and retail vacancy rates were tied with Cleveland for fifth-highest at 16.4 percent.

Still, the sluggish economy is showing signs of life. Southern Nevada’s median home value rose 14 percent last year to $129,100, and the region’s unemployment rate slid to 10 percent in December from 13.3 percent a year earlier.

Before Mustafa bought his seven Henderson office buildings, 22 investor groups, most from Southern California, toured the buildings for possible purchase. Collectively, they offered $400 million for the properties, underscoring the huge amount of money people are willing to spend for deals, said Hayim Mizrachi, managing director of NAI Global’s Las Vegas office, which represented the buildings’ seller.

Las Vegas is a riskier bet than other cities, but there can be rewards in risk.

As Mizrachi pointed out, “you can get a better return.”

Tags: Business