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CoStar Market Insight: Investors Gravitating to Value Add

Sales of 150 W. Jefferson Ave. and Troy Tower Highlight the Trend
October 30, 2017
Close to 600 office sales finalized in the Detroit Metro over the last four quarters, and the most obvious trend among these sales was the propensity of developers to gravitate toward properties rated 3 Star or less.

Such transactions accounted for over 95% of investment activity, and the inclination towards value-add transactions are a common occurrence among lower rated office assets. With major employers moving to the area, the pursuit of purchasing old buildings and adding improvements has proven to be a popular approach.

The Troy Tower at 901 Troy Drive in Troy North Submarket is a good example of this trend. The roughly 125,400-square-foot, 3-Star building sold to Allegiance Realty Corp., a North Carolina-based investor for $9 million ($71.80/square foot).

Like many recent transactions, the buyer acquired the asset to add cosmetic improvements both to the exterior and interior of the building, to further elevate the overall property value.

The majority of these trades are clustered downtown or in surrounding submarkets where construction has picked up. Employers are moving to the area to secure high-end office space and to escape rising costs per in metros like San Francisco. This has prompted buzz in the community around existing and new office space. With ample existing office buildings many investors have looked to purchase buildings in high-demand areas. Assets in these areas, such as Downtown, have unsurprisingly resulted in higher priced sales.

This can be seen with a recent transaction involving a downtown property. Earlier this summer, 150 W. Jefferson Ave. sold to Redico for $81.5 million ($166/square foot), the largest sale over the past four quarters.

The 490,000-square-foot office was almost 90% occupied at the time of sale, with notable existing tenants such as KPMG, Paddock & Stone, and Starcom/Digitas. The existing parking structure was eyed for its potential to house a residential redevelopment project though no such plans have been formalized yet.

CoStar Market Insights is a new feature providing a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 206 metro areas, with a granular understanding of the projects, players and economic trends that move these markets. Learn how CoStar Market Analytics can add to your market knowledge, helping to minimize risk and maximize returns.

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