Value Trumps Credit Crunch

November 16, 2007
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GRAND RAPIDS — The bundling of home mortgages into hedge funds turned those consumer notes into the modern-day equivalent of corporate junk bonds, the high-yield, high-risk securities that often plagued the market more than 20 years ago.

Analysts warned that the resulting collapse of the housing market would create financing difficulties for the commercial market by making mortgages scarce and more expensive. But that wasn’t the case when First Properties Inc. sold five fully leased industrial buildings to Virtú Investments of San Francisco last month.

Chad Barton, an investment specialist with Grubb & Ellis|Paramount Commerce, the firm that represented First Properties in the transaction, said lenders were impressed with the portfolio and the mix of tenants leasing space in the structures, so the deal was financed.

And although the brick and mortar and cancelled rent checks were vital to securing the necessary financial backing, more was needed to close the transaction.

“As we worked through this project and several other ones this summer, one of the key components for us in getting these deals over the finish line was the involvement of our local market knowledge,” said Barton.

Barton was joined in that effort by three other GE|PC colleagues: Investment Specialist Colin Kraay, Industrial Group Vice President John Kuiper and President and CEO Duke Suwyn. He said having everyone from the firm onboard played a key role in finding the right buyer and making the investment side of the sale work.

“The banks were very reliant on the accounts that we could come up with to support the values and really show them our market. So a lot of work — more work than we’re typically used to — went into the effort,” said Barton.

Kraay said a correlation between the consumer and commercial markets definitely exists when it comes to getting financing. He said lenders, in general, are being more cautious and asking more questions than they have in the recent past.

“The projects that are in trouble are the projects where you’re pushing everything to the extreme. People are almost buying because they need to place money (into something) and not necessarily because it’s a good investment. West Michigan is going to be able to sidestep the bulk of that because we have good, solid investments for the right reasons,” said Kraay.

Kraay pointed to the metro Chicago market as his example of a place where things are being pushed to the extreme.

“Some of the industrial properties there are selling down in the five and six cap rates, and that is well above replacement costs. In those markets, you’re going to have more of an issue in financing projects, when you’re buying substantially above replacement costs and the building is a year old.”

For comparison purposes, Kraay said GE|PC has closed about $50 million worth of deals in the region over the past three months, a time when the “credit crunch” was front-page news.

“We’ve got another $50 million pending that we hope to close before the end of the year. There is a credit squeeze out there, but in West Michigan, if it’s good property, well-located and well-leased, you can still achieve some deals and get them done,” he said.

Barton said the First Properties sale happened because the buildings the firm sold were good properties that offered good value to Virtú Investments. All the buildings have south-side suburban addresses and offer over 230,000 square feet of space.

“This portfolio and all the other stuff that we own is what we have built up over the past 40 years,” said Jeff Baker, president of First Companies.

“It’s great to hear those comments and it means a lot to us that the portfolio does have the value that we believe it does.”     

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