Jan 29, 2014 – Eleanor Duncan – Crocker Partners is shifting its investment strategy toward a much-maligned segment of the office sector—suburban properties. The company has been a major buyer of high-profile, well-located office properties in secondary markets but believes that strategy is almost played out. “In the early part of 2013, we did not have much competition in our markets,” said Tom Crocker, founder of the Boca Raton-based investment company. “Last year, we bought three office buildings in Miami. Those same office buildings are now far out of reach for us.”

Among the company’s 2013 acquisitions was a $262.5 million deal for Miami Center, a 34-story, 786,000-square-foot office tower, that was the largest in Miami since 2008. Since then, overseas money has poured into the city, causing values to rocket, Crocker said, adding he now anticipates record high trades for urban office in Miami and Fort Lauderdale.

Suburban offices were hit hard by the recession as well as a population shift toward urban environments. “The rest of the world believes [suburban office] is a dead asset class. The reality is that most people enjoy the live-work-play environment provided by urban environments, and it’s a trend that’s likely to continue over the next 10-15 years,” Crocker said. “Our view is not that [suburban office] is dead, but it is far more challenging. The kind of user has changed over the past five to six years.”

Crocker told REFI the firm’s new suburban office investment strategy is “highly speculative,” but he is convinced the tenant base has not entirely disappeared. “Those properties are there for a reason. Not every office is appropriate for a downtown sales enterprise,” he said. “For example, if you’re a Verizon sales office or tech company whose employees are out on the road as often as they’re at their desks, you want to be on the I-95 or someplace—not in a downtown office that it takes 10 minutes to get out of.”

The most important characteristic of the new suburban office tenants is the emphasis on efficiency. “Their density is two to three times more than the old suburban tenants—they’re looking to wring the last dollar of efficiency and productivity out of their [office] space,” Crocker noted. The company will be targeting assets where they can “re-imagine” the asset to accommodate this new trend towards density. “That means buying the asset really cheap,” he said.

One of the firm’s first suburban acquisitions is an office property in Orlando’s Maitland Interchange submarket for $80 per square foot—a steep discount to the property’s estimated replacement cost of $175 per square foot. Twenty-five years ago, Maitland was the place to be, but the market started to wilt after it outlived its usefulness. The property now has vacancy of upwards of 35% and the company is working on lease-up, Crocker said.

The company is expecting returns of about 15% on careful suburban bets, Crocker said. Today, buying in downtown second tier markets—where most of Crocker’s portfolio lies—gets investors all-in returns at 8-10%. That’s good news for Crocker’s portfolio, when the firm decides to trade. “I’m very happy with my current investment portfolio. The danger is that everything we buy dilutes those returns,” he added.