Good morning. In today's Monday Briefing, we will be discussing a group of contrarian investors who have a positive outlook on the future of the office market and are taking advantage of the current prices to acquire high-quality assets at a discounted cost.

📖 Read: Ken Griffin's Citadel churned out a record $16B in profits for its clients in the last year, surpassing the performance of the rest of the sector and standing as one of the most profitable financial ventures in history.

🎧 Listen: A new $1.3B arena coming to downtown Philadelphia will bring more amenities, a vibrant nightlife, and increased investment. Campus Apartments CEO David Adelman and CBRE's Spencer Yablon provide insight into the city's growth on The Weekly Take.

BARGAIN HUNTERS

Small Investors Are Taking Big Bets on Old Office Buildings

Despite the uncertainty from the aftermath of the pandemic, a few brave investors believe that the office market isn’t dead. These investors are deploying millions into high-quality office assets that are selling at attractive price points.

The unusual suspects: According to data from proptech firm Reonomy, 22 of the 35 recently sold office buildings in Metro Atlanta were purchased by small private equity firms and family offices. Some are purely speculating on the attractive prices and betting on a recovery in demand. Others are “conversion specialists” looking to repurpose old offices into other uses like apartments.

Buy low, sell high: Boyd Simpson, owner of The Simpson Organization, purchased a 57% occupied office portfolio in Atlanta for $109M, which he viewed as a “bargain.” Investors like Simpson believe in the long-term prospects of Atlanta’s office market for national, local, and regional companies, and are investing accordingly.

‘Opportunistic’ investors: Tioga Capital, an Atlanta-based investor, bought a 180 KSF office complex in Kennesaw, GA, for $61 per SF, far below the Metro Atlanta average of $171 per SF. The deal featured 3.5 acres surrounding the buildings, offering additional upside through industrial or multifamily development.

➥ THE TAKEAWAY

Below replacement cost: Office buildings are often selling for less than what it would cost to build them, making some investors comfortable with the risk. Even those who don’t consider themselves office players recognize the opportunity thanks to low competition and the ever-present need for office space.

• Opportunity be knockin’: CBRE estimates 42.6 MSF of office space will be converted to other uses between 2023 and 2025.

• Jack of all trades: From Broadway to buildings, one actor built a successful real estate business syndicating apartments in the Sun Belt.

• Public vs. Private: Morningstar dives deep into the pros and cons of investing in REITs vs. direct real estate.

• Playing defense: According to Blackstone (BX) CEO Stephen Schwarzman, BREIT has survived the higher interest rate environment by focusing on warehouses and apartments.

• Pump the brakes: Investors are hitting pause on built-for-rent projects due to fears of overcrowding, but new supply is still falling short of demand in most parts of the country.

• The Biggest Apple: Manhattan office leasing activity ground to a halt at the end of 2022, but there were a few bright spots for owners of new construction projects.

• Tug of war: A developer in Manhattan, Bruce Teitelbaum, built a truck depot after a councilwoman rejected his $700M high-rise apartment proposal to push for affordable housing.

• Watch-from-home: Cineworld, the parent company of Regal CInemas, filed for bankruptcy and announced plans to close 39 locations this year.

• Deserted in the desert: United Realty M.T.A. bought an 86 KSF office building in Chandler, AZ for $17.2M from Alidade Capital.

• Did someone say eggs?: Inflation has taken its foot off the gas over the past few months, but economists aren’t sure when it will return to pre-pandemic levels.

• Fair-er housing: The Biden administration is bringing back a rule that requires cities, counties, and states receiving federal housing funds to review and remedy policies that may be contributing to residential segregation.

• Pleasantly surprised: Single-family builder sentiment unexpectedly rose in January for the first time in 12 months, with a rebound for homebuilding expected in 2023.

• Big boy veto: Private equity giant KKR (KKR) blocked investors from cashing out of its private REIT.

• Hush, hush: 26 contracting companies were indicted on accounts of bid-rigging and kickbacks that defrauded NY developers of $5M+ over 8 years.

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