Glenfield Capital Going Contrarian, Scooping Up Office Towers

The debate about how America returns to the office may still be raging, but one Atlanta real estate investment firm isn't shying away from buying office towers.

In June, Glenfield Capital purchased One Federal Place in Birmingham, Alabama, for $67M, or $225 per SF, from Gemini Rosemont. The 300K SF tower is currently more than 90% leased, the Birmingham Business Journal reported.

It is part of a pipeline of upward of $200M in office properties Glenfield is seeking to buy this year, James Cate, the firm's managing principal, said during Bisnow's Atlanta Money Maker event this week. Glenfield is bullish on offices even though the long-term value of office buildings in the face of shrinking corporate footprints is being thrown into question.

“A $70M office building in Birmingham? That's like buying King Kong. You shouldn't do that, should you?" Cate said. "If you would have asked me eight to 10 months ago would we have had difficultly financing that? I would have said, 'Absolutely.' It's Birmingham, it's office, and part of what we're doing is being partly contrarian."

But Cate said lenders competed to finance Glenfield's acquisition of One Federal Place, with costs for the firm to borrow money coming in lower than Cate was expecting — at around 3% of the loan value.

“Supposedly, that's what you can do in multifamily or industrial. From a borrower's perspective in office, I wouldn't say this is 2019, but it's a very healthy marketplace,” he said. “Office may be out of favor, but it is inuring to our benefit because industrial is the investment of choice right now.”

In a September 2020 survey, CBRE found that 98% of responding tenants expected employees back to the office by this fall. But once bullish companies, many of whom had plans to bring workers back to the office after Labor Day, are starting to pull back on those requirements. As many as half of employers anticipate requiring employees to get vaccinated for the coronavirus before returning to the office.

The tug of war on compelling employees to return to the office is creating uncertainty among lenders as to how to value office loans given the unknowns on just how much space those companies will need in the future, Henry Lange, the regional director for Northwestern Mutual Real Estate, said at the event.

While smaller tenants have been back to the office, larger tenants are still wrestling with the return, and that could mean huge leases shrink in the future.

“I talk to brokers, they're saying their tenants want half the space and for less time,” Lange said. “We are looking at office. But we are certainly more selective on that. We have to sort of get comfortable on where market rents are, which is difficult because there are not a ton of leases happening.”

With the prices of both industrial and multifamily continuing to boom, lenders are finding other assets to go after for better returns, panelists said, especially sectors like hotels, which banks all but shunned during the pandemic.

Now, the amount of leverage banks and other institutions are willing to finance on hotels has returned to levels seen prior to the pandemic, Peachtree Hotel Group CEO Greg Friedman said. 

"Lodging appears to be a better trade," Friedman said. 

Cate said Glenfield is shopping prominent office buildings that are home to tenants with solid credit histories, similar to Glenfield's Birmingham purchase. Despite the concerns of a potential glut of emptying office space, Cate said this recovery is mirroring that of past recessions, including the 1999 dot-com bust and the Great Financial Crisis.

All it takes is for more C-suite leaders to decide that productivity is suffering in a work-from-home model, a concern Cate said he hears is rising among the leadership of Glenfield's tenant base, even though many executives don't speak out about it due to concerns over public backlash.

“I think there's a day of reckoning coming,” Cate said. “We're over 50% currently invested in our fund that we haven't even launched. We have had some investors that just said, 'No, nobody is going to work in office buildings ever again, James, why would we do that?' But we have a lot of smart people who have done a lot of other things beyond real estate, made money in other ways, who see the play right now, see the opportunity."