The former owner of the NBA's Phoenix Suns, Robert Sarver, is taking a contrarian view of the future of office space — despite its noted shifts in demand — with a newly launched firm to invest in office buildings in mixed-use areas being sold at a discount to historic values.
Sarver's Arizona-based private alternative real estate investment firm, called 3Edgewood, bought the State Farm-anchored 2.2 million-square-foot office, retail and medical office campus called CityLine in a Dallas-area suburb for a reported $580 million last month.
The deal could be the priciest U.S. suburban office deal to hit this year and will likely be 3Edgewood's most expensive transaction for the year, Jordan Mellovitz, head of real estate investment for 3Edgewood, told CoStar News in an exclusive interview.
"We are one of the crazy people buying office buildings," Mellovitz told CoStar News. "We believe, long term, if we own the right assets — with newer vintage buildings in a vibrant, mixed-use environment where a lot of tenants want to be — in the right markets that the office world will come back."
Another Texas deal will be 3Edgewood's largest transaction in terms of square footage this year, Mellovitz said. In September, 3Edgewood teamed up with Parkway in buying a nearly 3 million-square-foot portfolio spanning seven office buildings across two campuses in Houston. Parkway did not disclose the partnership with 3Edgewood when announcing the acquisition of the campuses called Post Oak Central and CityWestPlace. Parkway did not immediately respond to an interview request from CoStar News about the partnership.
One of the campuses in the Houston deal — Post Oak Central — is about to lose its longtime anchor tenant next year and the three-building office campus in Houston's Uptown-Galleria area is expected to get redeveloped by its new owners.
"Employers are hiring and, at some point, the office market will be OK even if the utilization of office space has gone down, employee count is going up," Mellovitz said. "We feel comfortable with the longer-term trajectory of office."
Mellovitz is leading the charge in this contrarian investment in real estate play launched by Sarver in May through 3Edgewood. Prior to launching 3Edgewood, Sarver co-founded Southwest Value Partners, a San Diego-based real estate company, in 1990. He sold the Phoenix Suns and the WNBA's Phoenix Mercury basketball teams at the end of 2022 for about $4 billion.
The firm is in the design phase of building its headquarters in a boutique office building totaling about 30,000 square feet in the Camelback Corridor of Scottsdale, a high-end neighborhood outside Phoenix.
So far, 3Edgewood has about five people working at the firm, said Mellovitz, who is based in Chicago but travels to Arizona weekly to collaborate with colleagues and work on the real estate investment pipeline for the contrarian investor. Mellovitz, whose resume includes various roles at Avison Young and Cushman & Wakefield, said he is focused on executing primarily data-driven deals where the firm is looking for value in the nation's Sun Belt.
"We like the demographics and macro trends of the Sun Belt, and we want to own real estate where people want to be," he added. "We are looking at some deals on the East Coast, but most of those would be in Florida, where there's been significant run-ups on rent and our value-building strategy may not work."
All-Cash Deals
3Edgewood has no set allocation of capital in seeking deals, but Mellovitz said there's an advantage to being an all-cash buyer for office properties right now. That all-cash strategy has helped 3Edgewood land its sought-after deals, he said.
"It doesn't make sense to put debt on office buildings right now, which is why we have seen success," he added.
The acquisition of State Farm-anchored CityLine will likely be 3Edgewood's priciest deal to land this year, Mellovitz said, declining to disclose the amount of the all-cash deal. Other real estate sources close to the deal say it sold for $580 million.
"We are looking for a significant discount to replacement cost and previous value," he added. "We buy by the pound and care about the in-place cash flow on a property. We are looking to find properties in markets that have not had the kind of run-up of rents seen in gateway markets and find that sweet spot to get to the right place of yield and cash flow."
To date, Mellovitz said he's seen an overwhelmingly positive reaction from the real estate investment community to the firm's deals so far this year and to what is becoming less of a contrarian investment strategy by the day. Meanwhile, Mellovitz is out there, trying to close a few more deals before year's end — even if they aren't as pricey as its acquisition of the State-Farm anchored campus in the Dallas area.
"We have seen some larger institutions coming off the sidelines," Mellovitz said, adding he's seeing more competition for office properties from investors. "We're starting to feel like we aren't the only buyers."