Time to buy office
by Cousins Properties
Cousins announced yesterday that it is under contract to purchase an 804,000 SF trophy office building in Downtown Austin for $521.8 million.
---- But isn't Austin in trouble? ----
In the near term, yes...
Values are down 55% from the peak
22% vacancy, 28% availability
7% of existing supply under construction
---- Transaction highlights ----
$521.8M acquisition, net of $37.2M of future TI fundings
Expected to close this month
Unobstructed views of CBD and Lady Bird Lake
Developed in 2022 by Trammell Crow Company
100% leased to Google through 2038
Google is reportedly trying to sublease some of its space
---- Estimated economics ----
6.9% going-in cap rate
CapEx drag of about 3% per year
Income growth of 4-5% via bumps and below-market rents
Unlevered IRR of 8.5%
Cost of debt (CUZ bond yields) of 5.6%
Levered IRR of 10.2%
---- How does this make sense? ----
1. Long-term income growth:
We estimate that Google's in-place rent is about 30% below market.
2. Relatively cheap equity:
CUZ's stock price is up 34% over the last year. Public values are now trading in line with private values, which puts Cousins in the acquisitions game.
3. Relatively cheap (and available) debt:
Cousins has easy access to REIT bond markets in the mid-5% range, which is 15% cheaper than conventional mortgage financing.
4. Strategic bet with AAA coverage:
Few markets have a weaker near-term outlook and a stronger long-term outlook than Austin. This purchase gives Cousins the benefit of a AAA bond for 10+ years with upside from low rents/great location when Austin recovers. The deal also makes Austin Cousins' biggest market, surpassing Atlanta.
Bottom line...
Good luck bottom fishing in the office market. Any deal worth having may play into the well-capitalized hands of dominant REITs.
Ps - stay tuned for our 2025 predictions.
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