On Broadway

It's fitting that Broadway Real Estate Partners has an office in the landmark Seagram Building on Park Avenue in Midtown Manhattan, built in the 1950s by famed German architect Ludwig Mies van der Rohe. The private equity real estate firm, looking to become a force in the rough and tumble world of premier office properties, seems right at home in one of the more famous office buildings in the world.

But when the firm relocated from Greenwich, Connecticut to New York last year, the decision was based less on modernist architecture and more on real estate fundamentals, namely location – the firm wanted to be closer to the financial markets – and market rents.

“We had a sense that Manhattan's leasing market was starting to move in the right direction,” says Scott Lawlor, founder and chief executive officer of Broadway. “Locking down space in a premier building long-term was going to wind up being an advantageous financial move.”

The bet paid off, as the 15-year lease Broadway negotiated has now insulated the firm against rising rents in Manhattan's increasingly hot office market. But the investment also illustrates what the firm is looking to do – on a much larger scale – in the US office sector.

“We purchase premier-quality office product where we think we're finding inefficiencies in the pricing,” Lawlor says of Broadway's overall philosophy. “It's that simple.”

Since its founding in 1999, Broadway has acquired 4.2 million square feet of office space, totaling more than $1.6 billion (€1.3 billion) in asset value. Working on a deal-by-deal basis, the firm closed its first transaction in August 2000, quickly organizing the same club of investors, led by UK-based asset management firm Scottish Widows Investment Partnership, in subsequent deals.

Last year, Broadway transitioned into a new phase of investing when it began raising its first discretionary, commingled institutional vehicle, Broadway Real Estate Partners Fund, which closed this past June on $210 million, surpassing its $150 million target.

Already between 30 percent and 40 percent deployed, the fund will most likely be completely committed by the middle of next year, according to Lawlor. The quick investment cycle is primarily a function of the size of the firm's deals, which average around $100 million, in some of the largest markets in the US. Broadway has invested heavily on the East Coast, with acquisitions in New York, Connecticut, Philadelphia, Florida and Washington, DC.

But the firm has also made investments in smaller markets like Michigan. And last year, reflecting the firm's growing ambitions, Broadway opened an office in Los Angeles, making two investments in that city. Now, the firm has turned an eye north to the Bay Area, as well as to selective opportunities in Boston and Chicago. Broadway is also considering a non-dollar allocation for its next fund, which would allow the firm to take its investing methods abroad.

Lawlor estimates that Broadway has until now been able to source around one-third of its deals off market, pointing out that, because of the firm's size target, a large percentage of its deals are transacted through brokers.

“Most owners of $100 million office buildings are institutional,” he says. “Most institutions are not going to let anyone shake loose a $100 million asset without an intermediary.”

In order to profit in these situations, Broadway tries to find opportunities that other prospective buyers have missed, be it inefficiencies in the property or capital markets, the physical attributes of a building or tenant issues.

Lawlor offers an example of Washington Harbor, a 537,259 square foot office and retail complex on the Potomac River in the Georgetown neighborhood of Washington, DC. “We bought [Washington Harbor], where the whole building was rolling within two or three years, and the market was pricing it accordingly,” he says, adding that there was concern about the short-term leasing markets. “The property had physical attributes as far as views and positioning that caused us to believe that – while on paper everything was rolling – effectively no one was ever going to leave, because [the building] was that special. It was unique.”

Another deal, the 237,844-square-foot Pickwick Plaza office complex in Greenwich, Connecticut, took advantage of a pricing situation. The firm acquired a suburban office property at a relatively high per-square-foot purchase price, which Broadway felt was not a proper metric for the space, as there was no space to build competitive office product in the market. Two years after the purchase, the firm was able to refinance the property, return the equity to investors and post an IRR of more than 40 percent.

“Both of these properties were marketed to the world by sophisticated sellers and sophisticated brokers – and got a lot of exposure,” Lawlor says. “It's just that each one was one of a hundred we looked at that year where we saw something.”

For every 100 properties Broadway looks at, the firm will bid on approximately 20 and hope to buy one, Lawlor says. “We don't just transact at the clearing price,” he notes. “There's nothing scientific about winning a bid. We want really good risk-adjusted yields and we want to buy assets where people aren't seeing something. [That's] really hard to do.”

But the firm seems to be finding a fair amount of opportunities. Broadway recently closed on the Aon Center in downtown Los Angeles, a 1.1 million square foot skyscraper and the city's second-tallest building, behind the fabled US Bank Center. With high-profile deals like Aon, the firm has quickly established itself as presence among office investors. Nevertheless, it's a presence Broadway is looking to grow.

“Over time, the objective is for Broadway to sit side-by-side with the premier names in the office sector,” Lawlor says.

KEY PERSONNELScott LawlorFounder and chief executive officerLinda LewisChief financial officerCharles MillardManaging director/President BPDirect SecuritiesJonathan YormakChief operating officerINVESTMENTSAsset value of investments:$1.6 billionProperties acquired since inception:16Exits since inception:5Current number of properties:11