The long standing value paradigm in this industry has always been “Location, Location, Location”. Perhaps that is beginning to change to “Q3”, a term coined by Stewart Title Chief Economist, Ted Jones in a recent presentation he made in Portland, Oregon here recently. Q3 is shorthand for the new Paradigm, “Location Quality, Property Quality, and Tenant Quality”.
Case in point, The Mortgage Bankers Association (MBA) had a brand new 10 story Leed Gold Certified Building constructed just a few blocks from the White House in Washington DC. The MBA paid approximately $79 Million in 2008 for this trophy asset and occupied about half of it. Their inability to lease the rest of the building forced them to sell it to the Costar Group in February 2010 for $41 Million, or a $37.7 Million dollar loss in just over a year.
The Costar Group, apparently using its own analytics (they are publicly traded and one of the premier commercial real estate information companies in the world), new a good deal when it saw it. They occupied approximately 80% of the building, and then resold it to a German Real Estate Entity in February 2011 for $101 Million, or a whopping 59.7 million dollar profit in a little less than one year, signing a long term lease at closing for the whole building.
This story is a clear example of the new paradigm at work. Only with all three aspects of Q3 in play, location quality, property quality, and tenant quality, was the market willing to recognize and assign value to this trophy property.