Bank shifts land unit's focus to investment One-time liquidator buys office complex

July 03, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

NationsBank Corp., after years of whittling down a $1.8 billion regional portfolio of foreclosed real estate, has shifted the focus of its South Charles Realty Corp. subsidiary toward investments.

The transition to South Charles Investment Corp. took a major leap last week, when the company bought a vacant, three-building office complex in Northern Virginia for $7.4 million, the first property acquisition under its new strategy.

"We feel we have all the skills necessary to operate in the real estate business in-house," said Turner B. Smith, South Charles' president. "The idea is to maintain our real estate-owned unit and at the same time expand, provide services to clients and attract other investors."

As part of the High Ridge Corporate Park purchase, South

Charles teamed up with a division of Alex. Brown Inc. and the Trammell Crow Co., a Dallas-based company that once was the nation's largest commercial property owner.

Smith said the three companies intend to invest more than $7 million to renovate and modernize the Fairfax Center, Va., project, which was developed in the mid-1970s on behalf of a defense contractor.

Market conditions appear to be working in South Charles' favor. In Fairfax County, office vacancy rates are less than 8 percent, down from 1994 levels of 33 percent. At the same time, rental rates have been inching upward to between $18 per square foot and $23 per square foot. By comparison, downtown Baltimore's vacancy rate is roughly 23 percent.

"The market for space here is very tight, there's been a fair amount of activity and job growth, and any new development will take 18 to 24 months to complete at a significantly higher cost than what we paid," said Bob Murphy, a Trammell Crow managing director.

That lower investment is expected to translate into lower rental rates, giving South Charles a competitive edge in the market. The renovated High Ridge space will rent for roughly $18 per square foot.

Still, High Ridge will be a challenge. For starters, the 210,000-square-foot project has been vacant for at least five years, and today accounts for the single largest block of available space in the county.

"They have a real challenge there if they want to make it a multitenanted building, because High Ridge was custom-built as three buildings and linked together later," said Mike Kuehn, a senior vice president of the Carey Winston Co., the Washington area's largest commercial brokerage and property management firm.

"But the market is going so well," Kuehn said, "that they'll have available space when others don't."

And South Charles will continue to rehabilitate and dispose of nonperforming real estate projects and loans, although its portfolio has shrunk to just $45 million, Smith said.

At that size, it's a fraction of the more than $1.8 billion South Charles controlled in 1992, the height of the regional commercial real estate depression. NationsBank inherited South Charles as part of its $1.4 billion acquisition of MNC Financial Inc. in 1993.

High Ridge also marks the first action by the company since a deal with investment bank Internationale Nederlanden Groep NV buy South Charles fell apart a year ago. The $175 billion financial institution, Europe's seventh largest, backed out because it was unwilling to meet NationsBank's asking price.

Pub Date: 7/03/96

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