Tourmaline Capital Partners, a Philadelphia-based investment management company that opened its door two years ago, is being flexible in its approach to financing as it seeks to build a portfolio of class A offices that suits tenants’ changing needs.
“When covid happened and throughout 2020, I think it became clear there would be massive value destruction across the board. I thought there would be some interesting opportunities as well,” says Brandon Huffman, chief executive. “The pandemic accelerated trends that were already underway that would change the landscape of how offices, tenants and employers interact with each other and what the built environment would look like.”
Huffman launched the firm with the aim of identifying, buying and creating a portfolio that could adapt to what they saw as the shifting needs of tenants. Prior to Tourmaline, Huffman held a senior post at Rubenstein Partners, another Philadelphia-area real estate investment firm, and has spent his entire career in office private equity.
“The view was to give autonomy back to tenants, and that great work environments would be much more conducive to a diversity of work postures throughout the week,” Huffman says. “The focus would be best-in-class, highly amenitized offices with hospitality-like services. Those buildings are always going to do better and will see people coming back to them first.”
The firm has done more than $3 billion of deals in gross asset value and owns several properties in markets in throughout the US. “We are focused on top-decile assets,” Huffman added.
Lining up financing
Tourmaline, like other managers, sees what Huffman says is massive illiquidity in the financing markets.
“It’s not just that rates are high, it is just that there is a lot less debt available, which makes it doubly expensive,” Huffman adds. “There are only a handful of people who are playing for large offices and need loans of $200 million or larger, and there are virtually no banks or life companies in the market to provide that financing.”
Additionally, the commercial mortgage-backed securities market continues to be choppy, and commercial real estate debt funds typically represent a higher cost of capital. “The debt funds can’t get their underlying leverage today and they’re also pricing these loans at historically wide spreads, based off of what is already a very high index,” Huffman says. “Seller financing is what is facilitating some of the deals we are doing.”
The firm’s flexible approach comes in situations in which the seller does not want to provide financing. “This means we will price the asset a lot differently and take the more expensive debt,” he says.
Breaking the fourth wall
In Huffman’s view, the market is moving toward a new iteration of office properties. The firm splits the office market into three eras, in which the sector evolved from being just a place where people went to work prior to 2010.
“From 2010-20, we had the amenities arms race for office 2.0 properties. A key difference is that the amenities during that period were within the four walls of the buildings,” Huffman says.
These amenities, however, have not been enough to draw people back into the office post-pandemic.
“I think the long-lasting lesson from covid is not that people like working from home. I think it is that people like having a variety of work postures throughout the week,” Huffman says. “I think the typical employee might want to spend a couple of days in the office and a couple of days at home. But they also like that sort of magical third place, whether it is the coffee shop or the gym. One of things we focus on is how to bring that magical third spot into the office tower, onto the office complex.”
Tourmaline is trying to create that experience within its own properties as part of its strategy.
“What we want to do is activate the connective tissue of all of the spots in a building so that an individual can get away and have that magical experience but also an elevator ride away from being back in the office,” he says. “They are also looking for good wellness, food and beverage and connectivity with other tenants, and tech-enabled solutions that make their days more efficient and user-friendly.”
Looking ahead
As it expands its portfolio, the company will only buy class A properties.
“We are very hesitant to play in the commodity sphere of the market. Even in markets that are doing well and have tailwinds, if you are buying a commodity product with no way to differentiate yourself from the competition, it’s just a race on pricing or just a race to the bottom,” Huffman says. “Because we focus on best-in-class offices, we will be buying larger, higher-quality offices.”
For the first time since last year, Tourmaline is finding opportunities that reflect what the firm sees as new pricing levels. “There has been this stalemate over the past 12 months where nothing has effectively been trading. But what is trading now is trading at very compelling levels,” Huffman says.
The firm has been most active in the Sunbelt, where it has found the biggest spread between risk and reward. “We saw a lot of demographic tailwinds in those markets and a lot of people who were still very scared of office. Over the longer-term, I think there will be a lot more opportunities in the traditional gateway markets as they continue to settle out.”
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