Property Description

This acquisition consists of two office buildings totaling 201,587 square feet in Columbus, OH and the Salt Lake City, UT suburb of South Jordan, two target markets for Gladstone Commercial. The portfolio is 100% leased with Morgan Stanley Smith Barney Financing, LLC (“MSSBF”) as the anchor tenant occupying 92% of the portfolio.

  • We acquired the properties on December 4, 2017 for $37.6 million. The properties are 100% leased with a weighted average lease term of 8.6 years.
  • The Columbus asset is a fully leased three-story, 102,559 square foot office building. MSSBF is the anchor tenant, leasing 83.7% of the property through December 31, 2025. The balance of the property is occupied by Congressional Bank, a privately owned commercial bank, through July 31, 2020. The Columbus asset has a weighted average lease term of 7.0 years and has an attractive parking ratio of 6.1 parking spaces per 1,000 square feet. The property, constructed in 2007, is located in the Easton submarket with diverse retail amenities in the Easton Town Center and in close proximity to the Columbus I-270 beltway loop.
  • The Salt Lake City asset is a three-story, 102,028 square foot office building that is 100% leased to MSSBF until December 31, 2027. The property, built in 2007, also has an attractive parking ratio of 5.8 spaces per 1,000 square feet and is located in close proximity to retail amenities, multifamily housing, executive housing and only two blocks from the I-15 Freeway and a light rail station.
  • The going in or “cash” cap rate was 8.18%. The average or GAAP cap rate was 9.23%.

Property Images

Investment Thesis

  • Investment grade anchor-tenant limits credit risk
    • Columbus: The property is anchored by MSSBF, who occupies 83.7% of the space. MSSBF is a major U.S. operating subsidiary of Morgan Stanley, who is investment-grade rated (BBB+). The presence of an investment-grade anchor tenant at the property provides predictable, stable cash flows for the first eight years of the investment (MSSBF’s lease matures on 12/31/2025). MSSBF has an expansion option allowing for them to become the sole tenant in the property. The balance of the property is leased by Congressional Bank, an unrated privately held commercial bank.
    • Salt Lake City: The property is 100% leased to MSSBF. MSSBF is a major U.S. operating subsidiary of Morgan Stanley, who is investment-grade rated (BBB+). This investment grade tenant at the property provides predictable, stable cash flows for 10 years.
  • Opportunity to acquire Class A, institutional quality office assets with good re-leasing potential in a downside scenario
    • Columbus: The property was developed in 2007 by Duke Realty and is a class A office property with LEED certified interiors. The floorplates (~35,000 square feet), while large, are in demand in the Columbus submarket due to the lack of similar options in Easton and many corporate users requiring larger spaces. If necessary, each floor could be easily modified for two tenants. The estimated replacement cost is in the $180-$200 per square foot range.  The build-out for the MSSBF space is modern, class A- cubicle-based office space with excellent natural lighting due to locating the offices/common areas (kitchens, break rooms, etc.) on the interior of each floor.
    • Salt Lake City: The property is a 2007 built, LEED Silver Energy Star rated building. The floorplates (~35,000 square feet) provide leasing flexibility in a downside scenario. Additionally, the first floor was previously multi-tenanted when the building was first constructed, prior to MSSBF occupying the entire building in 2016.
  • MSSBF has shown a commitment to the property and continues to invest its own capital into the property
    • Columbus: Since first leasing space at the property in 2008, MSSBF has expanded multiple times, nearly doubling their initial leased space. MSSBF has also invested a significant amount of its own money into the property, including major investments in mechanical systems (including a new cooling tower and generators capable of powering their entire space). MSSBF is also currently considering an upgrade to LED lighting (currently a mix of T-5 and T-8) at their expense. Since 2007, MSSBF has invested over $20.0MM in the property.
    • Salt Lake City: MSSBF leases the entire property and has held the largest space in the building since construction in 2007. MSSBF has invested $21.7MM of its own capital into the property since 2007 including office space build-outs and redundant infrastructure upgrades (generator, UPS module, air cooled chiller, etc.).

Market Description

Easton Submarket is the strongest office submarket in suburban Columbus – The Easton submarket is widely considered the strongest office submarket in Columbus due to its close proximity to I-270 (the beltway of Columbus) and strong amenity base. The property is located within walking distance of Easton Town Center, a major “live work play” mixed-use development. Easton can command a premium in rents to all other office submarkets (including the central business district) and has consistently attracted large, corporate tenants such as JP Morgan Chase, Alliance Data Systems, and L Brands.

Sandy South Towne Submarket is one of the strongest office submarkets in suburban Salt Lake City – The property is located in the Sandy South Towne submarket, one of the best in the Salt Lake City metro area that provides the “Live/Work/Play” environment current office tenants are looking for. As of Q3 2017, the submarket totaled 5.2MM square feet with a 9.6% vacancy rate and an average asking lease rate of $25.46 per square foot gross. As of Q3 2017, the submarket has totaled 305,461 square feet of positive net absorption, second only to the Central Valley (379,568 square feet) in the Salt Lake City metro area.

Tenant Description

MSSBF is a major, U.S. based operating subsidiary of Morgan Stanley. Morgan Stanley is currently investment-grade rated by S&P (BBB+) and is one of the largest financial institutions in the world. According to the 2017 Federal Reserve Resolution Plan, submitted by Morgan Stanley, as required under the Dodd-Frank Act, MSSBF’s primary activities are to hold real estate leases for Morgan Stanley’s branch offices and to finance fixed assets for its Wealth Management division. As of December 2016, MSSBF had assets of $1.69B, and equity of $1.1B.

Founded in 1935, Morgan Stanley is a worldwide financial services company providing various financial products to corporations, governments, financial institutions, and individuals worldwide. Morgan Stanley operates primarily in three business units: Institutional Securities, Wealth Management, and Investment Management. Of the three business segments, Institutional Securities and Wealth Management represent approximately 93% of their 2017 revenues.

The properties are used as an in-bound call and service centers for Morgan Stanley’s wealth management division. The primary function of each property is to provide technical and account support services to Morgan Stanley’s wealth management clients, including high net worth individuals.

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