While many real estate investors shied away from the office sector in recent years, citing remote work trends and a challenging lending environment, Tourmaline Capital Partners emerged in 2021 with a contrarian vision. Based in Bryn Mawr, Pennsylvania, this firm boldly targeted office properties, amassing an impressive portfolio across the Sun Belt and beyond. This strategic move, made amidst uncertainty about the future of workspace, highlights Tourmaline Capital Partners’ unique approach to real estate investment and its conviction in the enduring value of high-quality office spaces.
Tourmaline Capital Partners has rapidly grown its holdings to eight properties, encompassing 4.5 million square feet, along with two development sites. Their portfolio is primarily concentrated in the high-growth Sun Belt region, featuring prominent assets such as stakes in the Apex at Legacy campus in Plano, Texas, the One South tower in Uptown Charlotte, North Carolina, and the expansive Esplanade mixed-use office campus in Phoenix, Arizona. Demonstrating a broader geographic reach, their portfolio also includes the Steelman Collective in Minneapolis’ North Loop neighborhood, their sole holding outside the Sun Belt. In the competitive South Florida market, Tourmaline Capital Partners has made significant investments, securing stakes in the iconic Citigroup Center tower in downtown Miami and the prestigious 801 Brickell building in the city’s financial district.
Alt text: Exterior view of the Citigroup Center office tower in Downtown Miami, a key investment property for Tourmaline Capital Partners.
However, Tourmaline Capital Partners is not operating under the assumption of a universal office market recovery. CEO Brandon Huffman emphasizes a highly selective investment strategy. “There’s a lot of office buildings we would never own at any price… The bottom 30 percent of the office stock, I wouldn’t pay anything for,” Huffman stated. Instead, the firm’s thesis centers on a bifurcated market: a segment of underperforming, obsolete office spaces, a middle tier facing stagnation, and a top echelon of premium properties poised for exceptional performance. Tourmaline Capital Partners is firmly focused on this top tier, believing these assets will not only weather market fluctuations but thrive in the evolving landscape of work.
Huffman, along with co-founders Jeffrey Fronek and Jonathan Jacobs, recognized evolving workplace preferences even prior to the pandemic. Their experience as executives at Rubenstein Partners, a Philadelphia-based office real estate investment advisor, provided them with insights into shifting employee demands. The pandemic, in their view, acted as an accelerant, solidifying the trends they had observed and creating a unique investment window. “When the pandemic set in, we thought that could potentially serve as a catalyst to accelerate these trends. We thought the sector was going to evolve very, very quickly in some meaningful ways,” Huffman explained. This perspective – that uncertainty breeds opportunity – became the foundation for Tourmaline Capital Partners’ strategy to capitalize on the disruptions within the office sector.
To gain deeper insights into Tourmaline Capital Partners’ business model, investment focus, and market outlook, The Real Deal engaged in a detailed interview with CEO Brandon Huffman. The discussion explored the specific types of office properties that Tourmaline is targeting, the nature of their investment partnerships, their perspective on rising office rents in markets like Brickell, and even the origin story behind the firm’s distinctive name.
The following is an edited and condensed version of the interview for clarity.
Tourmaline Capital Partners’ Investment Strategy: Beyond Amenities to Holistic Workplace Experiences
Q. Can you elaborate on Tourmaline Capital Partners’ business model? What specific types of office properties are you investing in, and how are you adapting these campuses to meet the demands of today’s workforce?
A. The real estate industry often talks about the “flight to quality,” but the definition of quality has significantly evolved. In the past, quality might have been perceived as simply having a few upscale amenities within a building. However, Tourmaline Capital Partners believes that today’s tenants require much more than just a checklist of amenities. They seek a holistic workplace experience that integrates hospitality and robust services extending beyond the confines of the office building itself, permeating the entire campus environment.
The COVID-19 pandemic underscored that while employees may appreciate flexibility, they also desire a variety of work settings throughout their week. This includes spaces for focused work, collaborative zones, and environments that support well-being and convenience, such as on-site gyms and coffee shops. Tourmaline Capital Partners aims to create campuses that seamlessly integrate these diverse elements, minimizing the need for employees to venture outside the campus to access desired services and amenities. This focus on creating a comprehensive and convenient ecosystem distinguishes Tourmaline Capital Partners’ approach from traditional office property management.
Q. It sounds like Tourmaline Capital Partners is differentiating between office buildings that are merely “amenitized” with basic features like a gym and café, and creating office environments that mirror the vibrancy of urban downtowns. These downtown environments offer a rich, organic mix of restaurants, gyms, collaborative spaces, and walkable surroundings – elements that Tourmaline is actively recreating within its properties. Is that an accurate interpretation?
A. Precisely. It has become increasingly clear that this integrated, dynamic environment represents the optimal workplace for many contemporary businesses and their employees. However, effectively creating such an environment requires more than just adding amenities. It demands a deep understanding of real estate management and a keen awareness of evolving consumer preferences. Tourmaline Capital Partners believes in actively managing its properties and staying attuned to the needs and desires of its tenants.
As a relatively young team, Tourmaline Capital Partners operates with an understanding of modern work styles and preferences. This firsthand perspective informs their investment and management strategies, setting them apart from more traditional approaches that may be rooted in outdated office paradigms from even five or twenty years ago. This generational understanding of workplace dynamics is a core strength of Tourmaline Capital Partners.
Sun Belt Migration and Strategic Market Selection by Tourmaline Capital Partners
Q. You mentioned office market trends that were emerging before the pandemic, trends that you, Mr. Fronek, and Mr. Jacobs anticipated would accelerate. Can you elaborate on these trends?
A. One significant trend was the ongoing migration pattern towards the Sun Belt region. For decades, there has been a consistent movement of people and businesses to states like Florida and Texas, outpacing growth in traditional business hubs like Chicago or Philadelphia. Tourmaline Capital Partners recognized this demographic and economic shift as a key factor in their investment strategy.
The pandemic further amplified this Sun Belt migration, accelerating job growth and business expansion in these regions. While the Sun Belt is a primary focus, Tourmaline Capital Partners maintains a flexible and opportunistic approach. They recognize that pockets of strength exist beyond the Sun Belt, as demonstrated by their investment in the Steelman Collective in Minneapolis. Their strategy is not solely geographically determined but driven by identifying markets and submarkets with strong fundamentals and growth potential, regardless of location.
Alt text: The 801 Brickell office building in Miami’s Financial District, recently acquired by Tourmaline Capital Partners and Monarch Alternative Capital, showcasing a prime office asset in a key market.
The Partnership with Monarch Alternative Capital and Tourmaline Capital Partners’ Investor Network
Q. Tourmaline Capital Partners co-owns most, if not all, of its properties with Monarch Alternative Capital, a firm with offices in New York, London, and West Palm Beach. Could you explain the nature of this relationship between Tourmaline and Monarch?
A. Monarch Alternative Capital is a significant investment partner for Tourmaline Capital Partners, forming a close and collaborative relationship. From Tourmaline’s inception, they explored various partnership opportunities, and a strong connection with key executives at Monarch emerged. Monarch, a major player in private markets and real estate, seeks specialized expertise across different asset classes to identify, manage, and enhance investment opportunities.
Tourmaline Capital Partners effectively serves as Monarch’s dedicated office investment group. Monarch relies on Tourmaline’s specialized knowledge and operational capabilities in the office sector to source deals, execute strategies, and manage assets on their behalf. This symbiotic relationship leverages Monarch’s capital and broad market reach with Tourmaline’s focused expertise in the office sector.
[ Editor’s Note: Following the publication of the original interview, a Tourmaline spokesperson clarified the relationship, stating: “We [Tourmaline] have been working and collaborating with Monarch since day one, effectively they put us in business, and they continue to be instrumental in driving decision making, strategy and vision for the product.” ]
Q. Beyond Monarch, who are Tourmaline Capital Partners’ other investors?
A. Tourmaline Capital Partners’ investor base includes family offices and smaller private equity groups. These are often sophisticated investors who may not be widely recognized household names but rely on Tourmaline’s expertise to identify promising opportunities and co-invest alongside the firm. This diverse investor base reflects confidence in Tourmaline Capital Partners’ strategy and management team.
Navigating Financing and Interest Rate Fluctuations at Tourmaline Capital Partners
Q. How does Tourmaline Capital Partners typically structure its deals? Do you primarily utilize equity from investors, or do you incorporate financing?
A. Like most real estate investors, Tourmaline Capital Partners generally employs leverage, utilizing debt in conjunction with investor equity. The specific financing structure varies depending on each transaction and market conditions.
Tourmaline Capital Partners takes a pragmatic approach to financing, evaluating options from both traditional lenders and sellers. They are mathematically neutral to the source of debt, focusing on achieving target returns. If favorable seller financing is available, even at a potentially higher purchase price, Tourmaline will analyze the terms and structure the deal to achieve comparable returns to scenarios involving third-party debt at prevailing market rates.
Seller financing can be attractive when sellers prioritize maximizing purchase price, while third-party debt may be preferred when sellers seek a clean exit. Tourmaline Capital Partners adeptly navigates these scenarios, optimizing financing structures to align with both their investment objectives and seller preferences.
Q. What were the internal discussions at Tourmaline Capital Partners like when the Federal Reserve began raising interest rates in March of last year?
A. Interest rate hikes inevitably impact all asset classes, and commercial real estate is no exception. For Tourmaline Capital Partners, rising interest rates, while presenting challenges, also create opportunities, particularly within the office sector. Unlike some property types like multifamily, office assets often require ongoing capital reinvestment to maintain competitiveness and value.
The initial period following rapid rate increases saw market stagnation as buyers and sellers struggled to align on pricing expectations. Sellers often clung to pre-rate hike valuations, while buyers adjusted to the new financing landscape, resulting in a significant bid-ask spread and a slowdown in transaction volume. However, Tourmaline Capital Partners believes this period of price discovery is evolving. They anticipate that lender-driven processes will become more prevalent, leading to attractive acquisition opportunities for well-capitalized and strategically focused firms like Tourmaline. They see the current market environment as a window to acquire high-quality office assets at potentially favorable valuations.
Development Pipeline and South Florida Market Outlook from Tourmaline Capital Partners
Q. Could you share insights into Tourmaline Capital Partners’ plans for its development sites?
A. Tourmaline Capital Partners controls development sites in Dallas and Nashville. The Nashville site is envisioned as a large-scale, multi-phase mixed-use complex spanning millions of square feet. Preliminary plans for the Nashville development include buildings ranging from 26 to 32 stories, totaling approximately 911,000 square feet of real estate in the city’s Midtown area, as indicated on Tourmaline’s website.
However, Tourmaline Capital Partners is not rushing into development in the current economic climate. While these sites represent valuable long-term opportunities, they are strategically held for future development when market conditions become more favorable. Currently, the focus remains on acquisitions and value enhancement of existing office assets.
Q. Tourmaline and Monarch’s $250 million acquisition of 801 Brickell in October marked South Florida’s largest office deal of the year. However, the influx of out-of-state companies to South Florida has slowed compared to the peak of 2020-early 2022. What is Tourmaline Capital Partners’ outlook for South Florida, particularly regarding record office rents on Brickell exceeding $100 per square foot?
A. South Florida is transitioning into a global business hub. Concerns about the region’s critical mass and ecosystem to support major corporations have diminished as South Florida has demonstrably matured as a business destination. The attractive business climate is fostering self-sustaining growth, making South Florida an increasingly compelling market.
While absorption rates may have moderated from the frenetic pace of the immediate post-pandemic period, this is partly due to limited available space. Sustained demand necessitates new development to accommodate continued growth. Tourmaline Capital Partners remains optimistic about the South Florida office market, allocating significant resources to identify opportunities in the region, while also maintaining a national perspective.
Regarding office rents, Tourmaline Capital Partners does not anticipate a significant correction in prime submarkets like Brickell. They believe that a segment of users will continue to prioritize and be willing to pay for premium office space in desirable locations, supporting high rental rates.
The Story Behind the Name: Tourmaline Capital Partners
Q. Finally, what is the origin of the name “Tourmaline”?
A. Choosing a company name can often feel like an afterthought amidst the many priorities of launching a new venture. For Tourmaline Capital Partners, the name has a connection to the co-founders’ backgrounds and reflects their investment philosophy.
With partners hailing from San Diego, the name “Tourmaline” evokes Tourmaline Surfing Park, a well-known beach in San Diego. Beyond the geographic association, tourmaline is also a gemstone known for symbolizing balance, embodying the concept of yin and yang. This resonates with Tourmaline Capital Partners’ commitment to sound and balanced investment principles, seeking equilibrium in risk and reward. The name “Tourmaline” thus represents both a personal connection and a guiding investment philosophy for the firm.
