Tuesday, October 17, 2017

Medical Office Investments (Video)

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Workspace Property Trust Files for IPO to Raise $100 Million

A year after acquiring a nearly $1 billion portfolio of suburban office properties, Horsham, PA-based Workspace Property Trust on Monday filed to raise up to $100 million through an initial public offering.

Workspace Property, which first filed a confidential S-11 registration statement on June 30, plans to list on the New York Stock Exchange under the symbol WSPT, selling an undisclosed number of common shares in the IPO at a to-be-determined price. Goldman Sachs, J.P. Morgan and BofA Merrill Lynch are the joint book runners on the deal.

The company, led by former Mack-Cali Realty executives Tom Rizk as CEO and Roger Thomas as president, will use the IPO proceeds to purchase common units in its operating partnership, Workspace Property Trust, L.P., from Safanad Suburban Office Partnership, LP, an affiliate of Safanad Ltd.

The operating partnership will in turn use a portion of the net proceeds to repay the company's existing loan with KeyBank NA, repay a senior mortgage loan and three mezzanine loans in relation to the purchase of its second portfolio, and pay about $63.9 million in cash to redeem the preferred equity issued by the operating partnership as part of the second portfolio acquisition.

The operating partnership expects to use any remaining proceeds for general corporate purposes, including capital expenditures and future acquisitions.

Workspace Property hopes to capitalize on the outperformance of suburban office properties relative to CBD properties in recent years, with company executives telling CoStar in October 2016 "the prediction of the death of the suburbs is greatly exaggerated."

A year ago this month, the company acquired 108 office and flex buildings and 26.7 acres of land in five markets from Liberty Property Trust (NYSE: LPT). The $969 million purchase with partners Safanad, a Dubai-based global principal investment firm; and affiliates of diversified investment firm Square Mile Capital Management LLC, was the company's second major transaction with Liberty Property and expanded Workspace's holdings to 149 properties totaling 10 million square feet.

In the first half of 2017, 72% of U.S office leasing activity was concentrated in suburban markets, despite suburban markets representing only 69% of inventory.

The spread between average suburban office and CBD vacancy rates is at its lowest point since 1999. Construction as a percentage of inventory continues to increase in the CBD, even though suburban office vacancy rates have declined significantly faster than CBDs since 2011.

Meanwhile, construction has been constrained in the suburban office markets relative to the CBD, while downtown asking rents have been more volatile than suburban rents. Demand for suburban properties has ramped up recently as investors have begun to recognize the widening spread between suburban and CBD valuations, driven in part by investors' willingness earlier in the recovery to pay more for CBD trophy buildings and other assets with a perceived lower risk.

As the largest landlord in the Horsham/Willow Grove, PA submarket, Workspace has 536,994 square feet of flex and tech-flex space and 1.8 million square feet of low-rise office space in 40 properties, with retail development and other amenities providing opportunity for growth near several Workspace assets.

Workspace Properties is further positioned to benefit from continued demand and rent increases for its properties in the King of Prussia/Valley Force submarket, where the company owns 30 properties totaling about 2 million square feet of office and flex space.

The company also owns assets in South Florida, Tampa, Minneapolis and Phoenix.
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Thursday, October 12, 2017

Faster Growth of Amazon Fashion Could Rock Retail Real Estate

Lost in the coverage of Amazon's very public search for a second, multi-billion dollar national headquarters, was the barely-noticed lease the company signed in New York City last month. Yet that lease could signal billions of dollars in losses coming for retail commercial real estate across the country.

Amazon signed a 15-year office lease for 360,000 square feet at Brookfield Properties' recently-renovated 5 Manhattan West building. Amazon will take the entire sixth and seventh floors of the 2.15 million-square-foot tower as well as part of the eighth and 10th floors in a move that is expected to bring 2,000 jobs to the Penn Plaza / Garment District submarket of Manhattan.

Amazon Fashion has also previously invested $9 million in a 40,000-square-foot fashion photo studio in Brooklyn (pictured).

"We're excited to expand our presence in New York - we have always found great talent here," said Paul Kotas, Amazon's senior vice president of worldwide advertising.

Those jobs will be coming primarily in the Amazon Fashion and advertising divisions, and that signals the online retail behemoth is getting more serious about advancing its fashion and apparel sales. In the past year alone, it has introduced seven private apparel brands to its Prime members, including Goodthreads, Amazon Essentials, Paris Sunday, Mae, Ella Moon, Buttoned Down and Lark & Ro.

A hypothetical rapid rise in Amazon's U.S. apparel market share could have significant credit implications for existing retailers, REITs and CMBS transactions, according to Fitch Ratings in a 'shock scenario report' published last month.

Worst-Case Scenario
Sharp declines in retailer revenue and margins, along with accelerated store closings, would likely drive significant cash flow erosion and weaken credit profiles for apparel-focused retailers, mall REITs and retail-heavy CMBS deals in such a scenario.

This shock would likely fan out broadly across much of the retail real estate sector, with large credit profile effects on mall REITs and retail-heavy CMBS transactions. Large-scale store closures, going well beyond previously announced cuts, would likely follow, Fitch projected.

"REITs owning regional malls with high exposure to troubled anchor stores and a less diverse tenant base would face heavy cash flow pressure," Fitch analysts said. "We estimate that as many as 400 of approximately 1,200 U.S. malls could close or be repurposed as a result of retailer liquidations and square footage reductions."

The Fitch shock scenario assumes an accelerated three-year apparel market share shift to Amazon.com as a price-competitive and convenient alternative to traditional in-store purchases. The hypothetical rapid growth in Amazon's apparel market share to 25% by 2020 could cut apparel retailer margins by around 300 basis points, pushing several retailers toward financial distress.

In addition to weaker cash flow, many mall owners would face reduced access to capital due to negative lender and investor sentiment. Attempts to re-tenant or repurpose underperforming malls with high vacancy rates would likely take considerable time and capital. Efforts by REITs to reposition mall properties in this scenario would be difficult given constraints on capital spending and liquidity in a tight financing environment.

"Widespread defaults on loans backed by malls would have a significant impact on credit quality for Fitch-rated CMBS transactions," the rating agency said. "Given the accelerated timeframe of this retail shock scenario, special servicers would be forced to sell lower tier malls at significantly distressed values rather than undertaking normal stabilizing efforts."

Assuming Amazon's share gains are concentrated in lower price points, low- to mid-tier apparel retailers, including JC Penney, Kohl's and Dillard's, would face intense competitive pressure in such a scenario, Fitch said.


Amazon's Road into Fashion Isn't Assured
The Fitch stress test does not explicitly factor in retailers' responses to a more challenging operating and financing environment. Many of these responses, including cost reduction initiatives, asset sales and secured debt issuance, could mitigate the impact of such a severe competitive shock, particularly for companies that have ample liquidity to respond to accelerated competitive threats.

And let's face it, fashion and apparel margins and sales are thin and thinning out, and could present a tough market for Amazon to break into. Competitive pressures on in-line apparel retailers have been building for at least a decade. Younger apparel consumers have demonstrated less interest in traditional department store fashion offerings, and shifted more toward 'fast fashion' and off-price retailers.

Retail real estate brokers operate in dual worlds when it comes to shopping. They are both consumers of merchandise online and brick and mortar sales people. As such, their take on Amazon is interesting.

Going into fashion is nothing new to Amazon, said Soozan Baxter, principal of Soozan Baxter Consulting, a New York-based, landlord-focused retail advisory firm. "They own Shopbop and Zappos. Shopbop is a phenomenal collection of contemporary brands with a loyal customer, while Zappos is a favorite for anyone who likes to buy shoes online."

However, shopping on Amazon is like being in an online market place without a point of view, she said. The chaotic experience doesn't resonate.

"If they can execute a bricks-and-mortar experience that is more like Shopbop and perhaps even use that name, they will be very successful," Baxter said. "If they execute more retail stores under the name Amazon, do customers get confused: is it the bookstore? Is it a Macy's? Is it an Intermix? Is it a car showroom? Is it a grocery store? The point of view gets confusing."

"The bottom line is that the margins in retail are challenging. As they want to delve further into bricks and mortar, can they create a different experience? Furthermore, Amazon has been richly rewarded by Wall Street without making a 'real profit.' As Amazon morphs into more of an omni-channel player, how will Wall Street respond to them?" Baxter asks.

Jason Polley, managing leasing director of StoneCrest Investments in Germantown, TN, says Amazon clearly has retailers scrambling to evolve and better integrate their brick and mortar stores with their online presence.

"Apparel has always seemed to be an area of retail that requires a brick and mortar presence for the customer to see, touch and try on merchandise before a purchase, as on-line purchases of apparel have a much higher return rate compared to other products sold online," Polley said.

But the problem is not all Amazon.

"Despite Amazon's clear impact, I do believe some apparel retailers have lost touch with their customer base and their core mission to deliver what their customer wants to buy," he added.

Paul Schloss, an associate broker at NAI Horizon in Tucson, also says the onus is on traditional retailers.

"Conventional apparel retailer's inventory models demand velocity of inventory turn-over to generate absolute gross margin/profit to recover fixed occupancy costs," Schloss said. "As traffic migrates to the internet, and those logistical efficiencies drive down competitive prices and margins, we are witnessing the implosion of mall retailing: reduced consumer traffic and turns, obsolete structural inventory models. How these retailers re-construct, narrow and innovate their inventory profiles, merchandise offerings, and tactical offerings will define site base retailer's demise or survival."
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Warehouse boon fueled by Amazon's expanding need for space (Video)

Warehouse boon fueled by Amazon's expanding need for space: Black Creek Group president from CNBC.

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Equus Capital Partners Sells 22-Property PA MF Portfolio In $467M Deal

by Steve Lubetkin, Globest.com
Equus Capital Partners sold a 22-property, value-add multi-housing portfolio totaling 3,426 units in various Pennsylvania locations for $467 million. Holliday Fenoglio Fowler marketed the properties in six sub-portfolios on behalf of Equus.

“We are very pleased that we were able to successfully market and close all 22 properties within a year of launching the first sub-portfolio. The properties offered diversity of size, ranging from 50 units to 400 units; vintage, ranging from the early 1960s through the mid-2000s; and locations throughout the eastern half of Pennsylvania, from Harrisburg through suburban Philadelphia and into the Lehigh Valley.”

The properties sold in phases to different buyers throughout 2017, with the most recent closing at the end of September. Property locations include suburban Philadelphia, Lancaster, Harrisburg, Wyomissing, Lehigh Valley and northeastern Pennsylvania.

“Each of the 22 properties within the portfolio generated significant interest and attracted a variety of investors, from small private groups to large institutions. We conducted 113 tours, which resulted in 68 offers throughout the process.”
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