Friday, July 29, 2016

Philadelphia Strong Leasing While Southern NJ Office Leasing Declines

by Steve Lubetkin, Globest.com
The slow-down in commercial leasing activity in Southern New Jersey that began late last year may have been the beginning of a trend. However, office and retail remained strong in the Philadelphia market just across the river from New Jersey’s Burlington, Camden, and Gloucester Counties.

Office leasing totals in the three South Jersey counties were down significantly compared to the same period last year, and were lower than the already slower first quarter.

About 252,000 square feet of new leases and renewals were executed in the three counties surveyed, a decline of 23 percent compared with the first quarter of the year. The quarter saw an increase in prospecting, with about 250,000 square feet of lease deals in the pipeline and expected to close in the near term. Still, the trend of positive absorption continued – and improved over the previous quarter – making up approximately 206,000 square feet of total activity. Vacancy rates posted slight increases, but several large assets changed hands as owners repositioned and new investors entered our market.

However, mixed with this bad news were positive signs in the continued high level of activity in the investment and sales market, and an uptick in leasing in Cherry Hill and Voorhees. Overall, caution and uncertainty seem to be guiding factors.

“Several unknowns began influencing the markets during the second quarter – from the possible impact of the Brexit vote to the coming U.S. presidential election. Businesses are trying to figure out how their plans may be impacted by the uncertainties, but we still believe the overall outlook is still strong.”

Other office market highlights from the report:

Overall vacancy in the market is now approximately 11.85%.

Average rents for class A and B product continue to show strong support in the range of $10-$14 per square foot on a triple-net basis, or $20-$24 gross for the deals completed during the quarter. This is essentially unchanged from the previous two quarters.

All of the major private owners and REITS showed moderate leasing and prospect activity for the quarter – with Burlington County vacancies tightening up, many larger vacancy opportunities are also shifting towards Camden County, which is not controlled by these ownership entities.

New Jersey’s unemployment rate moved higher for the first time in more than a year, coming in at 4.9 percent. Like the national economic recovery, the New Jersey recovery appears to be experiencing a slight pause.

Highlights from the second quarter in Pennsylvania include:

Although not as pronounced as other “gateway markets”, the Philadelphia CBD office market is attracting attention from international institutional investors. Notable investments include the Korean Investment Fund’s acquisition of Cira Square at 2970 Market Street for $354 million from Brandywine Realty Trust and 1700 Market Street from Shorenstein Properties for $195 million.

Other transactions in progress are commanding all-time-low capitalization rates from some Middle East equity investors.
Beyond the CBD, the suburban market has been extremely active, including Saint Gobain’s headquarters facility, which sold for $123 million at a sub-6 percent capitalization rate. Additionally, Liberty Property Trust announced a master-planned redevelopment in Camden, involving 1.75 million SF of office, parking garages, hotel, and apartments.

There has been a flurry of favorable retail activity in the regional market in 2016. Some major projects include PREIT’s sale of three core CBD retail properties to Post Brothers for $45 million at a sub-4 percent capitalization rate, RIOCan REIT’s planned sale of 49 retail properties located throughout the Northeast, with many in the Philadelphia region, for $1.9 billion. In addition to these core assets, there is significant development of net leased properties, including Wawa/Sheetz/Royal Farms convenience stores, as well as a variety of other retailers. Finally, retail is filling in many of the ground floor spaces of multi-use properties and commanding some of the all-time highest rental rates seen thus far.

The industrial market is still experiencing strong activity, with increases in pricing and rental rates. One of the most significant transactions of the second quarter was the Target E-Commerce Distribution Center in York, PA, which fetched $60 million or $76 per square foot. While the appetite for core class A assets continues to be strong, pricing for multi-tenanted flex assets is demonstrating great appeal and marketability.
 Southern New Jersey retail market has had mixed results there, as well. Highlights from the retail section of the report include:

Overall retail sales and spending dropped during the second quarter, after an already underwhelming performance in the first quarter.
Retail vacancy in Camden County stood at 10.5 percent, with average rents in the range of $11.89 per square foot, triple-net.
Retail vacancy in Burlington County stood at 14.8 percent, with average rents in the range of $12.21 per square foot, triple-net.
Retail vacancy in Gloucester County stood at 6.4 percent, with average rents in the range of $12.00 per square foot, triple-net.
www.omegare.com

Thursday, July 28, 2016

Ethos Leases 28,000 SF in Yardley

Ethos Health Communications, a health communications company, signed a lease for 28,016 square feet in the office building at 777 Township Line Rd. in Yardley, PA.

The three-story, 110,000-square-foot building was built in 2006 by Liberty Property Trust. Other tenants in this building include UPenn Health System, Good Shepard Penn Partners and Stark & Stark.
www.omegare.com

Wednesday, July 27, 2016

U.S. Office Sector Enjoys Steady Q2 Leasing Momentum Even as Rent Growth Slows, Sales Stall

The U.S. office market continued its steady momentum in the second quarter, recording 39.4 million square feet of net absorption in the first six months of 2016, nearly equaling the 40.2 million square feet absorbed during the record-setting first half of last year.

The U.S. office vacancy rate ticked down another 15 basis points to 10.6% in the second quarter of 2016, well below the long-term historical vacancy rate of 11.3%. CoStar analysts expect the office vacancy rate to continue trending lower before bottoming out at around 10.2% in 2018, about the same as lowest point of the last real estate cycle.

"Basically, we expect to have two more years of occupancy recovery in the office market," noted Walter Page, CoStar's director of office research, who presented the Mid-Year 2016 Office Review and Forecast along with Hans Nordby, managing director for CoStar Portfolio Strategy and CoStar senior real estate economist Paul Leonard.

Several markets showed marked improvement at mid-year, including ones that were previously struggling, such as Phoenix, which posted positive absorption of 3.4 million square feet.

In Seattle, which has enjoyed a particularly strong run, Amazon's ongoing expansion helped drive 3.1 million square feet in net absorption. Even Washington DC saw a welcome return of strength in the second quarter after several years of flat demand growth. The D.C. office market absorbed a respectable 2.3 million square feet over the last four quarters.

"Finally, we’re starting to see some momentum in the D.C. marketplace, which should allow the vacancy numbers to start inching downward," said Page.

There were several notable exceptions. The energy sector slowdown and corporate relocations related to the completion of several pending build-to-suit projects played a role in Houston and Dallas, which recorded absorption declines of 2.4 million and 3.7 million square feet, respectively, since mid-year 2015. San Francisco, Raleigh, Boston and San Diego also logged declines due to a variety of factors.

But for the most part, the vast majority of office submarkets -- 66% -- saw their office vacancy decline in the second quarter, and more than half of all U.S. office submarkets have a lower vacancy rate than during the previous market peak in 2006-2007.

Demand for High Quality Space Resulting in Limited Supply

In a theme seen in many markets across the country, the supply of available space in newer, higher-quality office buildings is becoming increasingly limited. With relatively little new development in the pipeline based on historical levels, only about 81 million square feet of space is available today in buildings constructed over the last 10 years.

That total is less than half the 167 million square feet of vacant newer space that was available in 2007, according to CoStar's analysis.

"While there are some exceptions where plenty of high quality, new office space remains available, such as Houston and Washington, DC, for the most part we're really tight on nice, new space," noted Page.

As evidence, Page noted that the vacancy rate for 4- and 5-Star office properties remained unchanged at 11.7%, despite the fact that 90% of the new office space added to the market falls into that category.

Suburban office markets also continued to see increasing activity as large blocks of high-quality space become harder to find -- and more expensive -- in most major markets, with the exception of Los Angeles, Seattle, Chicago and Atlanta, where large blocks of downtown space remain readily available.

"Part of the story is that it’s now the suburbs’ turn in the cycle, and part of it is that the CBDs were so successful earlier in the recovery cycle that there’s no place left to grow," Nordby said.

As investors begin to focus on which markets are the most recession-resistant in the later innings of the recovery, certain niches such as medical office space stand out, Nordby said.

Demand growth is nearly twice as strong for medical office as for regular office, and over the long term, medical office has grown at about 1.3% annual rate compared to 0.7% for the broader office market, Page said. The medical office sector, which has never had negative demand growth, even during the two recessionary periods since 2000, had a midyear vacancy rate of 8% compared to the broader market's 10.6%.

Office construction stayed flat in the second quarter at about 130 million square feet under way, due in part of a large decline in Houston. But building activity is still slightly above its long-term average of 125 million square feet, with increased construction in D.C. and Atlanta, among other metros.


Some Cautionary Yellow Flags

While leasing and absorption levels remain robust and construction still well below historic levels, the U.S. office market did see some cautionary flags in the second quarter, including a big slowdown in office sales activity and the beginning of a slowdown in rent growth.

CoStar is projecting office rent growth will likely finish the year at an average of 3.4% and decelerate to the low 3% range over the next year. As with all trends, there will likely be a few exceptions, including the Nashville, Atlanta and Florida markets, where lower rents earlier in the cycle have limited construction. Also, rent growth in CBDs is expected to continue to outpace suburban markets.

Meanwhile, reflecting declines across all the property types, the volume of office sales completed in the first half of 2016 declined compared to the same period one year earlier, according to preliminary CoStar data.

"It's a worry," Nordby said. "A decrease in transaction volume generally portends a decrease or at least a flattening in prices."

And in another historical sign of softening demand, rising levels of surplus space placed on the sublease market by tenants, is rising in a few markets. In Houston, the contraction of large energy tenants has caused sublet space to balloon to more than 3.5% of total inventory. Companies such as Shell, ConocoPhillips, and BP have each put 500,000 square feet on the sublet market in recent quarters.
www.omegare.com

Equus Pays $32M For Class-A Office Building In Berwyn, PA

by Steve Lubetkin, Globest.com
Equus Investment Partnership X, a discretionary fund managed by Equus Capital Partners, paid $32.1 million to a joint venture of Brandywine Realty Trust and Realen for 1000 Chesterbrook Boulevard, a three-story class-A office building totaling 172,327 square feet located in Berwyn, PA, in the King of Prussia/Wayne submarket of Philadelphia, PA. The price was confirmed by Real Capital Analytics, a proprietary research firm.

“1000 Chesterbrook has long been considered one of suburban Philadelphia’s trophy office buildings and appeals to tenants seeking best of class space in the Western Suburbs,” says George Haines, Vice President of Equus. “With our strategic plan of enhancing certain building features and activating common areas coupled with 1000 Chesterbrook Boulevard’s proximity to the region’s most affluent towns, best school districts, and new retail attractions, we are confident that this asset will have significant appeal to the marketplace.” Haines, along with Joseph F. Felici, acquisitions manager and Timothy Feron, acquisitions analyst, oversaw the transaction for Equus.

The property was 92 percent-leased at the time of acquisition.

1000 Chesterbrook Boulevard was built in 1999 and occupies 12.7 acres. Equus plans to spend approximately $2 million on renovations to the lobby and enhancement of amenity spaces.  The building currently has a greater-than-market parking ratio of 4.4 spaces per 1,000 square-feet with approximately 75 percent of the existing parking spaces within a parking garage.

1000 Chesterbrook Boulevard is at the interchange of Routes 202 and 252, just five miles south of the intersection of I-76, US Route 202, the Pennsylvania Turnpike, and US Route 422. The King of Prussia/Wayne office market, which is 20 miles northwest of Center City Philadelphia, is the region’s largest suburban office submarket.  This submarket also benefits from its convenient access to Philadelphia’s prestigious “Main Line,” one of the most sought-after residential communities in the country. Additionally, 1000 Chesterbrook is within a 10-minute drive of one of the nation’s most notable retail destinations, the King of Prussia Mall (second-largest mall in the US) as well as the newly-developed King of Prussia Town Center.
www.omegare.com

Monday, July 25, 2016

Big Buyer Revealed for Liberty Property Trust Portfolio

It turns out the big buyer with which Liberty Property Trust said it was in discussions for a sizable portion of its suburban office and flex is a familiar name.

Workspace Property Trust said it has finalized an agreement to buy 108 office and flex buildings in four states from Liberty Property for approximately $969 million. Led by industry veterans Thomas Rizk and Roger Thomas, Workplace is the same firm that purchased 41 office and flex buildings in Horsham, PA from Liberty Property at the end of 2015 for approximately $245.3 million. At the time, Workspace said the acquisition marked the beginning of a strategic plan to build a portfolio of suburban real estate assets in the Northeast U.S.

Workspace is bringing in global principal investment firm Safanad as its partner on the acquisition, which is expected to close late in the third quarter of this year. The deal will boost Workspace's total portfolio to approximately 9.9 million square feet consisting of 149 properties in five markets.

Properties included in the upcoming acquisition total 7.6 million square feet and are located in Arizona, Florida, Minnesota and Pennsylvania. The portfolio is 88.9% and breaks out by property type as 5.1 million square feet of office space, 2.1 million square feet of industrial/flex space and 406,678 square feet of warehouse/distribution space.

In addition, the Arizona and Florida portfolios include nearly 27 acres of developable land.

Portfolio being acquired from Liberty Property Trust
Market         Bldgs.      Sq. Ft.
Arizona             14 1,078,652 (and 18.1 acres)
Minnesota     19 1,488,832
Pennsylvania     30 2,075,764
South Florida      11 1,136,020 (and 8.6 acres)
Tampa              34 1,799,568
Source: Workspace Property Trust


Workspace Property Trust is a partnership between Rizk Ventures, Forum Partners, JMP Group and EverWatch Capital. WPT CEO and founding principal Thomas Rizk is the former president and chief executive of Mack-Cali Realty Corp. Thomas was part of the original team under Rizk that took Cali Associates public in 1994. At Mack-Cali, Thomas served as executive vice president, general counsel, and secretary.

"We are excited about entering into this new relationship with Safanad and this acquisition represents the next step of our strategic plan to build a portfolio of high quality, well-positioned suburban real estate assets," Rizk said in announcing the $969 million acquisition agreement.

Safanad is a global principal investment firm with offices in New York, Dubai and London. Last year, Safanad backed student housing developer Aspen Heights to acquire newly developed student housing properties at large universities as part of a $400 million agreement to recapitalize a portfolio of student housing properties owned by Aspen Heights and its investment partners.

"At Safanad, we align ourselves with experienced industry partners through carefully selected investments," said Kamal Bahamdan, the investment fund's founder and CEO. "We are looking forward to working with Tom, Roger and the rest of the Workspace team who have extensive experience and a distinguished track record of creating value in suburban office markets."

At the time of its first acquisition from Liberty, Rizk said he saw a similar opportunity for the suburban market when he took Mack-Cali public. "There are some interesting parallels between the current market environment and when I originally deployed a similar strategy after taking Cali Realty public in 1994," he said. "We intend to use our deep relationships and strong market knowledge to aggressively pursue both marketed and non-marketed transactions," adding the firm planned to target transit-oriented assets located in near-city submarkets within the Northeast corridor.

For Liberty, the sale marks a major step in its ongoing strategy launched in 2011 to reposition its portfolio away from suburban office and flex holdings in favor of industrial property and new development.

www.omegare.com

PREIT Advances Mall Portfolio Upgrade with Deal to Sell 2 Properties; Decision to Market Another

Philadelphia-based mall owner PREIT continues to implement its strategy to upgrade its portfolio. The REIT has executed sale agreements and received non-refundable deposits for both the Washington Crown Center in Washington, PA, and the office building it owns at Voorhees Town Center in the New Jersey suburbs of Philadelphia.

The 676,000-square-foot Washington Crown Center in Washington, PA, is anchored by Bon-Ton, Macy's, Gander Mountain and Sears. As of March 31, 2016, the property generated sales per square foot of $318 and non-anchor occupancy of 87.9%.

Also under contract is the 48,444-square-foot office building at 220 Laurel Road in Vorhees, NJ. The building has been listing the building for sale at $6.5 million.

Details including pricing and proceeds will be made available upon closing, the company said. The transactions are expected to close before the end of the third quarter of 2016.

The company also has decided to put its 1.12 million-square-foot Beaver Valley Mall in suburban Pittsburgh up for sale, which it has acknowledged at the worst performing mall in its portfolio. But PREIT noted the mall's fortunes could soon see a boost be due for a boost.

Shell Chemical announced earlier this summer that it will move forward with the planned development of a multi-billion dollar petrochemical complex on a site one-and-a-half miles from the mall, which is expected to bring several thousand jobs to the region. This development presents an opportunity to maximize the value of the property upon sale while preserving capital for other investments, the REIT said.

PREIT has generated proceeds in excess of $645 million from property sales since June 2012.
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