Thursday, January 28, 2010

Developer Brian O'Neill sues Citizens Bank for $8 billion

It is getting ugly out there.

"Developer Brian O'Neill, whose empire is faltering in a brutal economy for builders and who already is being sued by his primary lender, has filed an $8 billion lawsuit against that lender, Citizens Bank of Pennsylvania, and its parent company, claiming they breached their financial commitments to him.

The move is an astonishing turn of events between local businessman and local bank and a stark look at just how rough the world of commercial real estate has become in these recession-worn days.

The lawsuit, filed in Philadelphia Common Pleas Court, is the harshest salvo to date in a relationship that started off amicably eight years ago and led to Citizens Bank's advancing more than $180 million in financing for O'Neill projects.

Lately, however, that relationship has been steadily deteriorating - much like the commercial real estate market.

In November, Citizens Bank secured a $61 million judgment against O'Neill in Montgomery County Court for default on an office-construction loan for his ambitious - and embattled - Uptown Worthington mixed-use project in East Whiteland Township, Chester County.

In December and January, the bank followed that up with two more judgments totaling $3 million against O'Neill and his namesake O'Neill Properties Group L.P., of King of Prussia, in connection with the unfinished Horizon Corporate Center, a 101-acre office/retail/restaurant complex in Bensalem, Bucks County, that includes a five-story office building that was completed in June but remains empty.

As he did in the case of the Uptown Worthington project, O'Neill denies he defaulted on loans related to Horizon.

"I'm going after them," O'Neill said yesterday, referring to his lawsuit against Citizens Bank.

The seldom-at-a-loss-for-words developer declined to say more, on the advice of attorneys. He referred a reporter to the 35-page suit filed on his behalf by the law firm of Kaufman, Coren & Ress P.C.

Citizens Bank was even more tight-lipped. "We don't comment on lawsuits," said spokeswoman Sylvia Bonner.

As disputes among businesses go, this one is especially caustic: In his lawsuit, O'Neill accuses the very bank that has helped him build what he says is an enterprise of $1 billion in completed projects and an additional $4 billion in the works of now trying to destroy it.

The suit contends that Citizens Bank reneged on financing agreements, engaged in fraudulent and/or negligent misrepresentations, interfered with O'Neill's existing and prospective business relationships, and defamed and disparaged him.

It all began in late summer or fall 2008, the lawsuit claims, when the parent companies of Citizens Bank - Citizens Financial Group Inc. and the company that ultimately took it over, the Royal Bank of Scotland Group P.L.C. - "started to collapse under the weight of billions of dollars of soured investments and were experiencing a significant liquidity crisis."

Citizens Financial Group, the lawsuit says, "embarked on a campaign to raise and recover capital by any means necessary - whether lawful or not."

The bulk of O'Neill's suit deals with the Uptown Worthington project - a 1.6-million-square-foot complex of housing, shops, entertainment venues, and high-value office space O'Neill has planned for the former Worthington Steel plant along Routes 202 and 29.

O'Neill contends that the bank backed out of its original financing commitment, one that was complex, in large part, because the site involved conversion of an old industrial property. By doing so, the suit contends, the bank has put the entire project "in jeopardy."

That prospect was causing great unease yesterday in Rochester, N.Y., where Wegmans Food Markets Inc. has its headquarters. The supermarket chain is building a store in Uptown Worthington that is scheduled to open June 13. Hiring of 600 employees starts next month.

"If this thing doesn't get open on time, we're going to have significant damages," said Ralph Uttaro, Wegmans senior vice president of real estate and development.

Uttaro said the litigation between O'Neill and Citizens Bank "makes us nervous [because] we're sort of in the middle of somebody else's dispute and don't have a lot of leverage to find our way out of it."

The lawsuit also contends that a decision in June by VWR International L.L.C., a Chester County laboratory-supply company, to cancel plans to have a new headquarters built at Uptown Worthington was the result of Citizens Bank's announcing that it would no longer serve as lead lender for the $540 million project. VWR's chairman and chief executive officer, John Ballbach, cited concerns over whether a new building could be completed by its relocation deadline, the end of this year.

Also underwriting O'Neill's work on Uptown Worthington is the Commonwealth of Pennsylvania, which has approved $104 million in loans and grants.

Yesterday, Mark Shade, a spokesman for the state Department of Community and Economic Development, said O'Neill continued to have the support of the Rendell administration. "We are confident in the project - unfortunately, it's hit a really bad economy," Shade said.

Less than $12 million has been disbursed for Worthington thus far, he said, adding that O'Neill "still needs to secure other financing for [the rest] to be available."

Last month, O'Neill warned that construction of the $218.5 million Philadelphia Regional Produce Market - $152.5 million of which is coming from the state - would grind to a halt if state enabling legislation were not passed soon.

Funds have since flowed - $32 million this month - and "the project is still moving," said Gregory V. Iannarelli, chief counsel for the Philadelphia Regional Port Authority, owner of the market site.

Iannarelli said yesterday that the agency was "watching" the O'Neill/Citizens Bank dispute, but was hopeful the produce market would "be on time and on budget."

What becomes now of this battle of local titans is a matter of considerable speculation in development, finance, and legal circles, with few willing to talk about it on the record, so as not to offend either O'Neill or Citizens Bank.

One developer, who declined to be identified, observed that Uptown Worthington was a unique project because it was not owned by a group of developers, just O'Neill: "There's a reasonable amount of personal guarantee that would cause Brian not to say, 'Take the keys. I'm done.' "

On the other hand, the bank's actions against O'Neill are a sign of "the changing times," said Walt D'Alessio, vice chairman of NorthMarq Capital L.L.C., a real estate investment banking firm.

"Capitalization rates are way up from when that project started," D'Alessio said yesterday. "I'm guessing the lender said, 'This property doesn't have the same value it had before.' Space demand is down, and real estate values are down."

Alan Fellheimer, a former Philadelphia bank executive and longtime banking lawyer with Fellheimer & Eichen L.L.P., predicted a settlement, with O'Neill completing Worthington.

"It takes forever to litigate these cases, and it costs a fortune," Fellheimer said. "And it's not the business either O'Neill or Citizens is in."

Girard Estate wants to sell Walnut Street site

The Girard Estate is looking to sell a building it owns on Walnut Street in Center City after deciding it no longer needs to hold on to the property.

The four-story, 16,000-square-foot building at 1222 Walnut St. is listed for $3.1 million, a slight discount on what the estate paid for the building in 2007 when it purchased it for about $3.65 million, according to city real estate documents. The vacant property sits a block from Thomas Jefferson University Hospital. It was built in the 1930s.

“What's unique about the building is each floor is 4,000 square feet,” said a broker with CBRE who is marketing the property for sale. There has been some interest in the building, especially by those who would use it.

“We're optimistic,” he said. “Activity is perking up.”

The Goldenberg Group Sells Bensalem Crossings

"67,215-SF Retail Center Trades for $13.6M

A private group of investors purchased Bensalem Crossings at 2200-2250 Neshaminy Blvd. in Bensalem, PA, from The Goldenberg Group for $13.6 million, or $202 per square foot.

The 67,215-square-foot retail center sits on about 10 acres and was built in 1999. ShopRite and CVS anchor it.

The Goldenberg Group, which developed, leased and managed the center, will continue to manage the center on behalf of the new owners."

Wednesday, January 27, 2010

Benjamin Foods Leases 122,400 SF in Hatboro

Benjamin Foods leased the entire industrial facility at 1001 S. York Road in Hatboro, PA. The food distributor plans to move into the space in March.
The 122,432-square-foot distribution building was built in 1973 in the East Montgomery County Industrial submarket.

Tuesday, January 26, 2010

Nor-Cal Beverage Inks 129,960-SF Lease

"CBL & Associates Properties and High Real Estate Group are underway with construction of Mill Creek Square, a $40-million, 285,000-square-foot community shopping center being developed on 35 acres situated along Lincoln Highway East (US Route 30) in Lancaster (East Lampeter Township), Pennsylvania.

Completion for Phase I of the project, which encompasses 225,000 square feet, is set for October 2010, while completion for Phase II (60,000 sq. ft.) is projected for May 2011.

Currently 82% leased, the first phase of the shopping center includes Kohl's (87,000 sq. ft.), Bed Bath & Beyond (42,750 sq. ft.), Christmas Tree Shops (34,500 sq. ft.) and Ross Dress for Less (25,000 sq. ft.), and more."

Tishman venture abandons Stuyvesant

Tishman & Speyer locally own One, Two & Three Bala Plazas in Bala Cynwyd, PA.

"NEW YORK - The financially troubled owners of two massive apartment complexes that sold for a record $5.4 billion a few years ago said Monday they're turning them over to their creditors.

The joint venture ownership team led by Tishman Speyer Properties and BlackRock Realty, hurt by the real estate market collapse, couldn't make a multimillion-dollar loan payment earlier this month for the Stuyvesant Town and Peter Cooper Village apartments in Manhattan.

Over the last few days it became clear the only viable alternative to bankruptcy would be to transfer to lenders control and operation of the 110 buildings and 11,000 apartments overlooking the East River, partnership spokesman Bud Perrone said.

"We make this decision as we feel a battle over the property or a contested bankruptcy proceeding is not in the long-term interest of the property, its residents, our partnership or the city," Perrone said in an e-mailed statement.

The group bought the complexes, which have about 25,000 tenants, in 2006 at the height of the real estate bubble in the nation's largest residential real estate deal.

The record purchase price seemed outrageous to many real estate analysts, but the partnership believed it had a winning strategy: It would aggressively convert thousands of rent-regulated apartments occupied by middle-class families into luxury units that would fetch top dollar.

But the tactic was a bust as the city's housing market cooled considerably. Ratings firms estimated the value of the 80-acre area had fallen to as little as $2 billion , far less than the outstanding loan balance.

Apartment conversions happened much slower than expected, tenants fought back and a state court ruled that about $200 million in the partnership's new rent increases was improper.

The group, which used a $3 billion mortgage and a $1.4 billion secondary loan to buy the properties, had been trying to restructure its debt. It couldn't make a $16 million loan payment due Jan. 8.

Analysts had been expecting the ownership group to default on its loan for several months.

It hasn't been determined when the ownership transfer of the sister properties will take place and who specifically the new owners will be, Perrone said.

Tishman Speyer, whose other properties include Rockefeller Center and the Chrysler Building, said it wouldn't consider a long-term management contract to continue operating the apartment complexes if it didn't involve ownership. It said it was committed to an efficient transition of the properties' operations and would manage them during that transition.

The housing complexes, which are so big they have their own newspaper, were built by Metropolitan Life in the 1940s for returning World War II veterans. MetLife Inc. decided to sell them in 2005, when real estate prices were soaring.

Tenants launched their own bid to take over the 11,227 units, three out of four of which were rent-stabilized and priced far below the market rate, before MetLife announced it had closed a deal with the partnership led by Tishman Speyer and BlackRock."

Friday, January 22, 2010

Community banks’ CRE loans are starting to show cracks

"Problems with commercial real estate (CRE) loans bubbled to the surface for community banks in the third quarter and are expected to continue to plague them through much of the year, bankers and analysts say.

Though construction and land loans — usually earmarked for home developers — are in default in higher percentages, CRE is now the primary driver of new nonperforming loans. The transition took place in the third quarter.

An examination of all U.S. banks with between $1 billion and $20 billion in assets by investment firm Boenning & Scattergood found that in the second quarter, CRE accounted for 33 percent of new nonperforming loans. That number shot up to 45 percent in the third quarter. Conversely, construction and land loans made up 36 percent of new nonperformers in the second quarter and only 28 percent in the third quarter.

Among the region’s 37 publicly traded community banks, which typically loan only to local projects, CRE made up 21 percent of all nonperforming loans in their portfolios during the third quarter, according to data provided by Charlottesville, Va.-based business intelligence firm SNL Financial. Nonperforming loans for new construction and development, which felt the downturn earlier than commercial real estate, were 44 percent of all nonperforming loans.

The first large local community bank to report fourth quarter earnings was Fulton Financial, and its numbers reflect the national trend of rising CRE problems. The bank indicated that its commercial real estate nonperforming loans increased 11 percent, offsetting an 11 percent decrease in nonperforming construction loans.

Extremely large projects are typically financed primarily by big national banks, insurance companies or pension funds, with community banks sometimes sharing in the loans with several other lenders. Data on local nonperforming loans held by national lenders was unavailable.

Boenning analyst Jason O’Donnell said commercial real estate is a lagging economic indicator and the Philadelphia region has been hit with problems later than more high-growth areas such as Florida, Arizona, California and Nevada.

“We’ve been later to the party than other regions, but it will be the major problem in portfolios over the next three quarters,” O’Donnell said. “If the economy continues to improve, CRE problems should moderate in the second half of the year. But if unemployment continues to stay high, it could go on longer.”

With the holiday season in the rearview mirror, many struggling retailers will now decide whether to discontinue operations or to scale back locations. That puts pressure on landlords, which in turn puts pressure on banks.

David Pioch, regional manager for commercial real estate at Wachovia Bank, said there has already been a fair amount of shakeout among retailers and store closings. Retailers are signing few new leases and asking for concessions on existing leases, he said.

Similarly, businesses forced to scale back personnel have asked landlords to renegotiate leases for smaller space at cheaper terms.

Joseph Walker, executive vice president for commercial real estate lending at National Penn Bank, said layoffs at businesses will cause immediate problems while retailer problems take time to manifest.

“An office building in which a tenant employs 300 people and cuts jobs, they can renegotiate the lease terms for less space,” Walker said. “Landlords will negotiate the new lease terms because they don’t want to lose the tenant all together.”

National Penn’s Scott Gruber, group executive vice president for corporate banking, said the bank likes to have diversity within the commercial real estate portfolio — $154 million in office buildings, $215 million in retail, $168 million in residential subdivision and $280 million in multifamily projects as of the third quarter.

Dominic DeSimone, co-partner in charge of Ballard Spahr’s distressed real estate initiative, said the largest CRE projects are financed by large banks. He said each big bank has a different philosophy — some will put up $200 million for a whole project and others instead split the risk with other lenders, including community banks.

Though community banks aren’t often involved in the largest of projects, Boenning’s O’Donnell and DeSimone each said community banks often have disproportionate percentages of CRE loans partly because their lending opportunities lead them to real estate and their portfolios are less diverse.

The competitive landscape for commercial real estate changed when the commercial mortgage-backed securities market, which took hold about 15 years ago and eventually reached more than 20 percent of the $3.5 trillion national CRE lending market, crashed in late 2007.

Pioch said Wachovia, which is still one of the region’s largest CRE lenders after being acquired last year by Wells Fargo & Co., competes with a select group of lenders for larger projects. And with the CMBS market challenged, the competition has become even thinner."

Keystone Property sells Devon parcel that contains bank, hotel

"Keystone Property Group has sold a portion of a property that fronts Lancaster Avenue in Devon for $7.25 million. The private Bala Cynwyd real estate developer sold a PNC Bank branch and a ground lease on a Marriott Courtyard at a 6.5 percent cap rate.

An undisclosed local private family partnership bought the property and lease. The 149-room Marriott has 29 years left on its ground lease. The bank branch has five years left on its lease. Both properties have rental rates “below market” and high barriers to entry making it an attractive deal for the buyer.

Keystone Property bought the lease and bank property in 2005 as part of a larger acquisition that included Devon Square, a two-building, 140,000-square-foot office complex on Lancaster Avenue."

Whole Foods Comes to Plymouth Meeting Mall

Whole Foods, the national grocery retailer, has opened its newest location at the Plymouth Meeting Mall at 500 W. Germantown Pike in Plymouth Meeting, PA.

The 65,000-square-foot store is part of the recent redevelopment of the 1 million-square-foot Montgomery County mall location. The store will include a prepared food section and a rooftop cafe, along with its bulk food sections. The store plans to employ a total of 174 employees, including 134 that will be full-time.

The Plymouth Meeting Mall is situated on 78 acres of land and is anchored by Macy's, Boscov's and AMC Theatres.

George Young Co. Sells 34,000-SF Facility for $1.9M

"George Young Co. R&E Partnership sold the industrial complex at 2724 S 20th St. in Philadelphia, to Talshan Properties LLC for $1.9 million or about $55 per square foot.

Located in the Southwest Philly Industrial submarket, the 34,000-square-foot facility was built in 1940 on two acres of land. Building features include six loading docks, six drive-in bays, and ceiling heights of up to 35 feet."

Lansdale School of Business Pays $1.5M for Industrial Bldg.

North Penn Business & Technical Institute Inc., also know as the Lansdale School of Business, has purchased the warehouse property at 290 Wissahickon Ave. in North Wales, PA, from Deltron Inc. for $1.52 million, or nearly $50 per square foot.

The 31,200-square-foot facility is in the East Montgomery County Industrial submarket. Building features include a drive-in bay, a loading dock and 15-foot ceilings.

Monday, January 18, 2010

Towers still towers over Market St.

This is a great article about Tower's merger but it also mentions many of the big leases coming up in the next 3 years. It also has a mention of much anticipated American Commerce Center Building. (2.2 million square feet)

"Towers Watson & Co., the post-merger name for the company that was known as Towers Perrin, is poised to sign a lease that would keep 1,000 jobs in Philadelphia.

The merged professional services company that works with clients in human resource, risk and financial management, is expected to sign a long-term lease on 260,000 square feet of office space in Centre Square, where employees are now located.

The deal comes as Towers Perrin and Watson Wyatt Worldwide completed this month a $3.5 billion merger creating Towers Watson. It’s one of at least seven high-profile lease deals coming to a head this year.

There were questions about whether the merged entity would seek to relocate its local operations since Watson Wyatt has its headquarters in Arlington, Va., with Towers Perrin in Stamford, Conn. The combined company is headquartered in New York City.

Negotiations on the lease are still ongoing and Centre Square is one of its leading options, said Dave Duncan, director of corporate real estate at Towers Watson. “We still haven’t finalized the deal,” Duncan said. “Until things are finalized, anything could happen.”

The lease at Centre Square is imminent and likely will be completed this month, according to real estate sources. Duncan anticipates a deal will be done sometime during the first quarter. The company has been at the building since 1975, he noted.

“It’s a good option and a good landlord,” he said. HRPT Properties Trust owns the complex, which is often referred to as the Clothes Pin building.

Towers was formed in Philadelphia in 1934 and had considered relocating to Camden in 2004 when it was being courted with an enticing financial incentive package by New Jersey economic development officials. After a series of negotiations that pitted New Jersey and Pennsylvania against each other, Towers decided to stay in Philadelphia. At the time, it received about $3 million from the Pennsylvania Department of Community and Economic Development and it only tapped $1.5 million of that through an opportunity grant, according to DCED. At that time, it signed a five-year lease that began in 2006 and is scheduled to expire in 2011, prompting the new lease.

This time around, the search and eventual deal weren’t as dramatic, though the company did look again at Camden, Philadelphia’s suburbs, and other Center City buildings, Duncan said. Towers Watson is in discussions with the state and city on financial incentives. “We’re not sure how that will pan out,” Duncan said. The company doesn’t expect the number of employees in the city to change from the current 1,000.

The lease — expected to be one of the biggest of the year — is an early positive note for the Center City office market at a time when activity is likely to be off.

Cozen O'Connor still hasn’t decided where it will go. The big law firm is looking for about 200,000 square feet. While it found Bell Atlantic Tower attractive, it hasn’t been able to work out a deal because of complications stemming from a master lease that Verizon has on the tower until 2012, according to real estate sources. The firm occupies space at the Stock Exchange Building at 1900 Market St., where its lease expires at the end of the year. The firm couldn’t be reached for comment.

KPMG is reportedly nearing a deal to renew on 125,000 square feet at 1601 Market St. and the White and Williams law firm, now in 125,000 square feet at One Liberty, is looking for space. Beneficial Savings Bank is reportedly trying to renew on 125,000 square feet at Penn Mutual Towers. That’s after it flirted with leasing space at the former Rohm and Haas Co. building at 6th and Market streets. One other company out in the market is Janney Montgomery Scott, which is in the market for about 150,000 square feet.

Perhaps the biggest wild card will be GlaxoSmithKline, which has major operations in Center City. The company has a lease that expires in 2013 for about 650,000 square feet at One Franklin Plaza from HRPT Properties Trust. It leases another 220,000 square feet at Three Franklin Plaza from Liberty Property Trust, and that lease runs out in 2014.

GlaxoSmithKline’s decision has the potential to kick off a new downtown building. While the company could stay where it is at One and Three Franklin Plaza overlooking the Vine Street Expressway, it could seek 900,000 square feet of space. If it keeps all of that space in Center City and decides to move, the company would have to relocate into a building that has yet to be built. One office project on the drawing board is the American Commerce Center, a 2.2-million-square-foot proposal for 18th and Arch streets that would create the tallest building in Philadelphia. It would need at least two years of construction time to get out of the ground."

Recently Signed Real Estate Deals

ReSearch Pharmaceutical Services Inc., needing extra space for 100 employees because of a new contract, has taken 21,350 square feet at 500 Virginia Drive in Fort Washington, Pa. The company, which goes by RPS Inc., has its headquarters next door at 520 Virginia Drive and wanted the expansion space nearby. The deal, from the search to the signing, was done within 60 days. RPS offers clinical development solutions ...

After six years in the Great Valley Corporate Center, GA Communications rented 20,229 square feet at the Oaklands Corporate Center in Exton, Pa., relocating from Great Valley Corporate Center. The company creates multimedia materials primarily for retail clients, including Sears, Lowe’s, Safeway and Supervalu. The company will move in during the second quarter. Brandywine Realty Trust is the landlord.

NextFab Studio leased 3,600 square feet the University City Science Center. The center, billed as a gym for innovators, has workspace equipped with 3D printers, laser cutters, digital embroideries and other high-tech tools. NextFab Studio, a membership-based technology workshop and prototyping center, is unveiling its new facility to the public at 5 p.m., Jan. 22.

Thursday, January 14, 2010

Capital Market Recovery Could Start in 2010

Lenders Should (Finally) Begin Writing Off Their Distressed Assets, Allowing for Deployment of Sidelined Capital.

The start of 2010 comes with fresh hopes in the realty capital markets, despite the continued impact of persistent recessionary burdens such as weak demand, falling values and constricted lending, as indicated by a string of commercial real estate industry outlooks.

After a turbulent 18-24 months since the market peaked, 2009 marked a year where transaction volume nearly came to a standstill. There is hope, though, that the economic uncertainty that has sidelined investors will recede resulting in more acquisition opportunities in the coming year as banks and financial institutions get around to cleaning up their balance sheets and move more aggressively to dispose of commercial real estate loans and financially distressed real estate assets, according to annual outlook.

Grubb & Ellis in its annual outlook is predicting an increase in sales volume of 20% to 30% over 2009 levels. However, prices, already down 40% from their peak in October 2007, may decline another 10% to 20% in order to meet buyers' expectations.

Property and Portfolio Research (PPR), is expecting an even bigger increase in transaction activity in 2010, fueled by increased distress on banks from loan delinquencies and "droves" of capital, led initially by foreign investors, expected to target major U.S. metro areas. In its recent "2010 Predictions" report, the CoStar subsidiary noted that, in the past year, banks were given and successfully used latitude in valuations and modifications. Along with the TARP injection, this latitude helped preclude a flood of distress and transactions.

PPR expects that trend to partially reverse in 2010 due to an expected increase in traditional payment distress and continued bank closures.

"Unlike loans with LTV issues, extensions are not the solution for those that cannot cover their payments, and many will be foreclosed upon and sold," according to the PPR report. "Delinquencies will continue to trend higher in 2010 as NOIs head lower."

Overall, the fact that banks likely will begin writing off their losses on distressed assets in 2010 means that the capital accumulating on the sidelines will start being deployed, and highly leveraged buildings, many without the capital necessary to attract tenants, will transfer to new ownership, removing what was a major impediment to recovery in the investment market.

The hopes have been fueled by the federal government's financial industry stimulus money to prop up banks, financial support for the acquisition of some legacy assets and from the fed's continued support of low interest rates. In essence, the fed's action have created a "dual-personality" investment play, according to the Real Estate Capital Institute (RECI), a Chicago-based volunteer-based research organization that tracks realty rates data for debt and equity yields. Investors are seeking relief on legacy debt assets; while also trolling for fresh new debt and equity assets based on more attractively reset prices.

"Due to government intervention, the concept of distressed selling and buying did not materialize anywhere in North America," said Mark E. Rose, chairman and CEO of Avison Young. "The U.S. government put money into the major banks, which in turn extended every loan they could to avoid realizing losses. The Securities and Exchange Commission watched from the sidelines and allowed the impacted lenders to postpone the inevitable."

"2010 is shaping up to be more of the same, but with a slightly positive bias," Rose said. "Fundamentals have firmed, decision makers are getting their sea legs back and the second half of 2010 should produce favorable comparisons to 2009. This, in turn, will drive the confidence we have been sorely missing and allow for activity to return to more normal levels."

The hopes may be realized but only with some sacrifice and a rethinking of investment criteria.

"Before recovery can occur in 2010, private markets must solve their own problems, even if that means capitulation; the bid and ask spreads need to narrow; and we must see job growth in North America."

John Oharenko, RECI's advisory board member, said he believes this year we'll be bouncing along the market bottom as values continue to slide, but at less dramatic levels than last year.

"Some of the greatest investment opportunities lie ahead, especially for those buyers willing to sacrifice current return and rely upon overall market momentum to improve during the next three to five years," Oharenko said.

Until the hopes for the new year begin to become reality, however, RECI suggests that investors will continue to be frustrated in that more funds exist than there are placement opportunities in which to sink their money. The main reason is that buyers still expect lower prices but sellers don't want to realize heavy losses unless it is forced upon them.

According to analysis there seems to be a steady stream of private and public money flowing into investment funds. During the past year, public funds (mainly REITs) raised more than $25 billion of equity for income properties funds. And, more than 650 new funds and companies raised more than $65 billion last year for real estate acquisitions. Most of the money raised (almost half) was being targeted for debt investments; about 25% was being earmarked for traditional commercial real estate properties; and the remainder for other types of real estate, including residential development and construction funding.

"Senior debt purchases are preferred by many investors who prefer to avoid untangling equity positions often plagued by multiple capital tiers including preferred and mezzanine funds," Oharenko said. "Multifamily continues to be the 'darling' of the income-property capital markets as the agencies [such as Fannie Mae and Freddie Mac] provide ample liquidity into this sector. Otherwise, commercial real estate property fundings are mostly focused on refinancing and workouts."

"The short leases of multifamily would be a pretty good hedge against inflation, particularly if you had long-term fixed rate debt in place through Fannie and Freddie," said Dr. Peter Linneman, Global chief economist and principal at Linneman Associates. "Multifamily held up better in the recession until the capital markets fell apart, and as they fell apart, multifamily production fell to the lowest level in the last 60 years. That will pick up, though more slowly [than single-family] because it's more capital market dependent."

"The recession has been over for six months and job growth is just months away, but the fact remains it will be impossible to predict what will happen next," Linneman said. "With significant tax, health care and regulatory proposals still in the offing, there is little clarity as to the ultimate outcomes or costs. We're concerned with commercial mortgage delinquency rates as they have been on the rise and could keep the commercial real estate industry in neutral for several more months."

Aaron Gruen, principal of Gruen Gruen & Associates, a Chicago-based economics, strategic marketing and land use/public policy analysis firm, told CoStar Group that: "Real estate market demand for many markets and uses can be expected to be weak over the next few years. Foreclosures are rapidly rising. Transactions/development was limited in 2009 but should increase in 2010. Core assets have already been repriced and some liquidity from balance sheet lenders is returning, but underwriting standards will be much higher and therefore highly leveraged transactions will be constrained."

"Historically, real estate was viewed as an income-producing asset that provides an inflation hedge and is not correlated strongly with equity securities," Gruen said. "It may be the pension and other groups investing in real estate funds will find this historic role appealing and focus on backing groups using relatively low level of leverage and buying well located core assets perceived to have less risk in the short term and better long-term potential to produce long-term cash flows. These kinds of properties are priced lower than has been the case for at least five years. But those that do not need to sell will hold on to them."

"Perhaps, given the stress and adjustments required, it will simply take some more time for sellers to become motivated and buyers to raise and place capital," Gruen continued. "After all, [the] Great Recession has permanently altered consumer, investment, and governmental behavior. Both public and private sector interests which influence land use and economic development need to reset their models and practices to work out projects and plans affected by the Great Recession and to respond to the opportunities the economic recovery will present. But this will take time and not be easy."

Monday, January 11, 2010

Philadelphia 4Q Vacancy Reports

4Q Philadelphia Office vacancy decreases to 12.4% and Industrial vacancy decrease to 12.4%. Full reports can be viewed at:

The quarter over quarter decreases were small. 4th quarter office vacancy was 12.4% where in 3Q it was 12.5%. This is helps prove the new saying of “flat is the new growth.” Although the vacancy decreases are small they are encouraging. Many tenants are taking advantage of the softer market and trading up into a better class of building. Class A office space recorded a net absorption of positive 409,646 square feet in the 4th quarter where it was a negative (1,612,551) square feet absorption rate in the 3rd quarter. These are signs we are moving in the right direction. The Philadelphia office market tends not to overbuild. The vacant space gets absorbed faster and therefore our market bounces back quickly from downturns. Class B and C office building also saw positive absorption of vacancy but not as large as the Class A office buildings.

The vacancy rate for Philadelphia 4th quarter flex/industrial markets decreased to 10.8%. This is down from 11% as compared to the 3rd quarter. 10.8% vacancy rate is what we had in the 2nd quarter 2009. Again, this is incremental absorption but the signs are encouraging. This translates into 3,903,123 square feet being absorbed in the 4th quarter. Average rents for Industrial space dropped from $4.76 per square foot in the 3rd quarter to $4.63 in the 4th quarter. These are quoted as triple net numbers. Average rental rate for Flex space also decreased from $9.66 per square foot in the 3rd quarter to $9.38 per square foot in the 4th quarter. These numbers are also quoted as triple net.
If you have further questions or inquiries about the Philadelphia area real estate market please feel free to contact me at (610) 616-4604 or

Sunday, January 10, 2010

Valley Forge Corporate Center is getting a facelift

This is very much overdue to make VFCC & Lower Providence competitive again.

"A Montgomery County township is a step closer to revitalizing an aging business park.

Lower Providence hopes to bring new life to the 300-acre Valley Forge Corporate Center, enticing developers to add retail, restaurants and possibly apartments or condominiums.

Last month, it received zoning approval for the changes that would open the door to retail and other uses, and now the township is moving aggressively to invite developers in.

“The feedback we were getting from businesses was that there were no amenities. It’s a real ’60s-style business park,” said Township Manager Joseph Dunbar, adding that businesses there want transportation, casual dining restaurants, recreation, energy efficient buildings and walking trails.

The business park was developed in the late 1960s. At its peak, in 1982, it had 4,341 employees. Today, there are about 3,220, said Project Manager Bill Roth. About 43 percent of the park’s space is vacant, though that figure was more than 50 percent in 2004. There are more than 40 individual building owners within the compound.

About 775 jobs have been lost in recent years, including cuts at Lockheed Martin, bearing maker SKF Group and United Kingdom-based Almac Group, which has a clinical-services site here.

Municipal officials describe the business park as a hybrid of dated industrial warehouses and aging office buildings with a sprinkling of modern facilities.

“In its heyday, it was an industrial park,” Dunbar said.

At that time, the site was bustling with plants run by Hewlett-Packard, General Electric and Allen-Bradley (now a division of Rockwell Automation Solution), a maker of industrial equipment. Volkswagen had a parts distribution facility.

In 2007, the township started the process of reinventing the industrial center and creating a master plan for growth. It hired a landscape architect, urban planner and engineer to work with township officials, property owners and tenants. Its goals were simple: create and retain jobs, fill buildings and increase property values.

Lower Providence Township, 17 miles west of Philadelphia, includes the villages of Audubon, Collegeville, Trooper, Eagleville, Yerkes and Evansburg.

To date, the township has invested $144,000 on the master plan study, $620,000 for infrastructure improvements and $120,000 for the plan implementation.

Marie Altieri, a member of the board of supervisors, described the 300-acre business park as “a lifeline.”

“We look at this as the future; it’s revenue generating. Lower Providence Township is built out. This business park had been ignored for many, many years. The vision of the board is to revitalize it and create long-term revenue. That’s been our focus for three years,” Altieri said.

Officials are rolling out the welcome mat for pharmaceutical, biotechnology, financial services, medical uses and data companies.

Access to the site could improve with a new interchange planned for Route 422. But construction on the $15.6 million interchange is expected to start next year, and its impact likely won’t be felt for a few years.

With development money in the deep freeze and the recession still fresh on people’s minds, redevelopment will be a long-term effort, officials said. Several developers have expressed interest in the parcel, though to date no one has stepped forward.

Teva USA to put HQ in Warrington

"Generic drug maker Teva Pharmaceuticals USA has decided to put a new headquarters and a massive distribution center in Warrington, Pa., ending year-long speculation about where the company will land.

Teva had entertained putting a new facility on the former Willow Grove Naval Air Station Base in Horsham, Pa. Instead it will locate a 1 million-square-foot site on a tract between Limekiln Pike and Lower State Road, according to a report published Friday on The site is near its current U.S. headquarters in North Wales, Pa.

A preliminary concept proposal shows a center on 156 acres near the Eureka Quarry, according to the report, which quoted township officials confirming the plan. About 500 employees will work from the new facility.

What, if any, state and local financial incentives Teva will receive couldn’t be determined.

A project of that size would cost an estimated more than $200 million in construction alone, with many more millions spent to outfit distribution space with sophisticated racking and conveyor systems needed to package Teva’s generic medicines.

The Willow Grove Naval Air Station emerged last year as a leading choice because the base is being shut down in a process that will be finalized by September 2011. Nearby residents worried about air traffic that the company would produce at the base.

Teva has a significant local presence. In addition to its U.S. headquarters in North Wales, which also houses a warehousing and distribution center, Teva has a large manufacturing and research facility in Sellersville, Pa., and offices in Horsham, Chalfont and Bryn Mawr, Pa. It has 1,500 employees in Bucks and Montgomery counties.

The company, a division of Teva Pharmaceutical Industries Ltd. of Israel, markets more than 300 products in a variety of therapeutic areas and generates $11.1 billion in global sales.

Teva is scheduled to unveil its plans to the Warrington supervisors Jan. 26."

Crozer does a sales lease back to raise $40M

Sale-lease backs are going to be more common in 2010 until creditors loosen the noose for lending and lines of credit.

"Crozer-Keystone Health System dominates the Delaware County medical business. It's a slow-growth market. Medical costs keep going up. But nobody - insurers, patients, the government, or donors - is offering to fund the increase.
With its narrow margins, Crozer is rated "BBB-," just above junk-bond status, by the Standard & Poor's credit-rating agency. S&P wants Crozer to raise cash and to boost its profits.

But with such a modest credit rating, it's tough to borrow the millions it would take to make Wall Street happy with Crozer. Especially these days, when banks have turned conservative amid massive loan losses.

Wachovia Bank, Crozer's lead creditor from its past expansion, has been unwilling to lend it more in recent years. Nor would TD Bank and other big lenders in the region.

What to do? Chief financial officer Philip J. Ryan says he started in 2007 to review the system's real estate holdings to see if it could turn them into cash without cutting operations.

He hired United Health Realty Advisers, of Ambler, to "unlock built-up value in real estate holdings" and line up local investors and lenders willing to invest.

Last fall, the system raised $40 million to improve its balance sheet, by selling a group of buildings in Springfield, through a complex debt-and-equity transaction.

Crozer is leasing the buildings from the new owners. Patients won't know the difference; Crozer gets a cushion of cash and makes its creditors happy, in hopes of cutting future finance costs.

"A lot of people were concerned about the Obama health-care plan and its effect on Crozer," said Frank Seidman, president of $1-billion-asset Capital Solutions, the Blue Bell equity-investment firm that bought the buildings with $11 million in cash, the rest in loans.

"But we have confidence in Crozer. We know them well. In Delaware County, they're too important to fail."

"A lot of hospitals could do this," said Goldenberg, who put the deal together.

The Springfield properties Crozer sold include two office buildings, totaling 80,000 square feet, and the 176,500-square-foot Healthplex, a gym and a physical-therapy center run by Crozer.

To finance the purchases by Seidman's firm, Joseph L. Rago, commercial real estate chief at Tri-State Bank, made a $6 million loan, at 6 percent, to be refinanced in five years. Susquehanna Bank lent $22.5 million at a slightly higher rate, for 10 years. Both loans amortize over 25 years, Seidman said.

In a statement, Crozer's Ryan said the deal would "better position the system financially" while letting the hospital stay "committed to our mission."

With the extra cash, "we expect their credit rating will go up," enabling Crozer to borrow for less.

"The miracle of the transaction was that a triple-B-minus health-care system was able to access $40 million, in a transaction that makes economic sense," Goldenberg said."

Friday, January 8, 2010

Video: Commercial Real Estate Outlook by Barry Gosin

"Commercial Real Estate Outlook by Barry Gosin CEO of Newmark Knight. He gives a great explanation of values, REITs and construction. This interview was this morning."

Tuesday, January 5, 2010

LCTI buys Hatboro building from Jenbrooke & Other Deals of Note

LTCI Inc. bought a 33,530-square-foot industrial building at 210 Bonair Drive in Hatboro for $815,000 ($24.31/sqft). The building was constructed in 1960 and renovated in the early 2000. Jenbrooke Properties Inc. sold it to LCTI, an insurer.

Financing was arranged for the acquisition of a shopping center in Feasterville. Deerwood Real Estate Capital lined up $3.9 million for the purchases of a 112,000-square-foot center anchored by Michael's and a Dollar Tree. The loan is a refinancing of an expiring CMBS loan and features a five-year term with 25-year amortization.

Goldenberg Group, a Blue Bell retail developer, cinched up a series of leases totaling more than 142,000 square feet making its portfolio 99 percent leased up, according to the company. The local deals include: hhgregg Appliances and Electronics, which took 35,127 square feet at Whitman Square in Philadelphia. Ashley Furniture signed for 39,758 square feet at The Court at Oxford Valley in Fairless Hills. The Court at Oxford Valley is owned by Goldenberg in partnership with The Pennsylvania Real Estate Investment Trust (NYSE:PEI); Five Below inked a 8,958-square-foot lease at Columbus Commons in South Philadelphia. Clearwire also took 3,907 square feet at Columbus Commons. Joyce Leslie signed a lease for 7,950 square feet at The Court at Deptford II in Deptford, N.J. ; Ombudsman signed a lease for 3,018 square feet at ParkWest Town Center in West Philadelphia. Also at ParkWest, Planet Fitness signed a lease for 9,400 square feet; and Verizon signed a lease for 1,875 square feet at The Shoppes at Upper Hanover in Montgomery County.

Sunday, January 3, 2010

Financing issues will dog the commercial RE industry - Philadelphia Business Journal:

This is a great insight to what the local experts are predicting for the commercial real estate market for 2010 and 2011. Commercial backed mortgage securities (CBMS) coming due between now and 2012 are estimated at $153 Billion.

"As residential real estate flirts with a tempered rebound this year, commercial real estate will be tested.

One looming issue is the maturities of commercial-backed mortgage securities used to finance property acquisitions during the run up to the credit crunch. Current estimates have $153 billion of CBMS loans set to mature between now and 2012 in markets across the United States, according to CB Richard Ellis data.

How much of that will involve properties throughout the region is difficult to peg down; however, the effects have already started to be felt.

Loans have matured on properties, such as 1601 Market St. in Center City, and the owner has been renegotiating a new deal in a tight lending environment. Delinquent loans on local apartments, retail centers and suburban office buildings have been sent to special servicer companies to try to salvage what they can. In other cases, banks have secured judgments against developers who borrowed money for projects.

“I think we’re in a period of torpor where we’re just lingering along on the bottom of the market,” said Ward Fitzgerald, CEO of Exeter Property Group. “I don’t expect the market to get any worse, but there will be signs of worseness because of foreclosures and bankruptcies. They are manifestations of things that have already taken place. We have already had a decrease in occupancies and rental rates have fallen so now you will see a lot of the effects of the disease. Up to now, we have just seen the disease.”

The challenge will be for property owners to avoid defaults, foreclosures and bankruptcies by refinancing. That won’t be easy. Financial institutions aren’t as cavalier with money as they were during the boom years, and lending standards have tightened. The CMBS market isn’t what it used to be.

Other issues are also at play. With vacancy up and weak leasing, some landlords don’t have cash flow to cover debt. In some cases, properties are underwater and reassessed at less than the loan.

That’s not all.

“One of the biggest risks out there is interest rates and floating rate debt,” Fitzgerald said. “If there is an increase in interest rates, you will see an even more tremendous amount of distressed real estate.”

The impact will be most felt by private property owners who were unable to tap public markets last year to raise equity to shore up balance sheets and stabilize properties. Two of the region’s office real estate investment trusts — Brandywine Realty Trust and Liberty Property Trust — are on firm ground.

For example, in the last year, Liberty has raised $1 billion and has cash on hand and a stronger balance sheet than when the recession began. It’s in the position where if it needed to borrow more money, it could, said CEO Bill Hankowsky.

That’s not an option readily available to private developers who relied heavily on borrowing and CBMS markets for financing.

“Capital is available for the haves and capital isn’t available for the have nots,” said Hankowsky, who described the recession, the evaporation of the capital markets and their effect as something akin to a tsunami. “Some people got knocked over by the tsunami and believe whomever is standing is surviving. That’s not accurate. There will be a long high tide that will create pressure on people.”

The major theme for this year will be fundamentals — keeping space filled and properties well run, Hankowsky said.

Another issue is whether the recession will turn into a jobless recovery. That will directly affect the office market and vacancy rates. Philadelphia County has the highest unemployment rate in the 11-county region at 11 percent, according to the Bureau of Labor Statistics. Chester County’s unemployment rate stands at 6.6 percent and Montgomery County at 7 percent. There is still a worry.

“There are fewer people employed in this country today than there were 10 years ago and 2.3 million lost office jobs between 2008 and 2009,” managing principal at Cresa Partners. “My read on that and translating that into real estate is we have bottomed out, but I think we’re at the bottom of a very big U and I don’t forecast us recovering in 2010 and 2011.”

That has meant increased office vacancy rates. The suburban vacancy rate now stands at 21.5 percent, according to data. In South Jersey, the rate is 17.4 percent. It’s not expected to get much better this year.

“Locally, regionally, nationally, there is a soft leasing market,” said managing director of CB Richard Ellis’ Philadelphia office. “I think what you’re going to see is vacancy rates ... bump up, negative absorption and downward pressure on rents.”

The sluggishness will continue for the first half of the year and then finally a slightly more optimistic view of the economy will finally take hold.

“I think people, particularly the second half of 2010, will feel as if we’re almost there. Is it going to be a rocket to the moon? No.”

Financing issues will dog the commercial RE industry - Philadelphia Business Journal:

Leases moving at Hayden’s Marsh Creek

Six new leases at Marsh Creek Corporate Center in Exton pushed the complex up to 98 percent occupied.

The four-building complex totaling 265,000 square feet was 79 percent leased up when Hayden Real Estate Investments of Conshohocken bought it three years ago. The recent leases include: nth Solutions, which took 6,050 square feet; Advanced Medical Home Care Supplies Inc., which leased 3,025 square feet; Visible Filing Concepts, which will move into 3,025 square feet; AQM Inc. leased 2,741 square feet; and Help-Now will occupy 2,000 square feet. TSIC Acquisition will occupy 1,975 square feet at the complex’s North Point office building. Hayden Real Estate arranged the deals ...

Additional leasing activity was under way at Cherry Hill Business Park in South Jersey, where seven leases were arranged by NAI Mertz on behalf of the landlord, Endurance Real Estate Group. Deals signed include: Newborn Nurses Group signed on for 10,300 square feet at 2 Pin Oak Lane. The organization, which provides services for newborns and their mothers, will have a staff of 40 working from the office; Camp Bow Wow, a doggie day camp and boarding facility, will be occupying 9,871 square feet at 3 Esterbrook Lane. The tenant was represented by Flynn Co.; Thomas Alberco, a wine wholesaler, took 9,771 square feet at 2010 Springdale Road; Ilken, a granite countertop manufacturer, leased 9,064 square feet at 2010 Springdale for a showroom and warehouse; Concrete Services International is relocating from Executive Mews in Cherry Hill into 8,535 square feet at 1 Keystone Ave. CB Richard Ellis represented the tenant; All Brand, a supplier of parts for major appliance brands, expanded into 8,262 square feet at 2010 Springdale; and at 2020 Springdale Road, the Garr Group took 3,039 square feet and is relocating from Voorhees, N.J. The company develops, produces and distributes promotional CDs and DVDs for clients including Kellogg’s and McDonald’s, among others ...

On the market is the former U. S. Gypsum property, which totals 28.9 acres at 3000 S. 56th Street in Southwest Philadelphia. The site sits near Girard Point at the Delaware River and 92 miles from the Delaware Bay mouth. A portion of the property is in a Keystone Opportunity Expansion Zone. Colliers Lanard & Axilbund is marketing the property.

Pulver breaks ground on Coatesville hotel

After more than five years, Oliver Tyrone Pulver Corp. has broken ground in Coatesville.

The Conshohocken developer is moving forward with a $36 million Courtyard by Marriott and an 80,000-square-foot office building.

For Don Pulver, president of Oliver Tyrone Pulver, Coatesville holds great promise. “It’s Conshohocken 20 years ago and the Great Valley of 30 years ago,” Pulver said, adding: “This is our little piece of Southern California.”

Pulver should know. While not a SoCal guy, he’s the developer who made Conshohocken a thriving office submarket that has helped lead to the eventual revitalization of the former steel town. The hotel and office development will go on 22 acres at Coatesville’s main intersection of routes 30 and 82. The hotel will have 125 rooms and while infrastructure work is under way now, actual construction of the building will begin by the middle of next year and create nearly 500 construction jobs.

A Marriott is key to the overall development. “They have a way of creating demand,” he said. “We learned how important that brand is to getting people to come to a place and to the office buildings.”

The company succeeded in constructing two Marriott in Conshohocken.

Don Pulver is still waiting for approval of his revised land development plan before constructing the office building, which won’t be constructed on spec. Pulver is currently is scouring the market for tenants. Plenty of prospects are already in the market and Pulver believes he can draw them to his project. He hopes to eventually construct 600,000 square feet of office space in several buildings though the exact number hasn’t been determined.

Pulver has worked with state and local government officials since 2004 on the Coatesville project, securing state funds, zoning and other approvals as well as private investment needed to kick start it. The state is ponying up $10.5 million of the $36 million price tag, including a $5.75 million Redevelopment Assistance Capital Program grant, a $1.25 million grant from the Infrastructure Development Program, and a $3.5 million loan from the Business in Our Sites program. When construction is complete, the new hotel and office will be a much needed boost for the city. It will employ about 330 people, which is more than 10 percent of Coatesville’s current job base.

O’Neill facing $61M ruling

Citizens Bank has secured a $60.9 million judgment against the developer of Uptown Worthington who borrowed money from the financial institution to construct the sprawling project in Malvern.

The judgment was entered in Montgomery County Court on Nov. 12 against Brian O’Neill after the bank and developer had tried to work out new terms on the loan, according to court documents.

The King of Prussia developer had originally arranged what was an $85.5 million loan with Citizens through Malvern Hill Associates and other O’Neill-affiliated entities for the acquisition and site improvements to Uptown Worthington, according to the loan documents filed in court. O’Neill guaranteed the loan, which was initially made in 2006 and amended and restated in October 2008 when the global financial markets were in turmoil.

O’Neill hasn’t filed a petition in Montgomery County Court to strike the judgment, which is a legal option available to anyone who has a judgment placed against them