Tuesday, May 29, 2018

Dunham’s Sports to Open New 43,000SF Store in Pottsville, PA

by Steve Lubetkin, Globest.com

Dunham’s Sports retail sporting goods chain will open a new, 43,000-square-foot store at Fairlane Village Mall, according to Levin Management Corporation, exclusive leasing and managing agent for the 405,000-square-foot retail property. Formerly located in Frackville, PA, Dunham’s Sports will continue its long tradition of providing area consumers with a wide variety of value-priced, name-brand merchandise at the new Fairlane Village Mall location. Founded in 1937, the chain maintains more than 230 stores in 22 states, offering a full line of traditional sporting goods, outdoor and athletic equipment, and active and casual sports apparel and footwear for men, women and children. Shoppers will be able to access Dunham’s Sports from both exterior and interior mall entrances. Fairlane Village Mall is co-anchored by Kohl’s, Michaels Arts & Crafts and Boscov’s department store. The property features a lineup of national, regional and local tenants also including Harbor Freight Tools, T-Mobile, Dollar Tree, Schuylkill Valley Sports, Benigna’s Creek Winery, Kay Jewelers, GNC and Super Shoes, among others.

Tuesday, May 22, 2018

Berger Rentals, Lancaster, PA Mainstay, Acquires 261-Unit MF Portfolio

by Steve Lubetkin, Globest.com
Berger Rentals acquired 261 residential units in a portfolio consisting of two multifamily properties—Quail Run Apartments and Stone Mill Station Apartments—for $25.5 million.

Each property was sold by two related entities that are all owned by the same investors. For Quail Run, they were Quail Run Holdings and OW Quail Run Holdings, and for Stone Mill Station, the owners were Stone Mill Holdings and OW Stone Mill Holdings.

All those entities appear to be owned by the same joint venture between Oscar Wercberger and Asher Handler, which acquired Quail Run for around $10.7 million and Stone Mill for $9.9 million, both in December 2015.

According to Real Capital Analytics, a proprietary research database, the joint venture for each apartment complex shares a mailing address in Lakewood, Ocean County, NJ. Handler is a managing partner of Redstone Equities, a real estate investment company that describes itself as focusing on “residential garden-style apartments, low- and mid-rise apartment buildings, several million square feet of industrial space, student housing and single family residential houses and townhomes,” in New York, New Jersey and Pennsylvania. The two properties appear on the Redstone Equities website’s portfolio page.

Both properties were refinanced in August 2017 through Fannie Mae, with Quail Run getting a $10.6 million first mortgage at a fixed 4.2 percent interest rate, and Stone Mill getting a $10.4 million mortgage at the same rate, according to Real Capital Analytics.

“The deal represented a value-add opportunity for the purchaser to obtain higher rents by upgrading kitchens and baths. This was the fifth time Kislak sold these properties, with the sale price higher each time as the rent roll has grown.”

Uniquely, the Quail Run Apartments at 1424-B Passey Lane in Lancaster, and Stone Mill Station Apartments at 250 Stone Mill Road in Manor Township, include 136 and 125 residential units, respectively, and were at 95-percent occupancy at time of sale. Both complexes are garden-style apartments consisting of 17 two-story and 11 three-story buildings, respectively, and are well-maintained and beautifully landscaped.

The unit mix for both properties is approximately 55-percent two- and three-bedroom units and 45-percent one-bedroom units.  Approximately 80 percent of the kitchens and baths have been upgraded with additional improvements to windows, roofs, hallways and stairs. Large spacious floor plans, walk-in closets, balconies/terraces or patios and individually-controlled HVAC are among the many features of the units.

The properties, within a half-mile of each other, are located in fast-growing Lancaster County with a population of more than 600,000 residents and centrally located with easy access to major Pennsylvania thoroughfares. Near major shopping centers, houses of worship and excellent public schools and many universities, the properties offer resident amenities such as off-street parking, private entrances, fitness center, on-site leasing office, playground and laundry facilities.

“Berger Rentals owns properties in the Lancaster market and these two are close by, increasing their presence in the market. The loan amount was approximately $21 million; the purchaser paid $4.5 million above the existing loan.” Freddie Mac financing was assumed by Greystone.

Q1 2018 trends in commercial real estate investment markets (Video)


Monday, May 21, 2018

Mixed-use development in multifamily today (Video)


Developers building industrial space on speculation

Natalie Kostelni Reporter Philadelphia Business Journal

About half a mile from I-95 in Marcus Hook, Anthony Diver has five-and-a-half acres in the Chichester Business Park and he knows exactly what he’s going to do with it. It’s something he hasn’t done in 12 years, but Diver is certain he and the market are ready for it.

The owner of West Chester’s Tamora Building Systems is going to develop a 63,000-square-foot industrial building on speculation — with no tenants lined up for it. He’s confident in his decision, which will cost about $5 million. “The vacancy is low and the market is strong,” he said.

Diver is hardly alone these days in striking now with a spec industrial building; such properties — used for manufacturing or to warehouse and distribute goods — are in high demand. The market for them is seeing all of the characteristics that fuel spec development. The overall vacancy rate in the Philadelphia metropolitan area stands at 5.9 percent and, in some submarkets, has sunk lower than that. While there’s ample demand, a limited supply is under development and rents are on the rise, according to CBRE Inc.’s first-quarter report.

These aren’t the big box warehouses that are 500,000 square feet up to 1 million square feet commonly found in the Lehigh Valley and central Pennsylvania and used by the likes of Amazon and Procter and Gamble. Rather, these are typically one- to two-story nondescript buildings ranging from 50,000 square feet to 250,000 square feet and used by an array of companies.

From Route 422 to Quakertown
Jay Bown, whose Industrial Investments Inc. owns 3.6 million square feet of such space in the counties surrounding Philadelphia, hasn’t seen a market quite like this in his 30 years in business. “This is the tightest I can remember,” Bown said. “We’re leasing things as soon as we have availabilities.”

While typical warehouse space runs about $5 to $6 a square foot, which is still pretty steep, some of Bown’s flex buildings are fetching rents as high as $10 to $12 a square foot.

He is embarking on his own version of spec space at 475 N. Lewis Road, a 169,000-square-foot building in Limerick. Industrial Investments paid $7.25 million for the property, banking that a company or two will want to occupy it once the existing tenant, John Middletown Co., moves out later this year.

“Right now, along the Route 422 Corridor down to King of Prussia, there are very few chunks of industrial space available,” Bown said. “You can’t find 50,000 square feet to 100,000 square feet.”

That’s hard to come by not only along the Route 422 Corridor but regionwide, and that’s a new reality for industrial brokers. Nick Adams of Jackson Cross Partners is seeing the issue manifest itself across most submarkets and, as a by product, has caused a new and heightened interest in Quakertown, Bucks County.

“There is a lack of inventory all over and so we’re seeing folks coming from the Lehigh Valley because they can’t find available land there and companies are moving up from Lansdale and Montgomeryville because they can’t find land or space there,” Adams said. “There is land in Quakertown and it’s right at the interchange of the Pennsylvania Turnpike.”

Gorski Engineering Inc. has been at the forefront of the development activity in Quakertown, having built out 50 acres of Milford Commerce North along AM Drive for Pulse Technologies, Celerity Integrated Services and Precision Finishing. Gorski has several projects in the works: in April, it submitted land development plans for 30 acres along New Road in Milford Commerce South, it aims to construct a 120,000-square-foot build-to-suit manufacturing building along Richland Commerce Drive in Northfield Business Campus and expects to add a 60,000-square-foot facility over the next 60 days, Kathy Gorski said. Separately, Nappen & Associates developing a parcel on AM Drive and seeking approvals to construct a 79,000-square- foot industrial building on spec at 2100 AM Drive. 

Full story: https://tinyurl.com/y7azus33

Wednesday, May 9, 2018

Korean Investment Group Wins Bidding for GSK's Navy Yard Office Building in Philadelphia

Liberty Property Trust sold the 207,779-square-foot office building at Five Crescent Drive in Philadelphia's Navy Yard to a unit of Korea Investment Management Co. Ltd. for $130.5 million, or approximately $628 per square foot.

Designed by Robert A.M. Stern Architects, the building is leased in its entirety to pharmaceutical company GlaxoSmithKline through 2028.

With its joint venture partner, Synterra Partners, Liberty has developed 1.6 million square feet of office and industrial space at the massive Navy Yard redevelopment. The two firms are currently developing 1050 Constitution Avenue for Axalta Coatings Systems in the Navy Yards project.

This is the second major property acquisition for the Korean investment firm in Philadelphia, following its February 2016 purchase of the 870,000-square-foot Cira Square in University City.

Grocery Outlet Leases Space in Easton

Discount grocert chain Grocery Outlet has signed a lease for about 21,146 square feet in the retail shopping center at 2429-2469 Nazareth Road in Easton, PA.

The shopping center, known as 25th Street Shopping Plaza, totals approximately 131,045 square feet and owned by The Lightstone Group, according to CoStar information. Other tenants in the center include Petco and Dollar Tree.

Grocery Outlet has more than 280 independently operated stores in California, Idaho, Nevada, Oregon, Pennsylvania, and Washington.

Subaru HQ in Camden, NJ (Video)


Wilder Buys Silver Spring Square in Harrisburg from DDR

The Wilder Companies, a Boston-based retail developer and manager, re-entered the Pennsylvania market with its recent acquisition of Silver Spring Square, in partnership with an institutional real estate fund.

DDR Corp. sold the 342,600 square-foot shopping center for $80.8 million, or about $235.87 per square foot.

Located on Carlisle Pike (Route 11), approximately 10 miles west of the state capital of Harrisburg, the 11-year-old center is anchored by a 126,240-square-foot Wegmans Supermarket and shadow-anchored by a 139,377-square-foot Target and an 87,000-square-foot Kohl’s. Other major tenants include Best Buy, Ross, Bed Bath & Beyond, Petco, Lane Bryant and Ulta, as well as seven additional pads sites.

The property was 98 percent occupied at the time of sale including a recent new lease signed by Old Navy for 12,295 square feet, taking a portion of the former space occupied by Office Max.

"Silver Spring Square fits perfectly into our acquisition platform targeting dominant grocer-anchored centers throughout the East Coast. We are excited to reestablish our expertise in the Pennsylvania market."

For Ohio-based DDR, the sale marked the completion of the first asset sale from its Retail Value Inc. (RVI) spin-off, which is expected to begin operating as a separate firm this july seeded with of 38 U.S. retail properties and all 12 of DDR's Puerto Rico assets.

Tuesday, May 8, 2018

Cambria Inks Full-Building Lease in King of Prussia

Cambria Company, a supplier of engineered quartz surfaces for kitchens, baths and other uses, leased the entire 60,486-square-foot, warehouse-showroom building at 780 Third Ave. in King of Prussia, PA.

Based in Le Sueur, Minnesota, Cambria's new location will serve clients in the Mid-Atlantic region for the family-owned, American-made producer of natural stone surface products.

Endurance and its investment partner, Thackery Partners, acquired the 50-year-old building as part of a five-building portfolio acquisition in early 2017.

The Cambria lease brings its King of Prussia portfolio to full occupancy.

"We are thrilled to welcome Cambria into our portfolio.Their use is perfect for the asset, and this building should enable them to serve their customer base for many years to come."

Endurance has made six acquisitions in the past two years totaling nearly 1.8 million square feet of office, warehouse, distribution and flex space. Its recent buys include Penn Warner Industrial Park, a 240,358-square-foot light industrial complex in Bucks County, PA, and 2000 Bishops Gate Blvd. in Mount Laurel, NJ, a 309,250-square-foot industrial building.

J. Alexander’s restaurant opens in King of Prussia

By Katie Kohler

J. Alexander’s first Pennsylvania location is in a prime spot. It is on the boulevard across the street from the King of Prussia Mall, which is the largest shopping mall on the East Coast and welcomes 25 million visitors annually. It is also in front of the shuttered Joe’s Crab Shack and next to the highly regarded Capital Grille, which shows that success by proximity isn’t guaranteed and competition is fierce.

The restaurant opened in April, and its owners believe it will be a welcome addition to the area’s dining scene as it focuses on providing high-quality food, outstanding professional service and an attractive ambiance.

“Guests in King of Prussia will dine in a restaurant characterized by a distinctive architecture and ambiance,” said President and Chief Executive Officer Lonnie J. Stout II. “In creating this ambiance, we are using European stemware for all of our wine service, high-quality plate ware, roomy seating packages, furniture-grade tabletops, commissioned artwork, and a high level of detail finishes in all areas of the restaurant.”

Seated on a comfortable bar stool, guests will notice that the restaurant minds every detail, including the ice cubes, which are large and clear. There are two separate ice machines, one of which produces larger cubes that are used for cocktails and bar guests.

“They last longer and they melt differently,” pointed out general manager Steve Borriello, a Penn State University graduate and King of Prussia resident.

Borriello might hail from Doylestown, but it is evident he has been schooled in the southern-charm of J. Alexander’s Nashville’s roots. He answers with “yes or no ma’am” while maintaining the hospitable, never stuffy air that permeates J. Alexander’s.

The menu features a wide selection of made-from-scratch American classics – hand-cut steaks, prime rib of beef, fresh seafood and sushi, along with a large assortment of interesting salads, sandwiches and homemade desserts. There is also a rotating selection of unique features, examples of which include Seafood Czarina, Tuscan Steak, Fresh Grilled Fish with Mango Papaya Salsa and Chicken Milanese. There is also a full-service bar with cocktails and a wide selection of award-winning wines by the glass and bottle.

The menu begins with deviled eggs, spinach con queso, and calamari, which shows J. Alexander’s desire, as Borriello says, to cater to everyone and touch every flavor palette.

Borriello’s menu favorite’s include baby back ribs, which are slow roasted in an Alto-Shaam oven, finished on a hardwood grill, then covered in Plum Creek BBQ sauce.

“The meat falls off the bone,” Borriello said

He also touted the prime rib, carrot cake, and the avocado bomb (ahi tuna and crab in a cappuccino cup lined with avocado served with warm tortilla chips), which is one of his best sellers.

“People will be interested when they come try us,” he said. “Being located near three hotels is great for us. We’ve developed relationships with them and are getting our name out in community. We are going to offer something that isn’t as necessarily as fine dining as the Capital Grille, but the food quality will be as good as Capital Grille and they won’t have to pay top dollar. The quality of the service, food and price point is something that is unique to us.”

Ground broken for East Norriton luxury apartments

By Gary Puleo, The Times Herald
The mixed-used dynamics of Bentwood Executive Campus will get a sizable upgrade when The Residences at Bentwood debuts next spring.

Tornetta Realty has owned the property at 201 E. Germantown Pike near the Plymouth Meeting border since the early 1970s, when the term “mixed use” was as unfamiliar to folks as the words “social media.”

While the site has been anchored by a hotel (currently Hyatt House) for 18 years, the time has come for some intensive expansion into amenity-rich housing on the 25 acre-plus property, noted Brett Altman of Altman Management Company, which is collaborating with Tornetta on the project.

At a groundbreaking ceremony held on Thursday for the five-story building that will house 261 luxury apartments, a resort-style spa and fitness center, Altman noted privately that research indicated the market is ready for The Residences at Bentwood.
“We think there is a pocket here that will support what we have in mind,” he said. “We have a strong corridor that includes Einstein (Montgomery) and the exchange of the turnpike and 476, which includes Plymouth Meeting Mall and the office buildings. There is workforce housing along the corridor that is well served, but nothing at the next level. The quality of our product will rival what’s going on in King of Prussia or anywhere.”

Jay Tornetta, President of Tornetta Realty and Valley Forge Properties, who attended Thursday’s ceremony, along with East Norriton Township Board of Supervisors Chairman Dennis DeSanto, noted that “Altman and Tornetta are both committed to long-term investments, high quality and maintaining family-run cultures. We also share a vision for quality and creating a new lifestyle option for both legacy residents and new households moving to Montgomery County, so it is a great opportunity to work together.”

With financial backing from Bryn Mawr Trust, the Tornetta-Altman alliance was a natural one for two iconic organizations, Altman allowed.

“Tornetta has had this ground forever and they decided they were better off doing a multi-family development instead of commercial, so they wanted to partner with someone who does this, and this is what we do. We run about 12,000 apartments in Pennsylvania, New Jersey and Delaware. We’re a family business that started in 1948 and Tornetta started about the same time with what they’re doing. So we’re both multi-generational family-driven businesses.”

Working with the Altman Group on the luxury apartments are its affiliated companies Elon Development and general contracting firm Allied Construction Services, along with architectural firm Barton Partners, which created a structure described as a unique, serpentine-shaped structure that allows for common spaces.

“We always say all of our projects involved all four of our disciplines — land planning, architecture, interior design and landscape architecture. That’s the hallmark of our firm, and this project involves all of that,” said Bruce Adelsberger of Barton Partners.

An aesthetic highlight of The Residences will be the two courtyards, noted Barton project manager Laura Gamble.

“One courtyard will be very active, with a bocce court, pool deck, plantings all around, and outside will be more of a Zen garden that will be more of a quiet, tranquil place,” she explained.

Bob Bluth of Altman Management added: “Everything from the room layouts to the materials selection and even the color palette includes unique touches. Also, the amenities program is as extensive and thoughtful as a resort’s. The project will also feature a multi-tiered parking garage that will give residents private access to their corresponding apartment floor. We are eager to see the final product delivered.”

The first phase of The Residences at Bentwood is expected to be ready for occupancy in April, 2019, with the completion coming sometime in mid-summer.

Virtual reality arcades opening around Philly region

by Connor Smith, Staff Writer Philly. com
At least nine virtual reality locations have opened in the greater Philadelphia region, from Langhorne and Glenside to Philadelphia and, soon, Ocean City, N.J.

Entrepreneurs are investing in high-end equipment and renting out their arcades to families, employers, and anyone else who wants to experience the cutting edge of virtual immersion, writes Connor Smith at philly.com.

At Liberty, the new VR arcade in Glassboro, you can stare up at the Eiffel Tower or roam the streets of Disney’s Magic Kingdom. “Elven Assassin” seeks to give you a true feel as you reach for your quiver, nock your arrow, and fire at hordes of orcs and trolls that rush toward your base. And games like “Fruit Ninja VR” can be an intense, fruit-slashing workout if you don’t mind flailing your arms like a fool.

Monday, May 7, 2018

Real risk of recession in 2019: Dan Niles (Video)


FedEx Freight Plans 25 Distribution Center Openings, Expansions Across U.S.

A company official for FedEx Freight, which just moved into a large new service center in the North Jersey Meadowlands, reported Wednesday that the company will be opening or expanding roughly two dozen more such facilities this year.

FedEx Freight and North Arlington, NJ, officials attended a ribbon-cutting ceremony and open house at the 140,000-square-foot distribution center at 38 Porete Ave. (pictured, above). The new building features 165 docking doors and sits on 45 acres, making it as one of the largest FedEx Freight terminals in the nation by acreage.

The service center, which employs 165 people, opened in January. It is just one part of the Memphis, TN-based freight carrier’s growth plans nationally this year, said Sean Healy, senior vice president of transportation, international, planning and strategy for FedEx Freight.

"In 2019 we will have over 1,500 dock doors throughout our network," said Healy of the company's plans to open or expand 25 facilities in fiscal 2018.

The new facilities will include one in Rockaway, NJ, and several in Long Island, NY. 

The debut of FedEx Freight's center in Bergen County is yet another sign that the demand for logistics and distribution space in the Meadowlands - with its available land and proximity to New York City and metro highways, ports and airports - isn’t waning.

The new facility that FedEx Freight is leasing, built on a former Bethlehem Steel site, is owned by Moishe Mana, the billionaire moving-company magnate and real estate investor.

He and his Jersey City, NJ-based company, Mana Fine Arts, are so bullish on the North Jersey industrial market that they just put the North Arlington property on the market for an asking price of $145 million., or $1,041 a square foot. That would, by a wide margin, top any other price paid in recent years for an industrial property in the Garden State.

Nir Eshed, a Mana Fine Arts executive who is also the sales broker on 38 Porete Ave., attended the ribbon-cutting, along with about 60 other people. Afterward, Eshed defended the high asking price for the property, citing the 20-year lease that FedEx Freight signed, backed by an investment-grade guarantee from its parent FedEx Corp., and the size of the tract, which is large enough to construct additional buildings.

As evidence of the strength of the Meadowlands market, Eshed said that Mana Fine Arts was in the process of selling two acres of a roughly 20-acre site it owns at 500 Schuyler Ave. in North Arlington, for $4 million, or $2 million an acre, to the utility PSE&G.

FedEx Freight relocated to North Arlington from a service center that it had outgrown in South Newark, according to Healy. 

"We had 50 less doors than here," he said. "We weren’t able to expand that facility and we needed more capacity. The yard was too small for the trucks we had in it."

The New York metro market is a crucial part of FedEx Freight’s network, and the new facility will help the company expand its presence there, said John Smith, senior vice president of operations for the company.

FedEx Freight already had eight New Jersey service centers in Delanco, Elizabeth, Farmingdale, Monmouth Junction, Vineland, Wayne and two in Newark, according to Smith. And it is in the process of trying to enlarge a facility in Middlesex County.

"There are some locations in New Jersey that we are looking to expand," Healy said. "We were at one today at South Brunswick. We’ve got about 110 doors in South Brunswick and we need to add probably 25 to 50 more doors there. So we’re working with the township and the council there to get approval to acquire some additional property that’s adjacent to our current facility."

The company is also already planning to expand the North Arlington facility, to add onto the building, a couple of years down the road, both Healy and Smith said. 

FedEx has more than 10,000 employees in New Jersey, said state Assemblyman Gary Schaer, D-36th District, who also spoke at the event.

FedEx Freight is one of three operating companies of FedEx Corp., with the other two being FedEx Express, for air-parcel delivery service, and FedEx Ground, for ground delivery, according to Healy. FedEx Freight offers Less-Than-Truckload (LTL) delivery service, with a typical load being two pallets weighing 1,000 pounds, he explained.

Friday, May 4, 2018

Prologis to Acquire DCT Industrial Trust

Prologis Inc., the world's largest logistics property owner, has agreed to buy Denver-based DCT Industrial Trust Inc. for $8.4 billion in stock and assumed debt.

The boards of directors of both companies unanimously approved the all-stock definitive merger agreement in which Prologis will add DCT's existing 71 million-square-foot portfolio plus 7.1 million square feet of development and redevelopment projects and 195 acres of land, predominantly in Seattle, Atlanta, South Florida and Southern California, with development potential of 2.9 million square feet.

The merger also includes 215 acres of projects under contract or option for sale in New York and New Jersey, Southern California, Northern California and Chicago with build-out potential of more than 3.3 million square feet.

The portfolio bolsters Prologis’ (NYSE: PLD) presence in such high-growth markets as Southern California, the San Francisco Bay Area, New York and New Jersey, Seattle and South Florida. Prologis Chairman and Chief Executive Officer Hamid Moghadam said the San Francisco-based REIT has for some time considered DCT’s portfolio to be complementary in quality, market position and growth potential.

Gene Reilly, Prologis CEO of the Americas, noted that the company expects to sell off about $550 million of the DCT property over the next two years, less than 7% of the portfolio.

"This high level of strategic fit will allow us to capture significant scale economies immediately," Moghadam said. "What we're picking up is 71 million square feet of irreplaceable real estate and we're keeping 93 percent of it. It would have taken us years and years to [aggregate] this portfolio in this type of market."

Moghadam noted that the two companies' complementary portfolios in key submarkets, sometimes within the same business parks like DCT properties in Sumner, WA; Brisbane, CA in the San Francisco Bay Area and Miami's Beacon submarket, make the merger more valuable than the sum of its parts.

"Having that kind of share and market presence, the ability to move tenants around and the ability to understand tenants' options and be able to serve them better, those are all intangibles that we have certainly not factored into the economics of this transaction," Moghadam said.

Logistics Firms Join Lodging, Mall Cos. as M&A Targets
Analysts said to expect more consolidation activity this year among REITs and other real estate operators.

In addition to the proposed Prologis/DCT merger, Marriott Vacations Worldwide Corp. today agreed to buy ILG Inc. in a stock-and-cash deal valued at $4.7 billion, creating the largest luxury brand for timeshare vacation resorts. The pairings are the second and third notable real estate buyout transactions announced this year, in addition to mall owner GGP Inc.'s acceptence of a $9.25 billion cash-and-stock offer from Toronto-based Brookfield Property Partners L.P.

In the lodging sector, Pebblebrook Hotel Trust last week stepped up overtures to buy LaSalle Hotel Properties, upping its offer to $3.7 billion.The proposed $26.5 billion pairing of T-Mobile US and Sprint Corp. announced over the weekend could affect millions of square feet of commercial property.

With REITs trading at discounts to net-asset values in the mid-teens and the market awash in public and private capital, 2018 is positioned to be a year of consolidation, REIT analyst Mitch Germain said in a note to clients.

"We anticipate the potential for additional M&A activity as there are record levels of private-equity dry powder on the sidelines and debt financing is readily available," Germain said.

Logistics has been among the hottest property sectors as e-commerce growth has fueled demand for more distribution centers, including locations near population centers in the final link of the supply chain to ship online purchases quickly to consumers. The transaction is Prologis's largest since the $8.4 billion acquisition of AMB Property Corp. in 2011, at the time the second-largest industrial REIT behind Prologis.

John Guinee, analyst with Stifel, Nicolaus & Co., said investors should look for more mergers & acquisitions activity in the industrial REIT sector amid impressive operating and leasing conditions and stronger-than-expected e-commerce demand.

"While we do not expect a topping bid [for DCT], we do assume that the other industrial REITs will be fielding or fending off acquisition proposals sooner than later," Guinee said.

The merger reflects the frustration of many buyers and abundance of capital trying to compete for a very limited number of logistics assets coming to market, said John DeGrinis, senior executive vice president, North Los Angeles in Colliers International's Encino market.

"This doesn't surprise me," DeGrinis told CoStar News, adding he expects to see more M&A activity in the sector. "It was becoming very evident a year ago that these two REITs and 30 or 40 other companies are all trying to do the same thing, which is buy and lease industrial properties or buy land to build assets."

"Keep in mind that when a big portfolio comes to market, there are probably 100 entities that would love to buy it, but 40 guys that get the offering memorandum and only one wins," DeGrinis added. "It's so difficult that I was wondering when the REITs would start taking over one another as another way to amass assets."

Under the terms of the deal expected to close in the third quarter, DCT shareholders will receive 1.02 Prologis shares for each DCT share. The price represents a roughly 16% premium for DCT shareholders. Prologis expects DCT President and CEO Philip Hawkins to join the Prologis board of directors.

Matt Kopsky, REIT analyst with Edward Jones, said the merger is a good strategic fit, as DCT owns warehouses in high-growth markets, which overlap nicely with Prologis's portfolio.

"DCT has a robust development pipeline in core markets," Kopsky said. "While a lot of [the pipeline] is speculative, we believe there is strong demand in these markets to fill them quickly."

While the economic cycle is in its later stages, Kopsky said industrial property markets have strong staying power given the growth in e-commerce demand and the modernization of supply chains to accommodate that growth.

"Well-located industrial real estate has pricing power and we believe that Prologis paid a fair price to acquire more of this," Kopsky said.

J.P. Morgan is acting as financial advisor and Mayer Brown LLP serving as legal advisor to Prologis. BofA Merrill Lynch is serving as financial advisor and Goodwin Procter LLP as legal advisor to DCT.

Stable CRE & Construction Market Conditions into 2020

Office completions are expected to peak this year and begin trending lower amid signs of a slowdown in U.S. office demand, a declining working-age population and an extended economic recovery entering the late stages.

That slowdown in construction is a good thing for office investors as it should keep supply in check and help extend the stable growth seen in office rents and sale prices.

Total office space under construction fell 7% in the first quarter of 2018 to 141 million square feet, down from 152 million square feet during the first quarter a year ago. The drop in construction occurred even as the national office occupancy rate continued to cruise in the first three months of the year at just under 90 percent, according to data presented at CoStar's First-Quarter 2018 U.S. Office Review and Forecast.

"It’s been a remarkable cycle, especially lately, with very little movement in occupancy over the past year," said CoStar Managing Consultant Paul Leonard, who presented the first-quarter office market analysis along with CoStar Portfolio Strategy Managing Director Hans Nordby.

With demand largely in check with supply in most metros, the national office market remains in a period of stability, Leonard said. While, annual rent growth has fallen well below the market peak of 5.6 percent, average office rents continue to increase at a healthy 2.1 percent clip.

"We're expecting very little rise in vacancy over the next few years, maybe one or two tenths of a percentage point through 2019," added Leonard. "That's why we're continuing to see good rent growth even though demand growth is beginning to slow."

While new construction is trending lower, office deliveries are expected to peak in 2018 as several large build-to-suit projects, such as Apple's mega campus in Cupertino, CA, reach completion. Office construction levels are expected to slow considerably in 2019 and 2020, Leonard added.

"Construction starts are down year-over-year and have been basically flat for two years," Leonard said. "Uncertainty in the remaining length of the cycle, coupled with diminished rent growth, will give enough developers pause, slowing the supply trend overall."

Despite the decrease in office construction activity, the level of speculative construction, which involves new development without a tenant commitment, is continuing to ramp up.

This is partly due to several high-profile built-to-suit projects reaching completion, resulting in a slow increase over the past year in the amount of space available for lease as a percentage of total office space under construction, Leonard said.

While the increase in speculative activity bears watching and certain markets, such as San Francisco, continue to see elevated office construction levels, the decline in new construction activity overall is good news for the market, Nordby said.

"The total amount of office space which is under construction is trending downward before the market hits the wall," Nordby added.

JV Acquires, Will Recap 123 South Broad Street

by Steve Lubetkin, Globest.com
A joint venture of SSH Real Estate and Young Capital, in partnership with the real estate arm of Quilvest Private Equity, is undertaking a $100 million recapitalization of the 880,000 square foot 123 South Broad Street and Witherspoon Building complex. Located in the heart of Philadelphia’s Central Business District, the property consists of the entire block on Broad Street from Walnut to Sansom Streets.

“We are excited to partner with Quilvest, an institutional investor with international real estate acumen. Quilvest’s investment and the new financing will enable us to complete our vision to make 123 South Broad Street the premier historic office building in Philadelphia,” says Peter Soens, partner of SSH Real Estate. “The building’s unique footprint allows us to easily accommodate tenants of all sizes from pre-built, 1,000 square foot suites to as much as 100,000 square feet across multiple floors. With top floors – 24-30 – available in June, we are excited to be able to offer best in class beautiful high ceiling space with incredible views along the Broad Street corridor.”

SSH Real Estate and Young Capital purchased floors six through 30 of 123 South Broad Street in March 2008, and invested in a capital and leasing program, updating the building’s mechanicals to reduce operating costs and undertaking repairs to the façade and interiors to achieve class A standards.

Over a four-year period, the aggressive leasing strategy successfully repositioned the property and increased occupancy from 79 percent to 95 percent. Wells Fargo is the anchor tenant with 225,000 square feet of space across multiple floors. The building is the headquarters of SSH Real Estate’s 60-person team, and includes a diverse mix of more than 50 professional companies and non-profits.
Along with Quilvest—an international wealth manager and private equity investor with $36 billion in assets under management—the new partnership plans to invest capital to renovate the lobby and other common areas, create new best-in-class tenant amenities and accelerate the current leasing momentum.

Over the last year, 11 new tenants have leased space totaling more than 75,000 square feet, and the property continues to attract creative users, innovative technology firms and traditional office tenants, such as Finch Brands, Design Science and Neumann Finance Company.

With capital allocated for building and tenant improvements, including upgrading the lobby and commons areas, the partnership is also exploring repositioning the building’s two-story dramatic penthouse space—once home of the historic Midday Club—into a unique hub for business collaboration, signature events and socializing. A possible panoramic roof deck is also being considered.

“Center City Philadelphia represents a strong strategic growth market. SSH Real Estate has intimate knowledge of the building and a proven track record of leasing success and excellence in property management,” says Barry Hammerman, partner of Quilvest. “123 South Broad Street is a legendary building with an ideal location and strong tenant base. The property is now extremely well-positioned to capitalize on the robust leasing market by providing next generation office space within a Philadelphia landmark.”

The complex was previously split into two condominium units with separate ownership: Unit 1, composed of 255,000 square feet of the basement through fifth floors of both 123 South Broad Street and the Witherspoon Building and Unit 2, composed of floors six through 30 of 123 South Broad Street and six through 11 of the Witherspoon Building, totaling 625,000 square feet.

The new partnership acquired Unit 1 earlier this year. Now with Quilvest Real Estate’s investment in Unit 2, for the first time in 20 years, the 725,000 square foot 123 South Broad office building will be under common ownership. As part of the transaction, the partnership secured a loan facility from Guggenheim Commercial Real Estate Finance, which includes significant capital to complete the anticipated leasing and capital improvements planned for the building. HFF served as the broker for the financing.

Constructed in 1927, when it was the ninth largest building in the world, 123 South Broad Street is a pillar of the city’s rich business legacy. The building boasts a 405-foot Beaux-Art style limestone façade, a beautiful three-story marble lobby and a unique “H” floorplan that provides up to eight corner offices per floor, with industry-leading ceiling heights, tremendous natural light and unobstructed views of Philadelphia.

As part of the new transaction, SSH Real Estate and Young Capital acquired complete ownership of the Witherspoon Building, a boutique 155,000 square foot building with an entrance on Juniper Street. The partnership is evaluating the building for a residential apartment conversion.

Thursday, May 3, 2018

Will WeWork Work?

WeWork, the darling startup that has helped landlords fill empty and spec office spaces across the U.S., is getting dinged this week.

On Monday, WeWork closed on a bond issuance that raised $702 million and increased the company's cash-on-hand to $3 billion. But the high price of the debt, which carries a 7.875 percent interest rate, and facts surrounding the capital raised are causing some in the financial market to question WeWork's business model.

Office owners are closely monitoring WeWork's financial health as co-working grows in importance to the commercial real estate industry. More than 28 million square feet of office space will be occupied by co-working companies by year-end 2018, up from 24.9 million square feet as of Dec. 31, 2017, according to CoStar Portfolio Strategy. The co-working industry has quintupled in size over the past 10 years.

Analysts are quick to point out that WeWork's lease obligations total $18 billion, including $3.8 billion over the next four years and confirmed by a copy of the prospectus obtained by CoStar News. That means its lease payments due through 2022 are higher than the $3 billion WeWork has in cash right now.

Several analysts questioned WeWork’s use in the prospectus of “community-adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).” In WeWork’s case, community-adjusted EBITDA removes growth costs including those for office space, sales and marketing from a property’s earnings.

WeWork's bond offering is concerning on several levels, says Conor Sen, a portfolio manager at New River Investments, a Los Angeles-based registered investment advisor (RIA). "First, the financials they released showed a tremendous amount of cash-burn, and inventing metrics like 'community-based EBITDA' is usually a bad sign," said Sen, who also is a columnist for Bloomberg View. "Second, the pricing of the bond, close to 8 percent, implies an indicative credit rating deep into junk territory, far lower than what the rating agencies gave it.

"And third, from a broader-market standpoint, when cash-burning companies like Netflix and WeWork are issuing debt, it can be a sign of froth more generally."

Sen said the fact WeWork bonds issued at $100 and closed for $97 is "very weak for such a recent offering."

For its part, WeWork said Monday that its bond offering is a success and points out that it had to increase the initial planned offering of $500 million by more than 40 percent, due to demand. With the capital raise, WeWork is in its strongest-ever financial position and now has $3 billion cash-on-hand, the company tells CoStar News. WeWork said it plans to use the net proceeds for general purposes as it pursues "disciplined and focused global expansion." Currently, international markets account for two-thirds of WeWork's growth.

In a note to clients, Eastdil Secured says concerns about the bond offering are being blown out of proportion by the press. "What we have here is a failure to communicate," Eastdil Secured writes in a nod to the prison warden in the 1967 movie Cool Hand Luke. "[The media] focused on the $18 billion of future rent commitments. While that number is correct, as we all know WeWork's guarantee structure is capped and burns down. Their actual guaranteed rent liability is a tiny fraction of what the headlines showed."

And while co-working has grabbed national and local headlines for the past couple of years, it's a small player in the U.S. office market - for now.

Of the 24.9 million square feet currently occupied by co-working operators, WeWork accounts for 10.1 million square feet. Regus' International Workplace Group (IWG) is the largest with 14 million square feet. Combined, IWG and WeWork account for 71 percent of all co-working space, according to CoStar.

WeWork's model centers on the company committing to long-term leases on large chunks of office space at market rents. While WeWork's landlords throw in tenant improvement allowances, they do not cover the overall build-out costs. WeWork then subleases spaces for a healthy premium while also charging for some conference room use, copies and other expenses.

The model is profitable when the economy is growing and corporations expand and entrepreneurs start new companies that want flexibility and lack the "credit-worthiness" needed to commit to long-term leases. WeWork has been focusing more on attracting larger corporate clients, such as French auto and motorcycle maker Groupe PSA. The company chose Atlanta for its North American headquarters and is setting up shop at WeWork’s location at 1372 Peachtree St. in Midtown, developed by Lincoln Property Co. Southeast.

While any financial distress at WeWork will worry individual landlords, real estate watchers say co-working would not single-handedly imperil the current strong national office market. In fact, co-working remains only a small segment of office occupiers. Even in its largest market - New York City - WeWork, IWG and other co-working operators represent less than 1 percent of the market with more than 7 million square feet, according to CoStar Portfolio Research.

In no other market does WeWork and its competitors occupy more than 0.4 percent of the market's office inventory, according to CoStar.

In Atlanta, where WeWork has committed to two sites in Buckhead and two in Midtown, typically of about 50,000 square feet, at least one owner is not worried about the viability of WeWork's model. When asked whether North American Properties has any concerns about reports of WeWork's debt offering and financial obligations might have in its lease at Colony Square in Midtown, NAP Managing Partner Mark Toro said, "We do not."

U.S. Office Market Performance and Economic Outlook (Video)