Thursday, September 20, 2018

Topgolf eyes locations in Philadelphia & King of Prussia

Natalie Kostelni Reporter Philadelphia Business Journal
As Topgolf Entertainment Group readies to open its 48th location in Mount Laurel, N.J., the company is exploring adding locations in the region and is already eyeing sites in King of Prussia and Philadelphia, according to several sources.

The King of Prussia location would be on a property that has been used for years for the American Baptist Churches USA headquarters at 588 N. Gulph Road, according to people familiar with the plans. The site totals 48.5 acres and is well located at Gulph Road and First Avenue with nearby access to Route 422 and other major roadways.

The other location under consideration is the former Nabisco and Mondel─ôz International factory at 12000 Roosevelt Blvd. in Northeast Philadelphia. The 27-acre property is owned by a joint venture involving Provco Group of Villanova, Pa., Goodman Properties of Jenkintown, Pa., and MCB Real Estate of Baltimore, Md. They have plans for a multi-phased mixed-use development with the first phase set to include a Wawa convenience store and gas station.

The King of Prussia project is also being pursued by Provco Group and a representative from the real estate company declined to comment.

The Dallas-based company opened what it called its largest location in the world at the Ocean Resort Casino in Atlantic City earlier this year. Topgolf, which is in expansion mode, isn’t divulging much information about its future locations.

“As for Topgolf’s plans for King of Prussia, we are in the very early stages and I don’t have any info I can share at this time,” said Morgan Schaaf, a company spokeswoman. She also declined to comment on any other plans the company may have in the Philadelphia region.

Topgolf is part of a growing sports entertainment sector that is replacing parts of traditional retail.

In this case, Topgolf combines golfing, such as indoor driving ranges, with dining. It provides golf lessons as well as games, competitions as well as a venue for parties and events. Most of its facilities are 3-stories and total between 60,000 square feet and 65,000 square feet and employ several hundred people. The Mount Laurel Topgolf will employ 500 people whereas a facility in Pharr, Texas, will have 350 employees.
Full story:

Wednesday, September 19, 2018

Ownership shuffle in Conshohocken as 2 office buildings sell

Natalie Kostelni Reporter Philadelphia Business Journal

Conshohocken is on the verge of seeing several large office buildings trade hands, shaking up the ownership of a little more than a million square feet of space in the submarket.

Equus Capital Partners of Newtown Square is buying Five Tower Bridge, an 8-story, 223,736-square-foot office building at 300 Barr Harbor Drive, according to sources close to the deal. The building is being sold by MIM-Hayden Real Estate Fund I, which is a partnership comprised of Hayden Real Estate Investments and Miller Investment Management that bought the building at the end of 2011 for around $70 million.

The Five Tower property also includes an adjacent developable site that could accommodate a new 220,782-square-foot office building that would front the Schuylkill River.

In another pending deal, American Real Estate Partners of Herndon, Va., is nearing an acquisition of Eight Tower Bridge, a 16-story, 345,000-square-foot building at 161 Washington St., according to a person with knowledge of this transaction. This would be the second office acquisition for American Real Estate in the region. The company bought 1600 Market St. in Center City earlier this year.

Full story:

Federal Opportunity Zones - New Tax Provisions Open Gates to $250 Billion in Property Investments

One of the least publicized provisions of the federal Tax Cuts and Jobs Act signed into law last December will be getting a lot more attention in coming weeks. The provision has the potential to stimulate a new round of investment in commercial real estate, mostly in struggling urban, suburban, and rural communities across the United States.

A provision of the law offers tax benefits to investments in so-called Opportunity Zones, economically distressed communities defined by state and federal officials. The Department of Treasury this summer officially designated more than 8,760 such zones eligible for the benefits based on recommendations from each state.

The flow of money coming into deals in those areas could be staggering. In its analysis of the tax law, the U.S. Joint Committee on Taxation implied $86 billion of investments in qualified opportunity zones. Real estate investors organizing funds to take advantage of the tax benefits estimate the total could hit $250 billion.

What's more, to take full advantage of the tax benefits that money would have to be deployed by the end of next year. That is a short time window to invest such hefty amounts. The window is growing ever tighter by the day, too, because the Internal Revenue Service and Office of Management & Budget have yet to issue final guidelines to investors for how the program will work.

"This is going to be a big part of my business over the next two years," said Rick Barnes, principal of Massachusetts-based CIC Realty.

The brokerage firm is seeking to list $200 million in qualifying properties to market to its national database of investors and fund managers. In the 138 zones in Massachusetts, Barnes said the most likely properties to benefit would be investment-ready opportunities in zones along Massachusetts' transit-oriented corridors going into Boston.

"For investors, this is a unique opportunity to capture a generous break on capital gains taxes, while investing in real estate that stands to benefit from a broader government mandate for growth," Barnes said.

The provision also stands to benefit under-served and oft-overlooked investment markets across the country.

"More sophisticated money is sorely needed in rural areas," said Robert Dunn, an industrial broker with The Stump Corp. in North Carolina. "In a rural market there is a finite amount of money available, and it tends to be controlling, not risk taking. The concept of sophisticated money seeking deals in opportunity zones has the potential of doing significant good in otherwise ignored places."

Barnes and Dunn are not alone in their instincts that the provision could be a game changer. Brokers across the country at the very least are revising listings to tag properties included in opportunity zones. Many are basing their entire pitch around the opportunity.

Opportunity zones are designed to spur economic development by allowing investors to defer tax on any prior gains through 2026, so long as the gain is reinvested in a "Qualified Opportunity Fund." In addition, if the investor holds the investment in an opportunity fund for at least 10 years, there would be no tax on any new gain from the investment in the opportunity fund.

States are starting to tack on additional incentives. Legislation proposed in Ohio would provide a 10 percent state tax credit on investments greater than $250,000 in qualified Ohio opportunity funds. In fact, a third of U.S. states are actively considering opportunity zone incentives.

[ Click here for details on the opportunity zone program. ]

Such tax benefit incentives have investment fund managers and equity funds poring through their pipeline of certified deals searching for properties in opportunity zones suitable for new opportunity funds, said James Hanson, president and chief executive of New Jersey-based Hampshire Real Estate Cos. Hanson oversees the operation and investment activities of the Hampshire companies and its funds. The firm is actively exploring the creation of qualified opportunity funds.

Under the law, funds could be set up as single-purpose entities or general funds to invest in several properties in several markets.

Hanson estimates Hampshire currently has a pipeline of potential of eligible deals with an all-in cost of about $250 million.

The deferral of a 15 percent capital tax is welcome, even better though, is the fact that there would be no tax on the new gain, Hanson said. However, the catch is that the deal has to make sense regardless of the tax benefit. History is littered with failed property deals undertaken primarily for a tax break, he said. If history repeats itself, the same could happen again in some of the deals that arising from the new opportunity.

Virtua Partners, a private-equity real estate investment firm based in Phoenix, was one of the first out of the gate this summer with a fund that seeks to take advantage of the newly created program. The investment firm is seeking to raise $200 million from investors.

"The first deals to get done will be those with the lowest risk, highest returns," said Derek Uldricks, president of Virtua Capital Management. "You don't make an investment just for the tax benefit. You have got to like the deal."

Virtua Partners is also one of the first out of the gate to undertake an opportunity zone fund project. It has completed a rezoning in Tempe, Arizona, for a 90-unit apartment project. Tempe City Council unanimously approved the 3.6-acre rezoning for multifamily development. The 16-month construction of the 90-unit apartment complex is scheduled to break ground in the first quarter of 2019.

That time frame also fits into another aspect of the tax law provision. As enacted, the law specifies the investment be used for a new development or, in the case of an existing property, the asset must be "substantially improved" within any 30-month period following acquisition of the property. To be treated as "substantially improved," the additions or improvements to the property must be equal to or greater than the acquisition cost.

The "substantially improved" provision is one of the many parts of the provision that have yet to be clearly defined. Unknowns of the program have firms such as Hampshire, Virtua and others still approaching the starting gate in what could be a sprint to the 2019 finish line. It also is currently holding back investors from signing over their money to such funds.

So while the first opportunity zone deals are starting to show up, the bulk of the flow will probably come in a surge starting late this year and peak throughout next year. If the estimates of how much money could be pumped into opportunity zones hold true, it would amount to anywhere from 16 percent to 46 percent more in commercial property sales than the $542 billion spent in 2017.

[Editor's Note: This the first of five parts on new Opportunity Zone tax benefits designed to boost investment in economically distressed communities. 
Part I, Investment Overview 
Part II, Potential Roadblocks 
Part III, Emerging Projects 
Part IV, Unintended Consequences 
Part V, A Successful Effort -- So Far]

Tuesday, September 18, 2018

Monthly Economic Outlook — September 2018 (Video)

Nasdaq Spotlight: Kenneth Weissenberg from EisnerAmper discussing all things REITs (Video)

How can tenants reduce personal guarantee risks on my lease? (Video)

Foreign Investor Closes On Its Biggest U.S. Industrial Deal to Date Including Philadelphia Area

A Bahrain-based global investor with $22 billion in assets closed on its biggest U.S. industrial portfolio yet, giving the firm another 4.5 million square feet spanning 56 properties throughout seven major markets including Chicago and Dallas.

Investcorp, which now owns 14 million square feet of U.S. industrial properties, has been gobbling up industrial portfolios here, with this latest $300 million deal marking the ninth such acquisition in the last 36 months.

The purchase is a sign U.S. industrial properties have become the darling of the global investment world, with demand increasing for e-commerce facilities, warehouses and distribution hubs that deliver stable returns. Historically, overseas investors were lured by the U.S. office and hospitality markets.

Foreign investment in U.S. industrial real estate has already hit $6.6 billion in the first five months of 2018, surpassing the $5.8 billion spent for the entire year in 2017, according to Avison Young's 2018 Mid-Year Foreign Investment Spotlight report. Brokers say there is a significant amount of overseas capital on the sidelines seeking high-quality real estate, which is getting harder to find.

The Investcorp deal is the largest U.S. warehouse portfolio acquisition since the inception of the business, said Mohammed Alardhi, an executive chairman of Investcorp who is helping to oversee the firm's expansion in industrial real estate.

"This investment further reflects our commitment to growing Investcorp's footprint in the United States, which is a key driver of the firm's overall growth strategy and an area in which we will look to continue expanding as opportunities arise," Alardhi said in announcing the acquisition.

At the time of the deal, the portfolio of Class A and B warehouse, light manufacturing and flex properties was 90 percent leased to companies in the e-commerce, food services, wholesaling and manufacturing industries. The property addresses were not immediately disclosed, but the portfolio includes the following:

  • 16 multi-tenant Class B industrial building in the Dallas area.
  • 14 single- and multi-tenant Class B industrial buildings in Chicago.
  • Nine multi-tenant Class A and B warehouses in Minneapolis.
  • Nine multi-tenant Class A and B industrial buildings in the Philadelphia/Delaware area.
  • Five multi-tenant Class A and Class B industrial warehouse/manufacturing buildings in Phoenix.
  • Two multi-tenant Class B industrial buildings in Houston.
  • One multi-tenant Class B warehouse building in San Antonio.

About 60 percent of the portfolio is located in top-tier industrial markets.

The properties are also in supply-constrained infill areas needing proximity to major population centers to deliver "last mile" services in the supply chain, said Rishi Kapoor, Investcorp's co-chief executive officer.

Kapoor said the investment helps the firm's clients gain and increase exposure in the highly relevant industrial sector that will benefit from some of the trends shaping the retailing industry.

Along with U.S. industrial real estate, Investcorp's New York team is also shopping for existing office, retail, industrial, multifamily and hospitality properties in the 30 largest U.S. markets. The team is seeking to acquire mid-market core and core-plus investments to add to its holdings, which now total about 550 properties.

Monday, September 17, 2018

Nasdaq Spotlight: Jeff Lenobel from Schulte Roth & Zabel w/Global REITs Summit (Video)

Nasdaq Spotlight: Ail Tunbi from Global REIT w/Global REITs Summit (Video)

Philly's Multifamily Market Is Showing Worrying Signs

Matthew Rothstein, Bisnow East Coast
It is exceedingly difficult to build multifamily in Philadelphia right now, while competition for investment has never been more fierce. In other words, it is a dangerous time in the cycle.

Slowing absorption numbers for newer apartment buildings and prohibitive construction costs have contributed to the near-total shutoff of the multifamily development pipeline, a situation exacerbated by the difficult real estate tax system in the city. Southern Land Co.'s new project, The Laurel, is an outlier due to the unique advantage of being in Rittenhouse Square, allowing it to charge well-above-average rents and condo prices.

"With construction prices, we can’t underwrite any new deals at all," Southern Land Senior Vice President Dustin Downey said. “You can’t make the numbers work, even if you get the land for free. So we’re looking at the suburbs where the land prices are lower, construction costs are lower, but it’s still a challenge to make the numbers work.”

The Laurel broke ground at 1911 Walnut St. Sept. 13, the same day Downey joined other notables in the multifamily market for Bisnow's Philadelphia Multifamily event at the Philadelphia 201 Hotel. Downey cautioned that projects valued at anything less than the top of the market have been rendered all but impossible, especially with the city's property assessments rising quickly and unpredictably.

"In Philadelphia, we’re underwriting no discount whatsoever, meaning that what we think the building is worth, that’s the taxes we’re anticipating paying,” Downey said. “That’s killing us right now. It’s killing us.” The investment market is singing a happier tune than the development side, as 2018 has seen a significant increase in deal velocity over 2017, CoStar Commercial Real Estate Philadelphia Market Economist Adrian Ponsen said. Even though absorption has been slow in the wake of a surge in deliveries, rents have climbed faster than they did last year after a dip in the winter months. “Household incomes are rising at a faster rate, which allows families to pay higher rent,” Ponsen said.

A deeper and broader pool of investors is looking at Philadelphia, and a lot of new faces have been foreign capital and institutional funds. They tend to look for safe investments, and are willing to pay a premium for them. Coupled with the fierce competition that has defined the value-add space for years, that has created an environment wherein new or recently renovated assets have grown in popularity in the city.

 “People might not have expected this, but what we’re hearing from clients is that with interest rates rising, core properties are a higher percentage of what’s getting traded,” Ponsen said. Of all the multifamily transactions that have closed so far this year at over $10M, half of them were sold by the initial developer and the other half had been held for five years or less by landlords that had added significant value. Among the highest-profile of those deals was Southern Land's disposition of 3601 Market St., which it completed in 2016 and sold in July.

HFF recently closed on the sale of a new-construction multifamily project in the Philly suburbs right after it stabilized for $100M. Though he could not disclose details due to some tax issues that are still being ironed out, he said the buyer was a core investment fund. “That sort of flies in the face of Philly’s inferiority complex, where people think that core funds don’t see here as a gateway market,” Thomson said.

But as more capital attempts to find deals in the city and fewer are available, aggression has increased on the financing side to fund acquisitions. Construction loans have remained cautious, but otherwise warning signs are flashing. “I don’t want to be Chicken Little, but we’re nine years into a cycle right now, and cycles are inevitable," KeyBank Senior Vice President Christophe Terlizzi said.

"We don’t know how long this one’s going to last, but it’s one of the longest ones. In my experience, what we have on average is seven-year cycles and five-year memories, and we might be falling for that trap right now.” Walker & Dunlop Managing Director John Banas said among the more worrisome parts of the market are players who were not active during the Great Recession, and thus didn't learn its harsh lessons. "One of the main things we do with our younger developers who didn’t go through the 2007 and 2008 is to protect them from their own worst enemy — themselves. We’re taking deals away from ourselves by giving five-year fixed rates just to protect these developers in the market.” On the capital side, debt funds have become the most dangerous element to the health of Philadelphia real estate. While banks remain cautious and prefer not to overleverage properties, they are losing out on deals to private sources that are indulging some potentially self-destructive investors and developers. Downey went so far as to call debt funds "the last of the dumb money out there."

The Federal Reserve has indicated that interest rates will continue to rise, and although Thomson said such hikes have not affected dealmaking so far, Terlizzi warned that future spikes could lead to developments failing to hit their pro forma agreements, preventing borrowers from being able to pay off those aggressive loans. “That could precipitate a liquidity issue, which has happened in the past," Terlizzi said. "So if you see that happen, that will affect prices and values across the board.” Downey speculated that some debt funds are structuring deals aggressively with full knowledge that they may not be paid back, saying such capital sources "[are] loan-to-own, and they’re happy to own.” Although the capitalization rates for multifamily transactions this year have dipped below 5%, panelists agreed that the individual deals themselves caused the dip rather than overarching market conditions.  Since most of the growth that has created these conditions has been in Center City, most of the concerns have been focused there. But one response to the shifting landscape has been looking farther away from the heart of the city for new development. According to CoStar data provided by Ponsen, the vast majority of multifamily completions between 2015 and 2017 were focused between western Center City and University City. A much higher portion of completions this year and developments still under construction have been in the North Broad Street corridor, South Philly, West Philly and into Northern Liberties.

Full story:

Friday, September 14, 2018

PhD's on CRE -Commercial Real Estate (Video)

Lands' End, Warby Parker Brick-and-Mortar Expansion Extends to NJ

Lands’ End and Warby Parker, two companies that didn’t start off as traditional retailers, are marking their expansion with brick-and-mortar locations across the nation by opening their first outlets in New Jersey this weekend.

Lands’ End, whose roots are in hawking classic American apparel through catalogs, is holding a grand opening event on Saturday at its new store at Chimney Rock Crossing in Bridgewater, New Jersey.

And Warby Parker, which got its start selling eyeglasses online that appeal to hipsters, on Saturday is also opening its first store in New Jersey, at the Garden State Plaza mall in Paramus.

The two companies' dive into brick-and-mortar may seem counterintuitive because the industry has seen such upheaval. But it is part of their effort to reinvent themselves and create an omnichannel experience for consumers, allowing them to shop easily via whatever platform they choose.

In Warby Parker's case, the opening of stores is a "clicks to bricks," or e-commerce companies recognizing that they need physical stores to maintain or increase their market share.

"Retail is reinventing itself, whether it be stores that are downsizing or in this case, stores that for years were catalog and eventually online, are also seeing the value of bricks and mortar. What it really says is that retailers are recognizing that probably the future of retail is not one or the other, but both," said Chuck Lanyard, president of The Goldstein Group, a retail broker based in Paramus. "More and more we’re going to see retailers who might have smaller versions of their stores are still going to want bricks and mortar. It means people still want to be able to walk in and walk out with the products for instant gratification."

In the case of Lands’ End, creating its own chain of standalone stores is filling the gap it faces because of the dire straits of Sears. That legacy retailer, which acquired Lands’ End in 2002 and then spun it off in 2014, still sells the clothing brand at locations within its stores. But Sears has been shutting its own stores, thereby diminishing Lands’ End’s footprint in brick-and-mortar.

By ramping up their store expansions, Lands’ End and Warby Parker represent the new breed of retailers that are filling up space vacated by defunct or downsizing companies such as Toys R Us and a long list of other failed retail chains.

That was one of the conclusions of a retail outlook report, "Out With the Old: Store Closures Present Opportunities for New Retail and New Uses."

"Just as some retailers are struggling and shuttering their stores, others are flourishing and expanding. Formerly pure-play online retailers are moving to bricks and mortar to more effectively reach consumers."

Including Bridgewater, Lands’ End has opened four stores so far this year, for a total of 15 U.S. locations. Earlier this year, the company debuted new stores in Staten Island, New York; Kildeer, Illinois; and Burlington, Massachusetts.

In addition to Paramus, Manhattan-based Warby Parker said that it plans to open two additional stores in New Jersey, in Westfield and Hoboken. The eyeglass retailer opened its first store in 2013 on Greene Street in Manhattan and now has more than 75 in the United States and Canada, with plans to bring that number to 90 by the end of the year, according to a company spokeswoman.

"Warby Parker started as a pure-play e-commerce retailer, and today they make more revenue from their physical stores than they do from selling online. They realized people want to buy glasses in the stores. They thought they could earn and maintain market share purely through e-commerce, but they quickly realized they could only go so far without having physical stores."

Lands’ End, which is based in Dodgeville, Wisconsin, has chosen a new shopping center, Chimney Rock Crossing, for its entrance into the Garden State.

"The combination of a completely new shopping center with convenient parking, easy access and restaurant options make this a great location for our new store concept," Claudia Mazo, senior vice president of retail at Lands' End, said in a statement.

At the new Lands’ End standalone sites, patrons can check out merchandise anywhere in the store. And at a digital kiosk, they can order goods at the company’s website. Those store orders come with free shipping and can be returned free of charge.

Warby Parker, for its Garden State Plaza location, has commissioned murals from artist Ping Zhu to decorate the premises. The shop’s design has elements of a classic library, with a 'reference desk' for frame adjustments and order pickups.

"New York City has been our home for years, so expanding right across the George Washington Bridge is a big milestone for us," David Gilboa, Warby Parker co-founder and co-chief executive, said in a statement. "Here in Garden State Plaza, we’re not only a part of some of the best shopping in the area, but we’re also surrounded by great community parks and green spaces."

The eyewear firm said that it has even designed sunglasses, "in whiskey tortoise with flash-mirrored Pacific blue lenses," that will be available at the mall for a limited time.

New Jersey is a popular location for retailers like Lands’ End and Warby Parker because of its population density and the household income of residents, according to Lanyard.

Tuesday, September 11, 2018

Super-Rich Families Are The New Real Estate Lending Class

Cameron Sperance, Bisnow
Fiscal caution and tighter regulations following the last recession have made it harder for real estate developers to get capital from traditional lenders this late in the economic cycle. But it is not impossible to find capital if you know the right family.

“It’s a new world in terms of being able to structure deals,” Harbor Group International Chairman and CEO Jordan Slone said Thursday at Bisnow’s National Real Estate Finance Summit. “After we saw the last downturn, things snapped back pretty quickly, but I really think the biggest difference today in ways deals are structured is there are so many ways to put deals together in terms of debt and equity.” The U.S. economy has been growing since June 2009, the second-longest period of economic expansion in U.S. history, after the one that followed the recession of the early 1990s. Mature economic cycles can lead to industry players seeking capital in different ways, as traditional financing sources tighten lending. For some in commercial real estate, the high net worth individual or family office investor is a capital source on the rise.  “We have a different investor model,” Post Brothers Apartments President Matthew Pestronk said. “It’s not institutional money, but ultra high net worth family money, which is institutional in size and in its ability to invest.”

Pestronk’s fellow panelist and Wrightwood Financial CEO Bruce Cohen described a food chain of capital every developer experiences as they start to build out a company. It often starts with help from friends and family before progressing to high net worth family offices to private equity and finally reaching direct relationships with a primary provider of capital. After maxing out at the entry level with friends and family capital, Pestronk said his company has found a sweet spot with the ultra high net worth family investor.  “That type of money is looking to get out of the stock market,” he said. “They feel that it is topped out and are now looking for opportunistic-type returns.”

Pestronk describes his network of ultra high net worth family investors as about a dozen multibillion-dollar family offices that either made their money in this lifetime or are just one generation removed from the individual who did. Although Post Brothers Apartments doesn’t typically sell its projects, Pestronk said, with the backing of the family investors, his company develops its projects to be able to underwrite opportunistic returns if they did. Ultra high net worth individual wealth is hitting record numbers. Global high net worth individual wealth surpassed $70 trillion for the first time in 2017 and is expected to exceed $100 trillion by 2025, according to Capgemini’s World Wealth Report 2018. The 10.6% of growth in this sector is the second-fastest year of growth since 2011. Real estate accounted for nearly 17% of the group’s investment, up nearly 3% since 2016 when it invested $10.3B in CRE. This upper echelon may provide a steady source of capital, but getting to it is not necessarily easy.

“Getting the first meeting is 70% of it,” Cortland Partners Senior Managing Director Ned Stiker said. “People are typically receptive to those who built a better mousetrap.” Stiker, whose real estate investment firm includes a mix of high net worth family offices and large institutional fund investors, said there is always room for more developers in the arena of ultra high net worth family capital. The key in securing the investment is articulating to the person whose function it is to find partners and acquisition opportunities how your ideas are better than the competition's ideas. But once an individual has his or her foot in the door, a larger capital network can follow.

“It’s interesting the way people have a cognitive bias,” Pestronk said. “You might have a person who made money in Hollywood, private equity or elsewhere. If he or she invests with you, you must be smart. They’ll tell friends because you’re smart and they invested with you.” While these wealthy families are providing capital to developers at a late stage of economic growth, the funding stream can also come with eccentricities.  “It’s a fairly unique model and sometimes idiosyncratic,” Pestronk said before joking, “One could decide to not invest in Philadelphia because they once took a train there and lost their wallet, so Philly sucks.”

Big Retailers Shrink Stores to Boost Sales

Fast-food chain Taco Bell's plan to open 300 new small-format restaurants across the country in the next four years is the latest by a slew of major national brands experimenting with smaller stores to cut real estate costs and cater to urban millennials.

Taco Bell, Barnes & Noble Inc., Whole Foods Market, Kohl’s Corp., Nike Inc., Target Corp. and Nordstrom Inc. are just a handful of major brands looking to increase market share and wring out more dollars per square foot of space in expensive urban markets by opening smaller brick-and-mortar stores.

The decision is a reflection of a rapidly evolving retail environment that is forcing retailers nationwide to reevaluate their real estate footprints. That scramble for space offers property owners and developers new opportunities to reconfigure properties and reshape their tenant mix.

"It’s not much different from what a lot of office users are doing right now. Everyone is trying to be smarter with their space and realize the savings that comes from that."

Sales at small-format stores outgrew those at larger stores by almost 400 percent in 2016 and now constitute more than a $1 trillion market, according to a 2018 report. It added that 51 percent of millennials - those between the ages of 22 and 37 -- say a store’s location is the top factor in a purchase decision.

In other words, the success of small-format stores also relies on convenience.

That's a driver behind fast-food purveyor Taco Bell’s plan to open 125, mostly small-format restaurants in New York City in the next five years. The company said it was under-developed in New York and wanted to tap into the city’s thriving urban market.

The Irvine, California-based company’s small-format restaurants -- called Urban In-Line and Cantina -- are tailored for "highly walkable areas" and have no drive-through windows. The smallest are just 1,200 square feet. The company plans to open 1,000 new restaurants across the U.S. in the next four years. Thirty percent will be smaller-format concepts.

"Boutique users, big-box retailers, your traditional power center line-ups are all trying to be leaner," Parsons said. "It comes down to maximizing square footage and cost-efficiency."

Many companies opening smaller stores are using technology to capture customer data and personalize the shopping experience.

Nike this year unveiled Nike Live in Los Angeles, a small-format, 4,600-square-foot store that coincides with the release of the Nike app designed to gather customer information and which allows shoppers to reserve items online, scan barcodes for product information and book personal appointments with in-store experts.

Nordstrom last year launched Nordstrom Local, a 3,000-square-foot store in Los Angeles’ tony Melrose neighborhood with no inventory. Shoppers can pick up items there and even order a drink. It plans to open more.

Target is opening small format stores in urban areas across the country, with an average store size of 50,000 square feet, compared to 170,000 square feet in its larger stores.

In an earnings call this spring, bookseller Barnes & Noble said it would begin opening smaller stores with 14,000 square feet of space, slightly more than half the size of most of its stores. Some Barnes & Noble stores occupy only 3,000 square feet of space, former Chief Executive Demos Parneros said.

Even Swedish retailer Ikea, which has opened 27 big-box stores across the U.S. the past 15 years, halted expansion plans in three U.S. markets this spring as it pilots a small store concept in Moscow.

The small-store trend "shows no signs of slowing, which will inevitably lead to continued growth of small format in 2018 and beyond," the Koupon report said.

Apartment Developers Converging On Philadelphia's University City

University City’s apartment landlords have enjoyed little competition from newly delivered units in recent years. Massive apartment projects continue to complete in development hotspots such as Center City and the Main Line. However, no apartment projects with over 200 units have delivered in University City since late 2015.

This lack of competition from new projects in leaseup has allowed University City rents to outperform. Since the beginning of 2015, the submarket’s 4- and 5-Star apartment rents have averaged 4.6 percent annual growth. This pace more than doubled the rate of 4- and 5-Star rent growth in the Philadelphia metropolitan area as a whole.

The sales market for high-end apartment properties in University City has also been booming recently. Three high-rise projects that delivered in the submarket between 2014 and 2015 -- 3737 Chestnut Street, Evo at Cira Centre South and Arrive University City -- have all sold for over $100 million within the past three years.

University City’s strong rent growth and sales pricing have received developers’ attention. The largest apartment project nearing groundbreaking is Conshohocken-based Exeter Property Group’s 3720 Chestnut. Exeter plans to demolish the Newman Center student ministries, which will be relocated around the corner on 38th Street, and building 420 apartment units with street-level retail.

In addition to 3720 Chestnut, three other large apartment projects are moving quickly through the planning stages along Chestnut Street between 37th and 45th streets. Christopher Rahn of CRP Builders has two projects in the works. These include 130-units at the site of the former Cash Wash at 4125 Chestnut, and entitlements for up to 323 units a block away at 4233 Chestnut, the site of the Christ Memorial Reformed Episcopal Church. CRP Builders purchased 4233 Chestnut in June 2018, secured necessary permitting for the residential conversion and is actively marketing the site to interested developers.

Finally, University City-based Oren Brothers continues to move forward with plans for 165 units on the 4400 block of Chestnut. The project received little resistance from neighborhood residents at its meeting at the Spruce Hill Community Association in March 2018.

Most of these projects are still months away from starting construction, which would take a minimum of 18 to 24 months from start to finish. At 3720 Chestnut, demolition work cannot even begin until January 2019 when the Newman Center is scheduled to be vacated.

All of this means that a surge in new University apartment deliveries is unlikely to occur any earlier than the fall of 2020, giving nearby landlords at least another year or two of minimal competition from new deliveries. However, all of these projects may end up completing within the same one- or two-year period at the beginning of the next decade. In that case, competition between projects in leaseup would likely lead to a softening in University City rent growth and a significant uptick in concessions.

Wednesday, September 5, 2018

Conshohocken Based Exeter Picks Up $148M Industrial Portfolio

by Gail Kalinoski
Just weeks after making a big industrial purchase in North Carolina, Exeter Property Group has acquired a 20-building, Class A, light industrial portfolio from Adler Real Estate Partners. The $148 million deal expands Exeter’s North Carolina and Texas holdings.

The 1.3 million-square-foot portfolio consists of Cardinal Park in Dallas, Shopton Ridge in Charlotte, N.C., and three Houston properties—Bammel Business Park, Business Center at Park 10 and Legacy Park. All five assets are located in highly desirable, infill submarkets with strong tenant demand, according to HFF, which marketed the property on behalf of the seller.

The HFF investment advisory team representing Adler included Managing Directors Adam Herrin and Trent Agnew, Directors Stephen Bailey and Patrick Nally, along with Senior Managing Directors Rusty Tamlyn and Chris Norvell.

Adler, operating at the time as Adler Kawa Real Estate Advisors (AKREA), acquired the 422,400-square-foot Shopton Ridge industrial/office complex in Charlotte in April 2015. The property was purchased in partnership with a group of co-investors through the Adler Kawa Real Estate Fund II, which targeted office and industrial assets in high demographic and economic growth areas of the United States. Shopton Ridge was roughly 90 percent occupied when AKREA acquired it, with tenants including PinPoint, Scent Air, Cardinal Health and Rent-A-Center.

Also in 2015, AKREA purchased Cardinal Park in Dallas, a 545,000-square-foot Class A office and industrial park located in the city’s technology corridor in the Richmond/Plano submarket through the AKREA Fund II. The park was 88 percent occupied with tenants including Yahoo!, CVS/Caremark, Inogen and Simplex Grinnell (Tyco).

About two years earlier, AKREA had acquired a 200,000-square-foot-portfolio in Houston, which included the 110,400-square-foot Bammel Business Park—located at 4702-4802 N. Sam Houston Parkway W.—and the 91,451-square-foot Legacy Park. Those properties, which were 95 percent occupied at that time, were also purchased through the AKREA Fund II. Tenants included Malvern Instruments, the University of Texas Board of Regents, NWN Corp., Lincoln Electric Co. and Flowserve Corp.

Shopton Ridge has good access to the Charlotte Douglas International Airport as well as intestates 485, 85 and 77. In Texas, Bammel Business Park and Legacy Park are located in Houston’s popular northwest submarket, a short drive from Bush International Airport.

Exeter’s acquisition of the Adler portfolio follows the purchase in early August of RiverOaks Corporate Center, a Class A industrial park and three additional land sites in the Charlotte submarket of Concord for $49.2 million. That deal brought Exeter’s holdings to more than 8 million square feet in the Carolinas and 3 million square feet in the Charlotte area. HFF also represented the seller, Beacon Partners, in that transaction, which included two buildings totaling 452,206 square feet and the development sites totaling 892,997 square feet. The 119-acre site is near interstates 85 and 485, and 23 miles from Charlotte Douglas International Airport.

In June, Exeter also purchased a 130,250-square-foot industrial property in Kennesaw, Ga., for $9 million.

$300M development underway in Quakertown

Natalie Kostelni Reporter Philadelphia Business Journal
A $300 million real estate project is rising just off the Quakertown interchange of the Northeast Extension that is attempting something novel. Called Milford Village, the multiphased development was designed to be a mixed-use, intergenerational community and not a place to simply “warehouse the elderly.”

The master planned, multiphased development will sit on 216 acres off Route 663, the main route connecting the turnpike interchange to Quakertown. Milford Village looks to create a community for the very young and the very old as well as those in between. While that sounds a lot like a typical town or pockets of a city, this is more deliberate. Plans for Milford Village intentionally places the young with the old to create intergenerational social dynamics that can benefit all ages.

“What you get out of this is an answer to a lot of social need,” said Roger Hiser, president and CEO of LifeQuest, a nonprofit senior and childcare service provider that is an integral partner on the project and owner of the 167 of the 216 acres that are being developed. “Everything I have managed or developed has evolved because of a need,” he said.

Both Hisder and Del Markward of Caracor Development, a real estate development arm of Markward Group and master developer of Milford Village, believe the project will solve an unmet need in the real estate market.

The first phase will involve the Village of Life Quest and expanding an existing nursing center operated by LifeQuest. The addition will have 123 assisted living units and 40 memory care units. A new child care center will also be developed as part of the first phase and an existing child care facility will be converted into corporate offices for LifeQuest.

That initial phase is underway and expected to be completed next year, the same time that St. Luke’s University Health Network will complete a new $100 million, 132,000-square-foot hospital, cancer center and office building on 30 adjacent acres fronting Route 663. That land had been part of the original Milford Village property but sold to St. Luke's eight years ago. The hospital system is under agreement to buy another 8.5 acres.

The second phase of Milford Village will entail developing 335 market-rate apartments and a 498-unit, 55-plus congregate care facility. Subsequent phases will include the development of: two office and retail centers of which one will total 43,200 square feet and the other 50,200 square feet; 13,000 square feet of space for business center and banquet hall; 74 townhouses and cottages; a restaurant totaling 6,000 square feet; and potentially another 30,000 square feet of retail or office space. A hundred acres will be preserved as open space.

It’s been a long road to reach this point. LifeQuest bought and assembled several contiguous properties surrounding its existing facility over the last 30 years. Markward spent 16 years figuring out what to do with the 216-acre property. At one point, a retail outlet center was planned for the site but when the financial crisis and declining retail environment hit in 2008, those plans were shelved. 

“This has been a 16-year journey of unpaid love,” Markward said.

LifeQuest spent 10 years securing zoning for a master plan for the property. It received approvals in 2010 for a mixed-use development anchored by its medical and senior care facility. Late that same year, St. Luke’s bought its parcel with an eye toward eventually building a hospital.
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Tuesday, September 4, 2018

1M SF Spec Industrial Under Construction in Northeastern PA

by Steve Lubetkin,

Mericle Commercial Real Estate Services is constructing a 1,023,000 square-foot speculative industrial building at 200 Technology Drive in CenterPoint Commerce & Trade Park East, Jenkins Township, PA.
The building is scheduled to be completed before the end of the year and will be the largest industrial facility ever constructed on speculation in Northeastern Pennsylvania.

Mericle president Robert K. Mericle says he decided to construct the building because of how popular CenterPoint and Northeastern Pennsylvania have become with companies seeking a strategic location for a new distribution center., Home Depot, Lowe’s, Neiman Marcus, Corning, Kimberly Clark, Isuzu, Tailored Brands, Benco Dental, Jerry’s Sports Center, and FedEx SmartPost are among firms that have opened large distribution centers in the park, Mericle says. Altogether, there are 51 tenants and 6,000 employees in nine million square feet in CenterPoint.

“CenterPoint is less than one mile from I-81 and I-476 and is immediately adjacent to major facilities for FedEx Ground, FedEx Express, and UPS,” says Mericle.  “The Wilkes-Barre/Scranton Airport is just three miles away and many major trucking firms are within a 15-minute drive.”

More than 51 million people live within 200 miles of CenterPoint. Philadelphia, Harrisburg, New York City, and Port Elizabeth can each be reached in about two hours.
“We have designed the building to accommodate mid-size to large bulk industrial tenants that have very high trailer parking requirements, and e-commerce fulfillment operations that need huge areas for employee parking,” Mericle says.

Mericle also says the project site has room for close to 1,000 trailers and more than 1,000 employee parking spaces.

All major utilities serve the site including fiber and there is strong water pressure.

Key features of the cross-docked building include:

  • 36-foot ceiling clear heights
  • 7-inch reinforced concrete floors
  • 198 9-foot x 10-foot insulated steel loading doors with 35,000-pound Rite Hite mechanical levelers and bumpers
  • 50-foot x 50-foot column spacing with 60 feet at the loading bays
  • Up to four, 4,000 amps services
  • LED lighting fixtures
  • clerestory windows
  • high-efficiency, gas-fired Cambridge unit heaters.

More than 700,000 people live within 30 miles of 200 Technology Drive.  “There are several excellent training grants programs available to help companies staff their operations,” says Mericle.

Because the park is located immediately off of two interstates just 10 minutes from Scranton and Wilkes-Barre – the region’s two largest cities – tenants are able to maximize labor draw.

200 Technology Drive began as a ReadyToGo!™ Site.  For each ReadyToGo! Site, Mericle clears, grades, and compacts the property, installs all utilities, and obtains all permits and approvals necessary to begin work on footers and foundations immediately upon the signing of a lease agreement.