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THE WATCH LIST NEWSLETTER 1
A WEEKLY NEWSLETTER FOCUSING ON CHANGING MARKET CONDITIONS, COMMERCIAL REAL ESTATE, MORTGAGES AND CORPORATIONS PUBLISHED BY COSTAR NEWS
IN THIS WEEK'S ISSUE:
Workforce Factors Working Against Landlords in Lease Renewals .................................................................................................. 1 U.S. Property Markets Post Strongest Sales Volume Since 2007 ..................................................................................................... 4 Mack-Cali Positions More Assets For Sale ........................................................................................................................................ 5 Taking Stock of Landlords Following JCPenney‟s Plan To Close 33 Stores ..................................................................................... 6 Property Pricing Posts Steady Gains ................................................................................................................................................ 7 Time Warner Sells HQ for $1.3 Bil., Plans Move to Hudson Yards ................................................................................................... 8 Foreign Investors Account for 60% of DC Office Building Sales ....................................................................................................... 9 Starwood Buys San Diego Office Portfolio from Kilroy .................................................................................................................... 10 Ruby Tuesday Shuttering 30 Locations as Part of Repositioning Strategy ..................................................................................... 10
Workforce Factors Working Against Landlords in Lease Renewals Although Tide Appears to be Turning; Tenants Still Hold Upper Hand in Negotiations
Even as net absorption and rents continue to rebound in most office markets, tenants with leases coming up for renewal still hold a lot of clout in negotiations with landlords in 2014. A variety of economic, technological and workforce factors are acting as counter influences to improving property fundamentals, according to brokers and landlords involved in current lease renewals who were interviewed by CoStar News this week. As a prime example of how many characterize the current lease renewal market, consider PRGX Global Inc., a recovery audit services provider based in Atlanta. PRGX renewed its lease this month on its 131,653-square-foot headquarters at 600 Galleria Parkway, extending for another seven years. However, like many firms, PRGX downsized during the recession, and subleased a portion of their office space. Under its new lease PRGX will reduce the office space covered by the lease by 73,911 square feet and reset its starting base rent at $22 per square foot effective January 2015. PRGX was scheduled to pay more than $33 per square foot in the final year of its original lease signed in 2002. Despite strong absorption and little new construction in most markets, real estate brokers say several factors continue to make this a tenant‟s market. "Landlords start off with high renewal rate expectations, but as the negotiations bear out, they have to reduce rates 10% to 15% to retain the tenant -- which is still better than re-leasing the space,” said Eric Leland, managing principal of Mohr Partners Inc., a tenant services firm based in Bellevue, WA. In 2013, office landlord DynaCom Management Inc. in Naperville, IL, renewed 75% of its tenants. “We are very optimistic about 2014 and hope to renew at least 75% or all, since tenants would still prefer not to spend money on a move if they don‟t have to and just negotiate a better deal to renew,” said DynaCom senior
MARK HESCHMEYER, EDITOR WWW.COSTAR.COM JANUARY 21, 2014
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THE WATCH LIST NEWSLETTER 2
leasing manager Mari Rodriguez. “Landlords such as ourselves have learned that it is less expensive to give great incentives to our tenants to renew than to market a vacant space and collect nothing at all.” In many markets across the country - such as Houston, Denver and San Francisco -- job growth has been strong while others are still waiting for a strong job catalyst. Rick Mineweaser, president of Diamond Pacific Investments in Scottsdale, AZ, said 90% of the tenants in the region are basically holding their own. The 5% that are expanding are somewhat offset by the 5% that are contracting, resulting in only a modest growth in absorbed square footage. In Tucson, AZ, Thomas J. Nieman, principal, commercial properties at Cushman & Wakefield Picor, said, "In this market, landlords work very hard to renew any lease, large or small, as there‟s just not enough new requirement activity to fill vacated spaces.” Though the jobless rate recently fell to 6.7% from 7% for the month, the decline mostly represents job seekers giving up their search and leaving the workforce, according to Paul Giannopulos, principal of Cresa Chicago, a tenant services firm. He said the market still has not recovered all jobs lost during the Great Recession and therefore a lot of slack remains in the economy. Labor force participation has dropped to the lowest level since 1978.
GROWING AND SHRINKING FIRMS OFFSET
Overall, Clarion Partners, an active New York-based U.S. real estate investment and management firm, said it is optimistic about office leasing in 2014 as the U.S. economic growth broadens. Nonetheless, it continues to see the pace of office absorption holding leasing activity back, due to shadow space and more efficient office space usage. “While tech, energy and business services tenants are still the main drivers of office demand, large tenants such as financial services, legal, and government agencies are still shrinking their footprints upon renewals,” said Tim Wang, director and head of investment research for Clarion Partners. The news this week that Wall Street titan Credit Suisse Group AG plans to sign a 20-year lease to keep its Americas headquarters at 11 Madison Ave. in Manhattan confirms Wang's assessment. The pending lease agreement is reported to be for about 1.2 million square feet. That means Credit Suisse would give back 600,000 square feet on renewal as it currently leases 1.8 million square feet. New York‟s banks and financial-services firms have laid off tens of thousands of workers in New York in the past few years, downsizing space to control costs amid tighter regulations. Stephen Boyd, a director in the REITs group at Fitch Ratings in New York, tracks leasing trends as part of his coverage of office REITs and agrees with Wang. “In finance the specter of increased regulatory burdens will keep the large institutions from expanding aggressively in places like NYC,” Boyd said. “Legal firms will likely continue to shrink their floor plates due to the technological developments (i.e. cloud computing which allows for more storage on-line for documents/legal journals, etc.). Government and government-related will likely still feel pressure from austerity measures at the federal, and to a lesser extent state levels.”
TECHNOLOGY AND WORKFORCE TRENDS REDEFINING DEMAND FOR OFFICE SPACE
Cresa‟s Giannopulos and others see a lot of technological and workforce trends also reshaping tenant office space demand. “Demand for office space is being influenced by improved technologies (most importantly mobile) and younger workers are demanding new work/lifestyle expectations (further) reducing footprints,” Giannopulos said. “The average square foot per person continues to shrink. From 2010 - 2012, the average has dropped from 225 to 176 square feet. There are predictions that it will drop to 100 square feet per person by 2017.” “Larger office users can often times significantly reduce costs through new work place designs planned around new space utilization metrics. The context is to enhance the work environment,” he added. “It is often easier and
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less capital-intensive to redesign vacant space, secure larger capital investments from new landlords and gain support through added building amenities.” Howard L. Ecker, president and CEO of Howard Ecker + Co., a national tenant rep firm based in Chicago, sees the same trends at work in his firm‟s markets. “Tech companies will expand,” Ecker said. “If you look at the biggest users of office space recently, tech tenants are much more interested in cool rather than quality. Their idea of quality is high speed Internet and good air conditioning; not marble, glass, and steel.”
EFFICIENCY FACTOR MAY BE RUNNING ITS COURSE
The „efficiency push‟ companies are doing is a real trend that is here to stay and must be watched over the next several years, particularly for mature businesses, said Sean P. O'Reilly, senior manager of transaction advisory services for real estate at Ernst & Young in San Francisco. O'Reilly said the trend among businesses to use office space more efficiently is still in the middle innings, and there is more game yet to play, he said. However, companies are still seeking the right mix. “A lot of tenants are still experimenting with what is the right office density for their business and what is the right space layout for the various components of their business,” explained O‟Reilly. “Several studies have already shown that the trend of established businesses adopting the high density collaborative environment seen in a tech company turns out to be penny wise and pound foolish as many jobs require more "focus" work than collaborative work. These studies have shown that putting employees who require a lot of focus work in a collaborative environment is causing a lot of employee dissatisfaction.”
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“So I think some companies outside of the tech world are currently over shooting the efficiency goal likely at the expense of employee retention where the right space density and layout for different businesses is still being worked out,” he added.
CYCLE TURNING IN LANDLORDS' FAVOR
Jonathan Larsen, regional managing principal for Cassidy Turley in Los Angeles, said he expects a higher percentage of leases will be renewed in softer markets and a lower percentage renewed in tighter markets due to landlords trying to begin to raise rents and lower concessions. “In 2014, more tenants will continue to look for the last opportunities to lock in lower rent and high quality,” Larsen said. As the recovery progresses and moves into the secondary markets, tenants also may be beginning to realize that their timeframe of holding the power in negotiations may be narrowing, according to Tyler Boyd, an associate with Voit Real Estate Services in the Sacramento, CA market. “We look for expiring tenants to spring to action, based on this assumption, and use their remaining negotiating power to their advantage,” said Boyd. “2014 should be the turning point for a lot of markets from early recovery into expansion, so we expect tenants to either lock in their rental rates for the next three to five years if they‟re satisfied with their location, or make their final „flight to recovery‟ move before it‟s too late.”
U.S. Property Markets Post Strongest Sales Volume Since 2007 By: Randyl Drummer For buyers and sellers of commercial property, 2013 was a very good year. Total commercial real estate sales are projected to be as much as 18.4% higher in 2013 from the previous year as U.S. property fundamentals and the economy continued to improve and investors in all property types fanned out into smaller markets in search of higher returns, according to preliminary CoStar COMPs transaction volume. Sales of office, industrial, retail, multifamily, hospitality and land totaled $361.6 billion in 2013, 16% higher than the $312.3 billion in property that changed hands in 2012, based on property transactions of all sizes that closed by Dec. 31, 2013 and recorded by CoStar Comps as of Jan. 13, 2014. CoStar is continuing to track down and tabulate additional 2013 property transaction activity, which is expected to boost total sales for 2013 to nearly $370 billion when all transactions are counted. In any case, the preliminary figures clearly reflect the strongest year for CRE investment since 2007, when $489.6 billion in total transactions were recorded. Property sales totals for the fourth quarter of 2013 were below the record-setting volume of a year ago, with a preliminary $102.23 billion in sales tallied as of Jan. 13. Property sales spiked in December 2012 as investors hustled to close deals prior to year-end, driven in part by concern over anticipated tax hikes and the restoration of previous tax rates for capital gains. The rush helped drive total CRE sales volume to $115.8 billion. In CoStar's just-released national market reports, vacancy rates decreased and net absorption continued its strong pace in the U.S. office, industrial and retail markets. For commercial property sales tallied as of Jan. 13, investors were especially active in the hotel property sector, with hospitality investment seeing a 40% increase to lead all major property categories in 2013, followed by sales of industrial property, which increased 22%. Office sales rose 17% and led all building types in dollar volume, followed by multifamily sales, which rose 14%. Retail property sales rose 7% over 2012, while land sales increased 4%.
REBOUND INVESTMENT ACTIVITY EVIDENT IN MAJOR MARKETS
The rebound in activity in the Manhattan office market helps tell the story of the U.S. office investment market last year. More than a half-dozen building sales and partial equity stakes in buildings were valued at more than
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$1 billion in 2013, all located in Manhattan. In 2012, no single-property CRE sales eclipsed $1 billion. Similar blockbuster transactions closed in the industrial, retail, multifamily, hospitality and land markets. Another hallmark of 2013 was the spread of activity into secondary and tertiary markets in all property types as rising prices and diminishing supply compelled investors to seek higher yields outside of New York City, Chicago, Washington, D.C., Los Angeles and San Francisco. The booming Texas economy and the recovery in other Sun Belt markets has sparked investor demand in such non-gateway markets as Austin, Dallas, Houston, Denver, Phoenix, Miami and Atlanta, according to Steve Pumper, executive managing director of capital markets for Transwestern. "In our estimation, this recovery will continue into 2014 and beyond," Pumper said. "For the Sun Belt markets that have not yet experienced rent spikes, we expect them to see increases within the next 12 to 18 months."
INTEREST RATES REMAIN TOP CONCERN
The main question facing commercial property investors in 2014 is what will happen with interest rates. The 10-year Treasury bond yield, currently around 2.88%, could increase to 3.25 to 3.50%, possibly impact property pricing and development costs, Pumper said. The improving economy also translated into stronger investment volumes around the world, with a solid fourth quarter pushing global 2013 investment volumes up 18% to $549 million, according to preliminary figures from Jones Lang LaSalle. "The desire of experienced investors to look at opportunities which require additional asset management or more creative solutions has helped push 2013 volumes past our initial expectations," said Arthur de Haast, lead director with JLL's International Capital Group. "With this trend expected to continue into 2014, we are confident that investment volumes will continue to grow."
Mack-Cali Positions More Assets For Sale It's been a busy start to the year for Mack-Cali Realty Corp., which continues to move forward with its portfolio diversification and transformation by selling and/or joint venturing its non-core, unencumbered assets even as it teamed with Ironstate Development Co. to begin construction on a 69-story apartment tower on Jersey City's waterfront. Among the portfolio diversification moves the REIT is making is formal offering for one major asset through a brokerage firm that has a fresh 15-year lease on it and two assets that it is negotiating to sell to another public entity, Mitchell E. Hersh, president and CEO of Mack-Cali said in an analyst conference call this past week. These assets likely would be sold into a joint venture, he added. “We‟d obviously get the cash from today‟s value and work with the joint venture partner to develop future value, of which we would share equally after they get a return on their invested capital,” Hersh said. “They would be highly leveraged … primarily through CMBS financing. We would also have the added benefit of assisting them in some of the leasing efforts and property management efforts. So we have some fee income.” Mack-Cali has already accumulated about $450 million in cash from other recent dispositions, money that it plans to put to work, either in new development or through the acquisition of multifamily or mixed-use property. The company is currently completing $160 million in multifamily acquisitions expected to close around the middle of the year. It plans to develop about a $180 million in projects in 2014; $90 million in joint venture equity and $90 million in on balance sheet development. A joint venture of Mack-Cali Realty Corp. and Ironstate Development Co. broke ground this week on URL (Urban Ready Living) Harborside 1, a 69-story, 763-unit multifamily tower on Jersey City's waterfront. The $291 million development, the first of three towers comprising 2,358 residences planned in the Harborside development, is expected to be completed in mid-2016.
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Taking Stock of Landlords Following JCPenney’s Plan To Close 33 Stores Not Surprised, Landlords Have Already Launched Redevelopment Plans
As part of its turnaround efforts, J. C. Penney Company Inc. will be closing 33 underperforming stores across the country this spring. The closings will result in the elimination of approximately 2,000 positions. These actions are expected to result in an annual cost savings of $65 million, beginning in 2014. Remaining inventory in the affected stores will be sold over the next several months, with final closings expected to be complete by early May. “As we continue to progress toward long-term profitable growth, it is necessary to reexamine the financial performance of our store portfolio and adjust our national footprint accordingly,” said Myron E. (Mike) Ullman, III, CEO of Plano, TX-based JCPenney. Meanwhile, the company is continuing its plans to open a new store location later this year at the Gateway II development in Brooklyn, NY. One landlord affected by the closures, CBL & Associates Properties Inc. had obviously prepped for the news and already has announced future redevelopment/replacement plans for the four JCPenney anchor locations in its portfolio that are part of the planned closures. “One of our most attractive investments coming out of the recession has been to improve the performance of our properties through redeveloping underperforming anchor locations. The opportunities created by the four JCPenney closures announced today fit perfectly with that objective,” said Stephen Lebovitz, president and CEO of CBL & Associates. “While we have been encouraged by JCPenney‟s recent improvements in sales and traffic, we have been anticipating certain store closures to occur.” “We have been proactively engaging in discussions and gauging retail demand with this in mind and are pleased to announce strong interest for the locations expected to close in 2014,” Lebovitz said. “Our next steps will be to move forward with negotiations with retailers and finalize redevelopment plans.” “The list of retailers interested in these specific locations includes sporting goods, arts and crafts and other box retailers, as well as a traditional department store for one location, all of which will enhance the performance of the malls overall,” he added. JCPenney locations in the CBL portfolio slated for closure are at Hickory Point Mall in Forsyth, IL; Janesville Mall in Janesville, WI; Wausau Center in Wausau, WI; and Northgate Mall in Chattanooga, TN. The stores aggregate approximately 499,000 square feet and $1.4 million in gross annual rent. JCPenney will continue to pay rent until lease expiration. The Northgate Mall store is leased from a third party and CBL will work with the building owner to facilitate its redevelopment. CBL”s proactive stance in the face of JCPenney closings is a positive for the REIT, according Fitch Ratings. However, the closures are in four of CBL's lower-productivity assets. The redevelopments face execution risk given potentially lackluster retailer demand at these locations, as well as upfront capital expenditures and related downtime in redeveloping the assets, which can ultimately weigh on credit metrics. Simon Property Group has two malls impacted by the closings, but Fitch said the impact will be minimal as the two affected malls are slated to be spun-off into a newly created entity later this year. JCPenney is also closing an 118,000-square-foot JCPenney store at PREIT‟s Exton Square Mall in Exton PA. PREIT said it is looking forward to incorporating the JCPenney building into its planned redevelopment of the mall which is also expected to follow the recapture of an existing Kmart location. "This is a tremendous opportunity for PREIT. Having control over the JCPenney and Kmart locations will allow us to reposition Exton Square Mall by capitalizing on the stellar demographic profile of the area, which is the best in
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our portfolio," said PREIT CEO Joseph Coradino. "PREIT has a strong track record of replacing department stores, having successfully replaced nine in the past nine years. We look forward to sharing the details of our plans for Exton Square Mall in the near future and demonstrating the value creation proposition this presents." Still, the closings are not a good thing for the other affected centers. Lea Overby, CMBS strategist at Nomura Securities, said 11 stores included on the closure list have either direct or indirect exposure to CMBS collateral, of which nine are included in legacy CMBS and two are included within CMBS 2.0/3.0. “Of the 11 stores with exposure to CMBS, JCPenney serves as collateral for seven loans, and non-collateral for four loans,” Overby reported. “We believe that the closure of the JCPenneys at each of these locations is likely to significantly increase the likelihood of default. With the exception of the two malls owned by CBL, the properties are generally owned by smaller mall operators that may be less able to provide the capital necessary to reposition these boxes.” “In addition, the locations are primarily in tertiary markets, decreasing the likelihood that the sponsor will be able to find a replacement tenant,” she said. Marielle Jan de Beur, managing director and head of CMBS and real estate research at Wells Fargo Securities, said JCPenneys store closure list is relatively short in the context of its portfolio of 1,100 stores. “One reasonable inference is that more closings are likely to follow,” Jan de Beur said. “The closings focus on leased properties. Only two of the 33 properties are owned. We believe the Bristol Mall and Lincoln Plaza Center locations are owned by J.C. Penney, based on CoStar data and Loopnet data.”
PLANNED STORE CLOSURES
Shopping Center City State Shopping Center City State
Selma Mall Selma AL N/A Cut Bank MT
Arrow Plaza Rancho Cucamonga CA Vernon Park Mall Kinston NC
Chapel Hills Mall Colorado Springs CO Burlington Center Burlington NJ
Meriden Square Meriden CT Phillipsburg Mall Phillipsburg NJ
Lake Square Mall Leesburg FL Wayne Towne Plaza Wooster OH
Gulf View Square Port Richey FL Exton Square Mall Exton PA
Muscatine Mall Muscatine IA Laurel Mall Hazleton PA
Stratford Square Mall Bloomingdale IL Washington Mall Washington PA
Hickory Point Mall Forsyth IL Northgate Mall Chattanooga TN
Five Points Mall Marion IN Bristol Mall Bristol VA
Marketplace Shopping Center Warsaw IN Military Circle Mall Norfolk VA
The Centre at Salisbury Salisbury MD Forest Mall Fond Du Lac WI
Westwood Plaza Marquette MI Janesville Mall Janesville WI
Northland Mall Worthington MN Lincoln Plaza Center Rhinelander WI
Singing River Mall Gautier MS Cedar Mall Rice Lake WI
Natchez Mall Natchez MS Wausau Mall Wausau WI
Butte Plaza Shopping Center Butte MT
Property Pricing Posts Steady Gains The latest CoStar Commercial Repeat Sale Indices (CCRSI) found that pricing continued on a steady upward trajectory for all types of commercial property in November 2013, boosted by the strong take-up of available space by tenants. The two broadest measures of aggregate pricing for commercial properties within the CCRSI -- the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index -- advanced by 0.8% and 1.1%, respectively in November 2013. The two major indices increased by 10.9% and 7.8% respectively over the 12-month period ending November 2013. Contributing to the increase in property values was the significant increase in net absorption of available space as commercial tenants occupied an additional 380 million square feet of office, retail and industrial space
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throughout the U.S. in 2013. The increased demand for commercial space was the largest annual gain in net absorption since 2007, according to initial annual totals by CoStar. The Investment Grade segment of the property market continued to dominate in space absorption. However, the pace of absorption in the General Commercial segment has improved significantly as the recovery continued to accelerate in secondary and tertiary U.S. markets. As a result, the General Commercial property segment‟s share of total net absorption increased from below 30% for the last several years to 32% in 2013. Pricing for the highest quality property in the most sought-after locations continued to attract the most consistent investor interest, according to the CCRSI. The U.S. Value-Weighted Composite Index, which weights each repeat-sale by transaction size or value (and therefore is heavily influenced by larger transactions), has increased by a cumulative 51.9% since the start of 2010, reflecting steady demand for institutional-grade property assets in top-tier metro areas that led the recovery. Recent pricing performance in the U.S. Equal-Weighted Composite Index, which weights each repeat-sale equally and is more heavily influenced by smaller transactions, has been more volatile. The Equal-Weighted Index was significantly more impacted by investor uncertainty over the economy and interest rates, but it has since rebounded. The Equal-Weighted Index has increased 18.4% from its trough in 2011. Meanwhile, the ravaging effect on property values that occurred during the recession continued to become a distant memory as the percentage of commercial property selling at distressed prices continues to decline, falling roughly two-thirds from the peak in 2011.
Time Warner Sells HQ for $1.3 Bil., Plans Move to Hudson Yards By: Randyl Drummer In the latest example of foreign capital‟s willingness to swoop in to pick off U.S. trophy assets, funds from Singapore and United Arab Emirates have joined Related Cos. in paying $1.3 billion for Time Warner Center, a 1.1 million-square-foot office property in Manhattan. The investment also includes a huge vote of confidence in the prospects of Hudson Yards. Media conglomerate Time Warner Inc. announced it will lease back space from the Related venture until early 2019 before moving its corporate headquarters and 5,000 employees, along with its HBO, Turner Broadcasting and Warner Bros. businesses, to the emerging redevelopment on the Far West Side of Manhattan. Time Warner has made "an initial investment" in acquiring more than 1 million square feet of available commercial space in 30 Hudson Yards, an office development by Related and Oxford Properties Group approved for construction at the southwest corner of 10th Avenue and 33rd Street. All parties have signed an initial development agreement for 30 Hudson and expect to complete final building plans by the first half of this year, and Time Warner and its businesses plans to occupy the new space at the end of 2018.
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The long-anticipated Time Warner Center purchase by the venture that includes Related Companies, an entity owned by the Abu Dhabi Investment Authority (ADIA) and Singapore-based GIC works out to about $1,182 per square foot. Eastdil Secured represented Time Warner on the sale of its office space, while Studley is representing Time Warner and CBRE is representing Related and Oxford on the planned Hudson Yards headquarters acquisition. "We see significant upside in leasing the high quality office space following Time Warner Inc.‟s planned relocation to 30 Hudson Yards. We believe strong demand for this first-rate office property will translate into a stable income stream which suits GIC as a long-term investor," said Tia Miyamoto, regional head of Americas at GIC Real Estate. "Time Warner Center is one of the premier mixed-use projects in the country."
Foreign Investors Account for 60% of DC Office Building Sales MetLife and Norges Bank Keep Trend Going with Purchase of 555 12th St. NW
In 2013, foreign buyers accounted for 60.1% of single-asset office building sales in the District of Columbia, according to research conducted by Jones Lang LaSalle. That's well above the historic average, foreign buyers have accounted for 18.3% of transactions, and nearly double the 2012 investment level, when foreign buyers accounted for 30.7% of sales in Washington, DC. According to JLL, the findings support the DC office market's resilience and continuing attraction for large investors. "Despite sequestration, the federal government shutdown and the lack of a budget, DC had record foreign investment in 2013 at record low yields, further confirming the city‟s global prominence and long-term fundamental strength,” said Bill Prutting, managing director for Jones Lang LaSalle. “In a continuing trend, core downtown properties captured the largest share of transaction volume in 2013, exceeding 2012‟s volume by over 25%.” “In 2013 we saw capital sources, primarily from Asia and the Middle East, investing in Washington, and witnessed continued investment from Germany as all foreign capital worked toward geographic diversity. We expect these new investors to continue building on their newly-acquired positions, and new and diverse overseas capital sources to successfully invest in 2014,” Prutting added. That activity looks like it could continue this year as Norges Bank Investment Management (NBIM) and MetLife Inc. completed another investment in downtown Washington, DC, this month. NBIM is the asset manager for the Norwegian Government Pension Fund Global. In Washington, D.C., NBIM and MetLife have reportedly closed on their purchase of the Thurman Arnold Building at 555 12th Street, NW, adjacent to the Metro Center subway station one block north of Pennsylvania Avenue. A 12-story, free-standing office building with 782,000 square feet, the property is LEED Gold certified and one of the largest office buildings in the city. It is currently 85 percent leased to a variety of tenants, although law firm Arnold & Porter is expected to move out of 435,000 square feet in 2015 when it moves to its new headquarters location. The acquisition of the downtown D.C. office building is the third deal in MetLike/Norges Bank's recently formed joint venture. Combined with other recent acquisitions in Boston and San Francisco, the gross value of the joint venture is now approximately $1.7 billion. According to Jones Lang LaSalle, the average price paid for office buildings in downtown D.C. increased in 2013 by 27.7% to $580 per square foot, as compared with $454 per square foot in 2012. “The fundamentals of the Washington, DC office market are sound, and investors were driven to the solid cash flows and low levels of risk that core properties provide,” said Scott Homa, vice president research at Jones Lang LaSalle.
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Homa attributed the increase in pricing in 2013 to a large number of well-leased, well-located buildings being put up for sale last year, especially as a proportion of overall sales, while adding that the stabilization of the market and improved growth outlook for 2014 were contributing factors.
METRO WASHINGTON, DC STATS 2013
Sales volume: $4.5 billion, approximately a 16.1% decrease from the year-end volume of $5.4 billion in 2012 (excluding portfolio sales);
Price per square foot: $368, a marginal increase from the average of $359 for 2012;
Cap rates: averaged 5.9%;
Properties traded: 72, down from 74 in 2012 and below the 10-year average of 99 per year. Source: Jones Lang LaSalle
Starwood Buys San Diego Office Portfolio from Kilroy Kilroy Realty Corp. completed the disposition of 13 San Diego office properties in two tranches to an affiliate of Starwood Capital Group Global for total of $327 million. Starwood, a major private investment firm based in Greenwich, CT, purchased the buildings free and clear of existing debt. In aggregate, the portfolio included 1.1 million square feet and was approximately 91% leased and includes one-, two-, and three-story office buildings located in the suburban markets of Sorrento Mesa and Rancho Bernardo. Kilroy said it plans to reinvest the sale proceeds into its expanding West Coast office development program and other potential acquisition opportunities. The sale of 4910 Directors Place occurred in December 2013 and the sale of 12 other office buildings located at 10020 Pacific Mesa Boulevard, 6055 Lusk Avenue, 5010 and 5005 Wateridge Vista Drive, 15435 and 15445 Innovation Drive, and 15051, 15073, 15231, 15253, 15333 and 15378 Avenue of Science occurred in early January 2014. HFF marketed the property on behalf of Kilroy. HFF also arranged a variable-rate acquisition loan on behalf of the buyer through Wells Fargo Bank and CIBC as the senior lenders and Goldman Sachs as the mezzanine lender. The HFF investment sales team representing the seller was led by senior managing directors Nick Psyllos and Ryan Gallagher, and senior managing director and co-head of HFF‟s national office investment sales platform Michael Leggett. HFF‟s debt placement team was led by senior managing directors Tim Wright and Don Curtis and managing director Aldon Cole.
Ruby Tuesday Shuttering 30 Locations as Part of Repositioning Strategy After a comprehensive review of its cost structure including its restaurant real estate portfolio, restaurant operator Ruby Tuesday Inc. (NYSE:RT) will close 30 locations, 15 upon lease expiration. Of the 30 restaurant closures, 27 are expected to close in the first quarter of 2014 and three are expected to close next quarter. Eight of the restaurants to be closed are company-owned and will be marketed for sale after the closing date. “A critical piece of our brand transformation is lowering our overall cost structure and we will continue to aggressively work toward implementing cost savings in areas that do not negatively impact the guest experience,” said JJ Buettgen, chairman, president and CEO of Maryville, TN-based Ruby Tuesday. The company did not open or close any new Ruby Tuesday restaurants during the past quarter.
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Buettgen said all of the restaurants slated for closure have been operating at a loss. “There were more reasons to close those stores than just EBITDA,” Buettgen added. “Many of those stores had very negative sales trends. They weren‟t necessarily losing a lot of EBITDA but they were trending very negatively. We also felt those stores were in markets where we didn‟t have a good position in the market and we decided not to go forward.”
