The Metropolitan condominium tower in downtown Dallas has a private theater, a rooftop pool and will soon overlook a new park.
More than 140 units have been sold at prices starting at just under $200,000. Still, almost half the 4-year-old project is unsold.
So, the Metropolitan has joined a number of condominium projects to offer units for rent.
"It's a great deal for someone who is not sure if they want to be a downtown condo owner," said Christine Lutz of Garrison Partners Consulting, a Chicago firm that's marketing the Main Street project. "You can test drive the product."
It's also a way for condo developers to fill empty units at a time when sales are in a slump.
Condominium sales in North Texas are off almost 20 percent this year from 2008, which was already a down year for the projects. That's left many new deluxe units sitting idle.
Another high-profile condo project that has begun to lease is the posh Residences at Palomar on Mockingbird Lane at North Central Expressway. It has rented out 37 of the 44 remaining units. Fewer than 10 of the condos are in the hands of individual owners, tax records show.
The Palomar condos – which adjoin the namesake luxury hotel – are renting for $2,000 to $5,400 a month. Renters get to partake of the same amenities as the condo owners, including a fitness center, pool and outdoor terraces.
"We are very flexible and will lease anywhere between six months and two years, including a popular lease-to-own program," said Sam Gillespie, chief operating officer of building owner Behringer Harvard Opportunity REIT.
The downtown Metropolitan condo is also working on a lease-to-own plan, that will debut in January, Lutz said.
"At least 25 percent of our renters are interested in becoming homeowners," she said. "The others are just thrilled to be renting in a luxury building and occupy a new unit.
"No one is saying we wanted to be a rental building, but this has been a positive experience," Lutz said.
Renting out the costly condos is a short-term solution that doesn't make long-term sense.
"All they are doing is paying for the lights and the taxes – they are reducing the pain and getting some kind of income," said consultant Mike Puls with Foley & Puls. "They have to do something if they aren't selling them."
Of course, the last thing competing apartment owners want is competition from the luxury condo market. Apartment vacancies in North Texas are already over 10 percent and expected to go higher in the next year.
But the number of condos turned apartments is lower in Dallas than in many markets that have a glut of the for-sale units, said Greg Willett, vice president with Carrollton-based apartment analyst MPF Research.
"There are some locales out there where competition from rental condos remains a big deal for the apartment market's performance," Willett said. "For Dallas, condos comprise a very small share of the total multifamily stock, even in the heart of the city, so they don't have much impact on apartment sector fundamentals in the big picture."
A bigger challenge for the Dallas rental market is that construction of 4,000 new traditional apartment units will be completed in the next few months.
Saturday, November 28, 2009
Commercial transactions
Sales
A Dallas investment group has purchased the Comerica Bank building at 6510 Abrams Road in Dallas. The 72,263-square-foot office building was 55 percent leased. Craig Lewin and Patrick Giles of Marcus & Millichap Real Estate Investment Services negotiated the sale.
Leases
Wistron Infocomm Corp. leased 180,000 square feet in the DFW Trade Center at 4051 N. State Highway 121 in Grapevine. Trey Fricke and Reid Bassinger of Lee & Associates DFW arranged the lease with Cannon Green and Blake Kendrick of Stream Realty Partners.
Star AC Supply LLC leased 33,717 square feet of industrial space at 11011 Regency Crest Drive in Dallas. Ryan Wolcott and Michael T. Grant of TIG Real Estate Services Inc. negotiated the lease.
LCash Group Inc. leased 14,370 square feet of commercial space at 1124 Security Drive in Dallas. Timothy Veler and Jeff Mercer of Mercer Co. negotiated the lease with Brett McMillan of Vantage Cos.
PBS&J Corp. leased 11,072 square feet of office space at 3301 Airport Freeway in Bedford. David Walters and Will James of Jones Lang LaSalle negotiated the lease with Cliff Bogart of Keller Williams Commercial.
Optimum Packaging has leased 10,000 square feet of light industrial space in Falcon Centre at 1701 Falcon Drive in DeSoto from Owen Brothers Enterprises. Brian Pafford and Michael W. Spain of Bradford Companies negotiated the lease with VIP Realty.
The Berry Firm, a law firm, leased 9,472 square feet in the Adolphus Tower at 1412 Main St. in downtown Dallas. Stephen LaMure of Dominus negotiated the transaction with Henry S. Miller Co.'s Mark Boynton. The company is moving from the West End.
Bucher, Willis & Ratliff, an engineering, planning and architecture consulting firm, leased 9,000 square feet of office space in the Coit Central Tower at Coit Road and North Central Expressway in Dallas. Nathan Durham and Lauren Napper of PM Realty Group negotiated the lease with Melissa Holland of Jackson Cooksey.
Ashton Woods, a residential builder, leased 7,511 square feet for a design center in the Vista Point South office and industrial complex on State Highway 121 in Coppell. John Beach of Jackson & Cooksey negotiated the lease with Chris Jackson, Tim Terrell and Blake Kendrick of Stream Realty Partners.
Ardetech Industries leased 7,340 square feet of industrial space at 11526 Pagemill Road in Dallas. Ryan Wolcott and Michael T. Grant of TIG Real Estate Services Inc. negotiated the lease.
Alliant Insurance Services leased 5,381 square feet of office space in Prestonwood Tower at 5151 Belt Line Road in Dallas. Mike Cleary and Peter Danna of CB Richard Ellis negotiated the lease.
The Right Angle leased 5,000 square feet of commercial space at 1314 Motor Circle in Dallas. Timothy Veler and Jeff Mercer of Mercer Co. arranged the lease.
Worldwide Revenue Solutions leased 5,500 square feet of office space at 555 Republic Place in Plano from Republic Place Investors. Rick Rensi of CB Richard Ellis negotiated the lease.
A Dallas investment group has purchased the Comerica Bank building at 6510 Abrams Road in Dallas. The 72,263-square-foot office building was 55 percent leased. Craig Lewin and Patrick Giles of Marcus & Millichap Real Estate Investment Services negotiated the sale.
Leases
Wistron Infocomm Corp. leased 180,000 square feet in the DFW Trade Center at 4051 N. State Highway 121 in Grapevine. Trey Fricke and Reid Bassinger of Lee & Associates DFW arranged the lease with Cannon Green and Blake Kendrick of Stream Realty Partners.
Star AC Supply LLC leased 33,717 square feet of industrial space at 11011 Regency Crest Drive in Dallas. Ryan Wolcott and Michael T. Grant of TIG Real Estate Services Inc. negotiated the lease.
LCash Group Inc. leased 14,370 square feet of commercial space at 1124 Security Drive in Dallas. Timothy Veler and Jeff Mercer of Mercer Co. negotiated the lease with Brett McMillan of Vantage Cos.
PBS&J Corp. leased 11,072 square feet of office space at 3301 Airport Freeway in Bedford. David Walters and Will James of Jones Lang LaSalle negotiated the lease with Cliff Bogart of Keller Williams Commercial.
Optimum Packaging has leased 10,000 square feet of light industrial space in Falcon Centre at 1701 Falcon Drive in DeSoto from Owen Brothers Enterprises. Brian Pafford and Michael W. Spain of Bradford Companies negotiated the lease with VIP Realty.
The Berry Firm, a law firm, leased 9,472 square feet in the Adolphus Tower at 1412 Main St. in downtown Dallas. Stephen LaMure of Dominus negotiated the transaction with Henry S. Miller Co.'s Mark Boynton. The company is moving from the West End.
Bucher, Willis & Ratliff, an engineering, planning and architecture consulting firm, leased 9,000 square feet of office space in the Coit Central Tower at Coit Road and North Central Expressway in Dallas. Nathan Durham and Lauren Napper of PM Realty Group negotiated the lease with Melissa Holland of Jackson Cooksey.
Ashton Woods, a residential builder, leased 7,511 square feet for a design center in the Vista Point South office and industrial complex on State Highway 121 in Coppell. John Beach of Jackson & Cooksey negotiated the lease with Chris Jackson, Tim Terrell and Blake Kendrick of Stream Realty Partners.
Ardetech Industries leased 7,340 square feet of industrial space at 11526 Pagemill Road in Dallas. Ryan Wolcott and Michael T. Grant of TIG Real Estate Services Inc. negotiated the lease.
Alliant Insurance Services leased 5,381 square feet of office space in Prestonwood Tower at 5151 Belt Line Road in Dallas. Mike Cleary and Peter Danna of CB Richard Ellis negotiated the lease.
The Right Angle leased 5,000 square feet of commercial space at 1314 Motor Circle in Dallas. Timothy Veler and Jeff Mercer of Mercer Co. arranged the lease.
Worldwide Revenue Solutions leased 5,500 square feet of office space at 555 Republic Place in Plano from Republic Place Investors. Rick Rensi of CB Richard Ellis negotiated the lease.
Tuesday, November 24, 2009
Sheryl Jean: Real estate investment trusts appear to be recovering
Investors in real estate investment trusts have needed iron stomachs in the last two years, but it looks like REITs are recovering.
Some REITs have sold or forfeited properties (after defaulting or being on the verge of defaulting on loans) and taken other steps to restructure their balance sheets. This year, they've seen some easing of credit markets, total returns rise and share prices rebound somewhat. Many industry watchers think publicly traded REITs hit bottom March 6 after starting their decline in early February 2007.
REITs have been saddled with huge debt payments coming due as property values have fallen. They've also faced liquidity issues with declining revenue in a soft economy.
The big story this year is that some REITs issued new equity and debt, braving high interest rates to ease short-term debt burdens at a time when bank credit is pricey.
"A year ago, there was a lot of concern that REITs might not be able to meet their debt obligations," said Brad Case, vice president of research and industry information for the National Association of Real Estate Investment Trusts. "Starting in late March, REITs began tapping the capital markets for the money needed to meet debt obligations."
Raising more money
REITs raised $32 billion from about 120 equity and debt offerings this year through late October, up from $8 billion and 82 offerings in all of 2008, according to NAREIT.
In September, Irving-based FelCor Lodging Trust Inc. issued $636 million in new secured debt to pay off $515 million in debt due in 2011.
"That debt maturity was the single biggest risk to the company," said Steve Schafer, vice president of investor relations for FelCor. The REIT is also working with lenders to refinance about $275 million in mortgages due in 2010 to free up more cash flow, he said.
FelCor has seen its revenue and cash flow hurt by the economy- related decline in travel to its 85 hotels. Its net cash flow from operations fell by half in the first six months of 2009 from a year earlier.
'Delay and pray'
Some REITs are busy refinancing debt, buying cash flow hedges and arranging interest rate agreements. Barry Vinocur, editor of REIT Zone Publications, calls it the "extend and pretend, delay and pray" approach by lenders while property values are low.
Dallas-based Ashford Hospitality Trust Inc., which owns about 100 hotels, is refinancing some of its nearly $300 million of debt maturing in 2011 to offset cash flow declines. Its net cash flow from operations fell 26 percent in the first half of 2009 from a year earlier.
NAREIT's index of equity REITs was up 9 percent this year through the end of October vs. a 17.8 percent increase for the Standard & Poor's 500 stock index.
The MSCI US REIT price index nearly doubled from March 6 through the end of October. While prices have bounced back this year, they're still down from the market height of early 2007.
As the economy improves, look for publicly traded REITs to start buying property. That's a true sign of recovery.
Some REITs have sold or forfeited properties (after defaulting or being on the verge of defaulting on loans) and taken other steps to restructure their balance sheets. This year, they've seen some easing of credit markets, total returns rise and share prices rebound somewhat. Many industry watchers think publicly traded REITs hit bottom March 6 after starting their decline in early February 2007.
REITs have been saddled with huge debt payments coming due as property values have fallen. They've also faced liquidity issues with declining revenue in a soft economy.
The big story this year is that some REITs issued new equity and debt, braving high interest rates to ease short-term debt burdens at a time when bank credit is pricey.
"A year ago, there was a lot of concern that REITs might not be able to meet their debt obligations," said Brad Case, vice president of research and industry information for the National Association of Real Estate Investment Trusts. "Starting in late March, REITs began tapping the capital markets for the money needed to meet debt obligations."
Raising more money
REITs raised $32 billion from about 120 equity and debt offerings this year through late October, up from $8 billion and 82 offerings in all of 2008, according to NAREIT.
In September, Irving-based FelCor Lodging Trust Inc. issued $636 million in new secured debt to pay off $515 million in debt due in 2011.
"That debt maturity was the single biggest risk to the company," said Steve Schafer, vice president of investor relations for FelCor. The REIT is also working with lenders to refinance about $275 million in mortgages due in 2010 to free up more cash flow, he said.
FelCor has seen its revenue and cash flow hurt by the economy- related decline in travel to its 85 hotels. Its net cash flow from operations fell by half in the first six months of 2009 from a year earlier.
'Delay and pray'
Some REITs are busy refinancing debt, buying cash flow hedges and arranging interest rate agreements. Barry Vinocur, editor of REIT Zone Publications, calls it the "extend and pretend, delay and pray" approach by lenders while property values are low.
Dallas-based Ashford Hospitality Trust Inc., which owns about 100 hotels, is refinancing some of its nearly $300 million of debt maturing in 2011 to offset cash flow declines. Its net cash flow from operations fell 26 percent in the first half of 2009 from a year earlier.
NAREIT's index of equity REITs was up 9 percent this year through the end of October vs. a 17.8 percent increase for the Standard & Poor's 500 stock index.
The MSCI US REIT price index nearly doubled from March 6 through the end of October. While prices have bounced back this year, they're still down from the market height of early 2007.
As the economy improves, look for publicly traded REITs to start buying property. That's a true sign of recovery.
Dallas-area commercial real estate executives foresee a stagnant lending picture
Freeze. Crunch. Collapse.
Whatever you call it, commercial real estate credit markets are stuck on slow.
A lack of debt and equity has all but halted new deals and put many existing projects in danger of default.
After little property lending in 2009, real estate and investment industry execs are pondering where the credit markets go from here.
The consensus is that the turnaround will be slow and painful.
Craig Hall, founder and CEO, Hall Financial Group:
“Anecdotally, what I am hearing and seeing is that debt continues to be very, very hard to come by. That said, I would expect it would get somewhat better as time goes on.
“The problem is even if — which I think will happen — commercial debt and equity thaw a bit, for many it will be too little too late.
“The problems are so extreme that values are down 20 percent to 40 percent. And if and when lenders start making loans, they will want loans at more conservative ratios than in the past; i.e., 65 percent instead of 80 percent.”
Stuart Wernick, senior vice president, Grandbridge Real Estate Capital:
“For thawing to occur, we need to see some sort of stability in governmental intervention, an increase in lending confidence and asset re-evaluation in the marketplace.
“The re-emergence of new debt and equity to commercial real estate will begin as asset re-evaluation speeds up. The timing depends on whether or not there is a need by the owners to sell their assets.
“A significant amount of the loans have serious refinancing risks. Most of our intellectual talent in 2010 will be used on modifying and restructuring those loans.”
Susan R. Gwin, executive director, Capital Markets Group, Cushman & Wakefield of Texas Inc.:
“The verdict is out as to whether or not we will see a slow-moving upward trend or whether we will see the kind of vacillations we have seen in the stock market over the last few years. I agree that conditions will continue to weaken into 2010 as lenders face capital shortfalls. Will more banks likely stop the ‘pretend and extend’ on loans and finally be forced to shed troubled assets?
“I also believe we will see creativity step in, largely due to the fact that if conventional lending sources withdraw, other capital will step in at some point. On a weekly basis, we are seeing new private equity firms or commercial mortgage companies or mortgage REITS come on the scene.”
Scott R. Lynn, director and principal, Metropolitan Capital Advisors Ltd.:
“In the past 60 to 90 days, there has been some evidence that life insurance companies have started to come off the sidelines providing very conservative loans on high-grade, top-quality properties.
“Players seeking loans and equity are surprised at the higher cost of capital. The traditional model of pricing capital over a predetermined spread is out the window. Most capital providers are naming their price based on the dynamics of the transaction, property type and leverage along with sponsor track record plus the sponsors’ willingness to commit their own capital.
“Bottom line: There’s always money available; it’s just a question of price.”
Mark Dotzour, chief economist, Real Estate Center at Texas A&M University:
“The Office of the Comptroller of the Currency is turning up the heat on banks of all sizes all over the U.S. to reduce their lending exposure to every aspect of commercial real estate. Credit for homebuilders and subdivision developers will be even more hard to come by in 2010 than it was in 2009.
“A sizable default in commercial real estate mortgages on properties all over America is inevitable. Prices nationally have fallen somewhere between 30 and 40 percent. Most properties purchased in 2006 and 2007 had way too much leverage, and now the values are well below the mortgage amount.”
Jack Eimer, president, Central Region, Transwestern:
“It’s interesting to me that many people in our industry forecast recovery of our commercial real estate sector beginning as early as mid-2010. These same professionals will quickly agree that the dynamics of this recession are significantly worse than the late ’80s and early ’90s. Do we forget that we suffered through six to seven years of malaise before we experienced a recovery?
“With property values already decreasing 30 percent to 35 percent from 2007 highs and net income continuing to be hammered by rising unemployment, a significant portion of this debt will have to be recapitalized with new debt. Where is it coming from?”
Jack Crews, managing director, Capital Markets Group Jones Lang LaSalle:
“We expect new equity raises to continue for the next few years as investors work to get back in the game on assets that have had their values adjusted to the new underwriting and economic conditions. Private investors, directly or through broker dealer networks, lead the efforts to date.
“Additionally, real estate investment trusts have raised some $16 billion through secondary offerings in 2009 and are positioned well to take advantage of a market where cash will be king.
“Debt is still limited to better-quality assets and borrowers. We do not expect traditional life insurance company lenders to come back quickly and with a lot of debt, but we do expect them to come back. Commercial mortgage-backed securities providers will come back slowly and at a much smaller size as the overall financial markets rebound on Wall Street.”
Mark D. Gibson, executive managing director, Holliday Fenoglio Fowler LP:
“In terms of capital in general, there is abundant capital in both the equity and debt markets for assets which meet the buyer and lender underwriting. However, the real lack in commercial real estate is not capital but product; i.e., assets to sell or to lend against.
“We are forecasting continued monetary defaults and therefore more product coming to market over the next eight quarters, and we believe there is adequate capital to absorb same.
“The capital markets have healed, there is ample liquidity for well underwritten assets but a shortage of product. And finally net operating incomes will be declining over the next two years or until job growth emerges.”
Whatever you call it, commercial real estate credit markets are stuck on slow.
A lack of debt and equity has all but halted new deals and put many existing projects in danger of default.
After little property lending in 2009, real estate and investment industry execs are pondering where the credit markets go from here.
The consensus is that the turnaround will be slow and painful.
Craig Hall, founder and CEO, Hall Financial Group:
“Anecdotally, what I am hearing and seeing is that debt continues to be very, very hard to come by. That said, I would expect it would get somewhat better as time goes on.
“The problem is even if — which I think will happen — commercial debt and equity thaw a bit, for many it will be too little too late.
“The problems are so extreme that values are down 20 percent to 40 percent. And if and when lenders start making loans, they will want loans at more conservative ratios than in the past; i.e., 65 percent instead of 80 percent.”
Stuart Wernick, senior vice president, Grandbridge Real Estate Capital:
“For thawing to occur, we need to see some sort of stability in governmental intervention, an increase in lending confidence and asset re-evaluation in the marketplace.
“The re-emergence of new debt and equity to commercial real estate will begin as asset re-evaluation speeds up. The timing depends on whether or not there is a need by the owners to sell their assets.
“A significant amount of the loans have serious refinancing risks. Most of our intellectual talent in 2010 will be used on modifying and restructuring those loans.”
Susan R. Gwin, executive director, Capital Markets Group, Cushman & Wakefield of Texas Inc.:
“The verdict is out as to whether or not we will see a slow-moving upward trend or whether we will see the kind of vacillations we have seen in the stock market over the last few years. I agree that conditions will continue to weaken into 2010 as lenders face capital shortfalls. Will more banks likely stop the ‘pretend and extend’ on loans and finally be forced to shed troubled assets?
“I also believe we will see creativity step in, largely due to the fact that if conventional lending sources withdraw, other capital will step in at some point. On a weekly basis, we are seeing new private equity firms or commercial mortgage companies or mortgage REITS come on the scene.”
Scott R. Lynn, director and principal, Metropolitan Capital Advisors Ltd.:
“In the past 60 to 90 days, there has been some evidence that life insurance companies have started to come off the sidelines providing very conservative loans on high-grade, top-quality properties.
“Players seeking loans and equity are surprised at the higher cost of capital. The traditional model of pricing capital over a predetermined spread is out the window. Most capital providers are naming their price based on the dynamics of the transaction, property type and leverage along with sponsor track record plus the sponsors’ willingness to commit their own capital.
“Bottom line: There’s always money available; it’s just a question of price.”
Mark Dotzour, chief economist, Real Estate Center at Texas A&M University:
“The Office of the Comptroller of the Currency is turning up the heat on banks of all sizes all over the U.S. to reduce their lending exposure to every aspect of commercial real estate. Credit for homebuilders and subdivision developers will be even more hard to come by in 2010 than it was in 2009.
“A sizable default in commercial real estate mortgages on properties all over America is inevitable. Prices nationally have fallen somewhere between 30 and 40 percent. Most properties purchased in 2006 and 2007 had way too much leverage, and now the values are well below the mortgage amount.”
Jack Eimer, president, Central Region, Transwestern:
“It’s interesting to me that many people in our industry forecast recovery of our commercial real estate sector beginning as early as mid-2010. These same professionals will quickly agree that the dynamics of this recession are significantly worse than the late ’80s and early ’90s. Do we forget that we suffered through six to seven years of malaise before we experienced a recovery?
“With property values already decreasing 30 percent to 35 percent from 2007 highs and net income continuing to be hammered by rising unemployment, a significant portion of this debt will have to be recapitalized with new debt. Where is it coming from?”
Jack Crews, managing director, Capital Markets Group Jones Lang LaSalle:
“We expect new equity raises to continue for the next few years as investors work to get back in the game on assets that have had their values adjusted to the new underwriting and economic conditions. Private investors, directly or through broker dealer networks, lead the efforts to date.
“Additionally, real estate investment trusts have raised some $16 billion through secondary offerings in 2009 and are positioned well to take advantage of a market where cash will be king.
“Debt is still limited to better-quality assets and borrowers. We do not expect traditional life insurance company lenders to come back quickly and with a lot of debt, but we do expect them to come back. Commercial mortgage-backed securities providers will come back slowly and at a much smaller size as the overall financial markets rebound on Wall Street.”
Mark D. Gibson, executive managing director, Holliday Fenoglio Fowler LP:
“In terms of capital in general, there is abundant capital in both the equity and debt markets for assets which meet the buyer and lender underwriting. However, the real lack in commercial real estate is not capital but product; i.e., assets to sell or to lend against.
“We are forecasting continued monetary defaults and therefore more product coming to market over the next eight quarters, and we believe there is adequate capital to absorb same.
“The capital markets have healed, there is ample liquidity for well underwritten assets but a shortage of product. And finally net operating incomes will be declining over the next two years or until job growth emerges.”
Dallas commercial property likely to drag in 2010, panel says
Top commercial real estate executives aren't looking for a sharp rebound next year.
That was the consensus Friday at a real estate outlook panel organized by The Dallas Morning News.
"I don't think next year is going to be much different from this year," said Clay Smith, chief executive of retail property firm SRS Real Estate Partners. "You are going to see very little, if any, new retail development for a while.
"When you build it hoping they will come – well, they are not coming," Smith told several hundred commercial real estate industry members at the meeting.
The commercial real estate market has struggled from the ill effects of a national recession and credit crunch, and higher-than-predicted local job losses.
"Real estate depends on job growth," said D'Ann Petersen, a business economist with the Federal Reserve Bank of Dallas. She estimates job losses at nearly 115,000 in North Texas this year. "Our forecast doesn't bode well for housing and commercial real estate."
Commercial real estate is heavily reliant on major retailers, which Smith said are bracing for a dismal holiday shopping season.
"Clearly, there are some retailers that are hanging on," Smith said. "They have been betting on the holiday season to bring them out of it, and it's not going to do it."
Overall, he said, local and regional merchants are doing better.
Still, Smith said, Texas is in the best shape of any market across the country where his firm does business.
A recent flurry of office building leases in the Dallas area is a good sign of what businesses are expecting, said Jim Yoder, managing director of Jones Lang LaSalle.
"The panic has ended, and people are trying to position their business," Yoder said. "Unfortunately for us, there is not a lot of velocity in the market. Many tenants are still pushing off decisions."
Yoder said he had been hopeful that Dallas would "dodge the bullet" in the national recession.
"But our rents are down 10 percent, and 13 to 15 percent in some markets," he said. "We expect building vacancies to peak in mid to late 2010."
Larry Hamilton, one of the few developers in town still looking for loans to do deals, said the credit market remains frozen.
"We think we got close to the last construction loan in America in 2008 for our Aloft hotel," which just opened in downtown Dallas, Hamilton said.
Hamilton, whose company is the largest developer of downtown residential space, is trying to borrow about $20 million to kick off redevelopment of downtown's historic Lone Star Gas buildings. That's about half of what the project will cost.
"A lot of bankers are tempted – they'd like to do it," Hamilton said. "But something is blocking them."
That was the consensus Friday at a real estate outlook panel organized by The Dallas Morning News.
"I don't think next year is going to be much different from this year," said Clay Smith, chief executive of retail property firm SRS Real Estate Partners. "You are going to see very little, if any, new retail development for a while.
"When you build it hoping they will come – well, they are not coming," Smith told several hundred commercial real estate industry members at the meeting.
The commercial real estate market has struggled from the ill effects of a national recession and credit crunch, and higher-than-predicted local job losses.
"Real estate depends on job growth," said D'Ann Petersen, a business economist with the Federal Reserve Bank of Dallas. She estimates job losses at nearly 115,000 in North Texas this year. "Our forecast doesn't bode well for housing and commercial real estate."
Commercial real estate is heavily reliant on major retailers, which Smith said are bracing for a dismal holiday shopping season.
"Clearly, there are some retailers that are hanging on," Smith said. "They have been betting on the holiday season to bring them out of it, and it's not going to do it."
Overall, he said, local and regional merchants are doing better.
Still, Smith said, Texas is in the best shape of any market across the country where his firm does business.
A recent flurry of office building leases in the Dallas area is a good sign of what businesses are expecting, said Jim Yoder, managing director of Jones Lang LaSalle.
"The panic has ended, and people are trying to position their business," Yoder said. "Unfortunately for us, there is not a lot of velocity in the market. Many tenants are still pushing off decisions."
Yoder said he had been hopeful that Dallas would "dodge the bullet" in the national recession.
"But our rents are down 10 percent, and 13 to 15 percent in some markets," he said. "We expect building vacancies to peak in mid to late 2010."
Larry Hamilton, one of the few developers in town still looking for loans to do deals, said the credit market remains frozen.
"We think we got close to the last construction loan in America in 2008 for our Aloft hotel," which just opened in downtown Dallas, Hamilton said.
Hamilton, whose company is the largest developer of downtown residential space, is trying to borrow about $20 million to kick off redevelopment of downtown's historic Lone Star Gas buildings. That's about half of what the project will cost.
"A lot of bankers are tempted – they'd like to do it," Hamilton said. "But something is blocking them."
Alliance Data Systems moving from Telecom Corridor to Plano tower
Plano has landed a major corporate office relocation, the latest in a recent string of high-profile business moves to the city.
Alliance Data Systems Corp. is shifting its headquarters from the Telecom Corridor to the new One Legacy Circle office tower on the Dallas North Tollway near Legacy Drive.
More than 230 people will work for Alliance Data in 84,000 square feet of space on the top three floors of the eight-story building, which is in the Legacy Town Center retail, residential and office complex.
The company will also have large signs on top of the building.
"We started in earnest working on this deal over two years ago," said real estate broker Lawrence Gardner of OMS Strategic Advisors, who represents the high-tech firm. "Initially, we were looking at building a two- or three-story campus."
But developer Trammell Crow Co. successfully pitched its new West Plano office tower to the company, Gardner said.
The Alliance Data move next year will take the 214,000-square-foot office building to more than 80 percent leased, said Trammell Crow principal Dave Noble.
"We are seeing a lot of health care, insurance and financial services firms looking for office space in this area," Noble said. "I'm working with two more prospects for this building.
"I wish I had another floor to rent."
Alliance Data officials said the location in Legacy Town Center was a draw.
"We believe this location offers a truly unique environment and with many appealing amenities for our employees," said Alan Utay, general counsel and chief administrative officer.
Plano has landed almost 900,000 square feet of real estate leases this year.
"We are not experiencing the softness other areas are," said Sally Bane, executive director of the Plano Economic Development Board.
The city of Plano plans to provide an economic development grant to help pay for Alliance Data's move.
The company is currently on Waterview Parkway near the University of Texas at Dallas.
"It's a big win for the city of Plano and a great location for Alliance Data," said Cushman & Wakefield's Mike Wyatt, who also worked on the deal. "After 28 months, two code names, two directors of real estate and multiple lives, it's nice to have such a win."
Founded in 1996, Alliance Data provides data, research and marketing services for retailers, banks, hotels and other firms.
Because of the demand for office space in the Legacy project, Trammell Crow is looking at development plans for another building, said Denton Walker, Crow's senior managing director.
"It would probably be a floor or two taller than One Legacy Circle," Walker said, and it would be built at the corner of the tollway and Headquarters Drive.
Real estate brokers say that several large office tenants are looking at buildings and sites along the tollway in Plano.
One of them is Pizza Hut in Addison, which is considering a move farther north.
Alliance Data Systems Corp. is shifting its headquarters from the Telecom Corridor to the new One Legacy Circle office tower on the Dallas North Tollway near Legacy Drive.
More than 230 people will work for Alliance Data in 84,000 square feet of space on the top three floors of the eight-story building, which is in the Legacy Town Center retail, residential and office complex.
The company will also have large signs on top of the building.
"We started in earnest working on this deal over two years ago," said real estate broker Lawrence Gardner of OMS Strategic Advisors, who represents the high-tech firm. "Initially, we were looking at building a two- or three-story campus."
But developer Trammell Crow Co. successfully pitched its new West Plano office tower to the company, Gardner said.
The Alliance Data move next year will take the 214,000-square-foot office building to more than 80 percent leased, said Trammell Crow principal Dave Noble.
"We are seeing a lot of health care, insurance and financial services firms looking for office space in this area," Noble said. "I'm working with two more prospects for this building.
"I wish I had another floor to rent."
Alliance Data officials said the location in Legacy Town Center was a draw.
"We believe this location offers a truly unique environment and with many appealing amenities for our employees," said Alan Utay, general counsel and chief administrative officer.
Plano has landed almost 900,000 square feet of real estate leases this year.
"We are not experiencing the softness other areas are," said Sally Bane, executive director of the Plano Economic Development Board.
The city of Plano plans to provide an economic development grant to help pay for Alliance Data's move.
The company is currently on Waterview Parkway near the University of Texas at Dallas.
"It's a big win for the city of Plano and a great location for Alliance Data," said Cushman & Wakefield's Mike Wyatt, who also worked on the deal. "After 28 months, two code names, two directors of real estate and multiple lives, it's nice to have such a win."
Founded in 1996, Alliance Data provides data, research and marketing services for retailers, banks, hotels and other firms.
Because of the demand for office space in the Legacy project, Trammell Crow is looking at development plans for another building, said Denton Walker, Crow's senior managing director.
"It would probably be a floor or two taller than One Legacy Circle," Walker said, and it would be built at the corner of the tollway and Headquarters Drive.
Real estate brokers say that several large office tenants are looking at buildings and sites along the tollway in Plano.
One of them is Pizza Hut in Addison, which is considering a move farther north.
Uptown's Mondrian tower won't be sold despite foreclosure posting
One of Uptown's most prominent residential towers is posted for foreclosure. But the owners and lenders of the 20-story Mondrian Cityplace apartment high-rise say it won't be sold at next month's foreclosure auction.
FILE/DMN
The Mondrian Cityplace high-rise was built in 2003.
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Built in 2003, the eye-catching rental building at McKinney Avenue and Blackburn Street is a landmark overlooking the West Village complex.
The 218-unit building is owned by ZOM Cityplace LP, a partnership organized by Florida-based developer ZOM Inc.
Dutch lender SNSPF Interim Finance BV said in foreclosure filings this month that the building owner is in default on a $41.9 million loan made in August 2003, accord to the latest foreclosure data collected by Addison-based Foreclosure Listing Service.
The threatened foreclosure is an "unfortunate misunderstanding," ZOM officials said Thursday. A spokesman for the developer said the filing was made while "negotiating terms of an extension to an existing loan on the property."
Dallas attorney Bruce Coleman, who represents SNSPF, confirmed the status of the building.
"They have told me not to plan on foreclosing," Coleman said late Thursday. "The lender has instructed the trustee not to proceed with the December foreclosure sale pending an amicable resolution of the issues."
The Mondrian posting is the largest of 227 current foreclosure postings made against Dallas-Fort Worth area commercial and investment properties, Foreclosure Listing Service reports.
Barclays takes over Crescent Real Estate partnership
Ownership in some of the Dallas area's most prominent office towers has changed hands.
TOM FOX/DMN
The Fountain Place tower in downtown Dallas is one of 36 office buildings in which Crescent Real Estate Equities has ownership. Barclays Capital said Friday that it has acquired control of Fort Worth-based Crescent Real Estate Equities Limited Partnership.
Crescent has stakes in 36 office buildings nationwide – including Dallas' Crescent complex in Uptown and the Trammell Crow Center and Fountain Place towers downtown.
Barclays took over the Crescent assets after a unit of Morgan Stanley Real Estate was unable to meet debt payments on the properties. Exact terms of the transaction were not disclosed.
Barclays said that it has formed a partnership with former Crescent vice chairman John C. Goff to operate and own the real estate.
"Given his extensive knowledge of the Crescent portfolio, John is well suited to manage the company going forward," Barclays commercial real estate managing director Haejin Baek said in a statement.
Two years ago, Wall Street firm Morgan Stanley paid $6.5 billion to buy Crescent. But the investor was unable to meet $2 billion in debt payments due to Barclays this month.
Morgan Stanley had already taken hundreds of millions of dollars in value write-downs on the Crescent properties.
Crescent doesn't hold all of the ownership in its high-profile Dallas buildings.
In 2004, it sold a 60 percent stake in the Crescent complex to a JPMorgan Chase & Co. subsidiary. JPMorgan Chase also bought a 76 percent share of the Trammell Crow Center and Fountain Place.
The Dallas buildings are "some of the largest and best assets" in Crescent's portfolio, Baek said Friday. "They are high-quality, trophy office buildings."
Tenants in the properties won't see any shift in operations, she said.
And Barclays is committed to Crescent properties.
"We are taking a very long-term view," Baek said. "We are going to manage these buildings through this cycle in the real estate market."
Crescent owns and manages more than 17 million square feet of office space around the country. It also has investments in resort residential real estate and hotels.
TOM FOX/DMN
The Fountain Place tower in downtown Dallas is one of 36 office buildings in which Crescent Real Estate Equities has ownership. Barclays Capital said Friday that it has acquired control of Fort Worth-based Crescent Real Estate Equities Limited Partnership.
Crescent has stakes in 36 office buildings nationwide – including Dallas' Crescent complex in Uptown and the Trammell Crow Center and Fountain Place towers downtown.
Barclays took over the Crescent assets after a unit of Morgan Stanley Real Estate was unable to meet debt payments on the properties. Exact terms of the transaction were not disclosed.
Barclays said that it has formed a partnership with former Crescent vice chairman John C. Goff to operate and own the real estate.
"Given his extensive knowledge of the Crescent portfolio, John is well suited to manage the company going forward," Barclays commercial real estate managing director Haejin Baek said in a statement.
Two years ago, Wall Street firm Morgan Stanley paid $6.5 billion to buy Crescent. But the investor was unable to meet $2 billion in debt payments due to Barclays this month.
Morgan Stanley had already taken hundreds of millions of dollars in value write-downs on the Crescent properties.
Crescent doesn't hold all of the ownership in its high-profile Dallas buildings.
In 2004, it sold a 60 percent stake in the Crescent complex to a JPMorgan Chase & Co. subsidiary. JPMorgan Chase also bought a 76 percent share of the Trammell Crow Center and Fountain Place.
The Dallas buildings are "some of the largest and best assets" in Crescent's portfolio, Baek said Friday. "They are high-quality, trophy office buildings."
Tenants in the properties won't see any shift in operations, she said.
And Barclays is committed to Crescent properties.
"We are taking a very long-term view," Baek said. "We are going to manage these buildings through this cycle in the real estate market."
Crescent owns and manages more than 17 million square feet of office space around the country. It also has investments in resort residential real estate and hotels.
Dallas commercial property likely to drag in 2010, panel says
Top commercial real estate executives aren't looking for a sharp rebound next year.
That was the consensus Friday at a real estate outlook panel organized by The Dallas Morning News.
"I don't think next year is going to be much different from this year," said Clay Smith, chief executive of retail property firm SRS Real Estate Partners. "You are going to see very little, if any, new retail development for a while.
"When you build it hoping they will come – well, they are not coming," Smith told several hundred commercial real estate industry members at the meeting.
The commercial real estate market has struggled from the ill effects of a national recession and credit crunch, and higher-than-predicted local job losses.
"Real estate depends on job growth," said D'Ann Petersen, a business economist with the Federal Reserve Bank of Dallas. She estimates job losses at nearly 115,000 in North Texas this year. "Our forecast doesn't bode well for housing and commercial real estate."
Commercial real estate is heavily reliant on major retailers, which Smith said are bracing for a dismal holiday shopping season.
"Clearly, there are some retailers that are hanging on," Smith said. "They have been betting on the holiday season to bring them out of it, and it's not going to do it."
Overall, he said, local and regional merchants are doing better.
Still, Smith said, Texas is in the best shape of any market across the country where his firm does business.
A recent flurry of office building leases in the Dallas area is a good sign of what businesses are expecting, said Jim Yoder, managing director of Jones Lang LaSalle.
"The panic has ended, and people are trying to position their business," Yoder said. "Unfortunately for us, there is not a lot of velocity in the market. Many tenants are still pushing off decisions."
Yoder said he had been hopeful that Dallas would "dodge the bullet" in the national recession.
"But our rents are down 10 percent, and 13 to 15 percent in some markets," he said. "We expect building vacancies to peak in mid to late 2010."
Larry Hamilton, one of the few developers in town still looking for loans to do deals, said the credit market remains frozen.
"We think we got close to the last construction loan in America in 2008 for our Aloft hotel," which just opened in downtown Dallas, Hamilton said.
Hamilton, whose company is the largest developer of downtown residential space, is trying to borrow about $20 million to kick off redevelopment of downtown's historic Lone Star Gas buildings. That's about half of what the project will cost.
"A lot of bankers are tempted – they'd like to do it," Hamilton said. "But something is blocking them."
DMN
That was the consensus Friday at a real estate outlook panel organized by The Dallas Morning News.
"I don't think next year is going to be much different from this year," said Clay Smith, chief executive of retail property firm SRS Real Estate Partners. "You are going to see very little, if any, new retail development for a while.
"When you build it hoping they will come – well, they are not coming," Smith told several hundred commercial real estate industry members at the meeting.
The commercial real estate market has struggled from the ill effects of a national recession and credit crunch, and higher-than-predicted local job losses.
"Real estate depends on job growth," said D'Ann Petersen, a business economist with the Federal Reserve Bank of Dallas. She estimates job losses at nearly 115,000 in North Texas this year. "Our forecast doesn't bode well for housing and commercial real estate."
Commercial real estate is heavily reliant on major retailers, which Smith said are bracing for a dismal holiday shopping season.
"Clearly, there are some retailers that are hanging on," Smith said. "They have been betting on the holiday season to bring them out of it, and it's not going to do it."
Overall, he said, local and regional merchants are doing better.
Still, Smith said, Texas is in the best shape of any market across the country where his firm does business.
A recent flurry of office building leases in the Dallas area is a good sign of what businesses are expecting, said Jim Yoder, managing director of Jones Lang LaSalle.
"The panic has ended, and people are trying to position their business," Yoder said. "Unfortunately for us, there is not a lot of velocity in the market. Many tenants are still pushing off decisions."
Yoder said he had been hopeful that Dallas would "dodge the bullet" in the national recession.
"But our rents are down 10 percent, and 13 to 15 percent in some markets," he said. "We expect building vacancies to peak in mid to late 2010."
Larry Hamilton, one of the few developers in town still looking for loans to do deals, said the credit market remains frozen.
"We think we got close to the last construction loan in America in 2008 for our Aloft hotel," which just opened in downtown Dallas, Hamilton said.
Hamilton, whose company is the largest developer of downtown residential space, is trying to borrow about $20 million to kick off redevelopment of downtown's historic Lone Star Gas buildings. That's about half of what the project will cost.
"A lot of bankers are tempted – they'd like to do it," Hamilton said. "But something is blocking them."
DMN
Fitch downgrades Galleria towers debt; owner vows not to default
A high-profile Dallas office project has made the list of major U.S. properties that credit analysts are scrutinizing.
MILTON HINNANT/DMN
Cannon Commercial CEO Kam Mateen says, 'We have never defaulted before and are going to pay our loans.' Fitch Ratings singled out the Galleria office towers – three buildings with more than 1 million square feet next to the shopping mall – in a recent report.
Fitch downgraded and revised its outlook on the towers' financing when it looked at commercial mortgage debt held by a JPMorgan Chase Commercial Mortgage Securities Trust.
But the California-based owner of the properties said Friday that the loan is not in jeopardy.
"What the bond rating agency is saying is baseless," said Kam Mateen, CEO of Los Angeles-based Cannon Commercial Inc. "We are a very big company with lots of reserves.
"We have never defaulted before and are going to pay our loans."
Wall Street rating firm Fitch said in its report that the debt payments on the Galleria buildings are current and that the buildings have a high occupancy rate.
But Fitch also said in the report, issued last month, that it expects the interest-only loan to default and "incur losses of approximately 20 percent."
The loan matures in 2017.
Fitch based its forecast on anticipated declines in cash flow from the Galleria buildings and falling values.
The towers are considered among the most successful properties in the area around the Dallas North Tollway and LBJ Freeway.
Constructed between 1981 and 1990, they were purchased in mid-2008 by Cannon Commercial, which also owns other properties in Texas. The deal was one of the largest in North Texas in a decade and was estimated to be worth more than $300 million.
The buildings are about 90 percent leased, and major tenants include Fedex, Highland Capital and Invesco.
Mateen said that when the Galleria loans come due, his company will pay them off.
Cannon Commercial owns and manages more than 12 million square feet of real estate in six states.
With the shakeout in real estate values and lack of credit for refinancing, thousands of commercial properties around the country are facing debt problems.
It remains to be seen how much of this real estate will ultimately wind up in default or face foreclosure.
"The foreclosure activity has actually been slower than we anticipated," Jim Yoder, managing director at Jones Lang LaSalle, said Friday during a panel discussion sponsored by The Dallas Morning News.
The debt on the Galleria buildings was among 29 "loans of concern" that Fitch detailed in its October debt downgrade.
MILTON HINNANT/DMN
Cannon Commercial CEO Kam Mateen says, 'We have never defaulted before and are going to pay our loans.' Fitch Ratings singled out the Galleria office towers – three buildings with more than 1 million square feet next to the shopping mall – in a recent report.
Fitch downgraded and revised its outlook on the towers' financing when it looked at commercial mortgage debt held by a JPMorgan Chase Commercial Mortgage Securities Trust.
But the California-based owner of the properties said Friday that the loan is not in jeopardy.
"What the bond rating agency is saying is baseless," said Kam Mateen, CEO of Los Angeles-based Cannon Commercial Inc. "We are a very big company with lots of reserves.
"We have never defaulted before and are going to pay our loans."
Wall Street rating firm Fitch said in its report that the debt payments on the Galleria buildings are current and that the buildings have a high occupancy rate.
But Fitch also said in the report, issued last month, that it expects the interest-only loan to default and "incur losses of approximately 20 percent."
The loan matures in 2017.
Fitch based its forecast on anticipated declines in cash flow from the Galleria buildings and falling values.
The towers are considered among the most successful properties in the area around the Dallas North Tollway and LBJ Freeway.
Constructed between 1981 and 1990, they were purchased in mid-2008 by Cannon Commercial, which also owns other properties in Texas. The deal was one of the largest in North Texas in a decade and was estimated to be worth more than $300 million.
The buildings are about 90 percent leased, and major tenants include Fedex, Highland Capital and Invesco.
Mateen said that when the Galleria loans come due, his company will pay them off.
Cannon Commercial owns and manages more than 12 million square feet of real estate in six states.
With the shakeout in real estate values and lack of credit for refinancing, thousands of commercial properties around the country are facing debt problems.
It remains to be seen how much of this real estate will ultimately wind up in default or face foreclosure.
"The foreclosure activity has actually been slower than we anticipated," Jim Yoder, managing director at Jones Lang LaSalle, said Friday during a panel discussion sponsored by The Dallas Morning News.
The debt on the Galleria buildings was among 29 "loans of concern" that Fitch detailed in its October debt downgrade.
Construction to start on huge northeast Dallas shopping center
After almost four years of planning and preparation, construction will start next week on Trammell Crow Co.'s huge Timbercreek Crossing shopping center in northeast Dallas. Walmart, Sam's Club and J.C. Penney stores will anchor the 40-acre retail development at Northwest Highway and Skillman Street. An additional 60,000 square feet of shops and restaurants will also be built in the complex, which opens in 2011.
SONYA N. HEBERT/DMN
Ground will be broken next week on Timbercreek Crossing, which will include Walmart, Sam's Club and J.C. Penney stores. Developer Trammell Crow endured a long, sometimes contentious zoning debate on the 40 acres that once held apartments. "We are excited to bring such a unique opportunity to the market, especially now, when value is in such demand," said Denton Walker, Crow's senior managing director. "This will be one of North Dallas' highest-traffic retail locations when the anchors are open for business.
"East Dallas is an underserved market and has seen very little retail investment," Walker said. "This is a natural retail corner with good access."
Construction will start first on the Walmart and Sam's stores in a two-story building that includes a parking garage.
"It's not your typical Walmart," Walker said. "This will be unlike anything this area has seen as far as design and quality.
"We have to do a parking garage to accommodate all the customers – there is just not enough land," he said.
The Walmart and Sam's building will fill about 320,000 square feet.
"This unique two-story design that features a Sam's Club on the first level and a Walmart store on the second level gives us the ability to meet the needs of all our customers," Walmart spokeswoman Kellie Duhr said.
J.C. Penney will break ground next year on a 104,000-square-foot store, Walker said.
Most of the development should be open by late 2011.
"Bank of America has already committed to the project, and we are talking to some small shop retailers," Walker said.
The Timbercreek Crossing shopping center replaces almost 1,100 apartments that were demolished last year. Trammell Crow sent lease termination notices to about 600 families who lived at the 30-year-old complex at the end of 2007.
Crow got approval for the retail development after a long and sometimes contentious zoning debate.
"We are coming up on our fourth-year anniversary of owning this property," Walker said. "We've had some ups and downs along the way, but it is going to prove to be a huge success."
The shopping center will be the largest retail project started in North Texas this year. Most other developments have been put on hold because of economic and credit problems.
But there has been a flurry of recent retail expansions in the area around the new Crow center.
The site is east of the NorthPark Center shopping mall, which was almost doubled in size in 2006. And developers are completing the nearby Park Lane retail and mixed-use complex on North Central Expressway.
SONYA N. HEBERT/DMN
Ground will be broken next week on Timbercreek Crossing, which will include Walmart, Sam's Club and J.C. Penney stores. Developer Trammell Crow endured a long, sometimes contentious zoning debate on the 40 acres that once held apartments. "We are excited to bring such a unique opportunity to the market, especially now, when value is in such demand," said Denton Walker, Crow's senior managing director. "This will be one of North Dallas' highest-traffic retail locations when the anchors are open for business.
"East Dallas is an underserved market and has seen very little retail investment," Walker said. "This is a natural retail corner with good access."
Construction will start first on the Walmart and Sam's stores in a two-story building that includes a parking garage.
"It's not your typical Walmart," Walker said. "This will be unlike anything this area has seen as far as design and quality.
"We have to do a parking garage to accommodate all the customers – there is just not enough land," he said.
The Walmart and Sam's building will fill about 320,000 square feet.
"This unique two-story design that features a Sam's Club on the first level and a Walmart store on the second level gives us the ability to meet the needs of all our customers," Walmart spokeswoman Kellie Duhr said.
J.C. Penney will break ground next year on a 104,000-square-foot store, Walker said.
Most of the development should be open by late 2011.
"Bank of America has already committed to the project, and we are talking to some small shop retailers," Walker said.
The Timbercreek Crossing shopping center replaces almost 1,100 apartments that were demolished last year. Trammell Crow sent lease termination notices to about 600 families who lived at the 30-year-old complex at the end of 2007.
Crow got approval for the retail development after a long and sometimes contentious zoning debate.
"We are coming up on our fourth-year anniversary of owning this property," Walker said. "We've had some ups and downs along the way, but it is going to prove to be a huge success."
The shopping center will be the largest retail project started in North Texas this year. Most other developments have been put on hold because of economic and credit problems.
But there has been a flurry of recent retail expansions in the area around the new Crow center.
The site is east of the NorthPark Center shopping mall, which was almost doubled in size in 2006. And developers are completing the nearby Park Lane retail and mixed-use complex on North Central Expressway.
7-Eleven ramping up in DFW
If it seems like there’s a 7-Eleven on every corner now, just wait a few years.
The Dallas-based convenience store giant will add more than 75 stores in North Texas over the next three years, as part of a fast-track plan triggered by opportunities created in the commercial real estate downturn. The company will add 550 stores nationwide and about 4,000 worldwide during the same period, CEO Joe DePinto said.
“We’ve really positioned ourselves for this,” DePinto said. “We have a strong balance sheet, real estate values are down, and a lot of other retailers aren’t growing right now, so there’s a lot of real estate available that would have been cost-prohibitive in the past.”
The new North Texas stores will be built in Dallas, Tarrant, Collin, Denton and Rockwall counties, with new-store investment valued at about $50 million through 2001. The Slurpee retailer has 266 stores in the area now.
“We’re seeing a lot of good opportunities for growth,” said Dan Porter, 7-Eleven’s vice president of real estate and new store development. “With the market being what it is, landlords want a national, [solid] credit tenant, and we bring that to the table. In today’s environment, they want someone they can trust to pay the bills every month.”
7-Eleven has increased its real estate staff in Texas and hired CB Richard Ellis Inc. as its local brokerage. This is the first time the company has used an exclusive broker for its expansion plans.
Mike Friedman, CBRE senior vice president and Naveen Jaggi, senior managing director for CBRE’s national retail group, will lead the site selection efforts in North Texas and Southern California, where CBRE also has an exclusive agreement with 7-Eleven.
7-Eleven looks for prime, high-profile corners with easy access and preferably a right-hand turn-in for drivers headed to work, Friedman said. Competition for those corners was fierce until about a year ago, with banks and drug stores vying for the same space. That’s not the case anymore, he said.
“(7-Eleven has) a corporate mandate that they want to open more stores, so the timing is perfect in this market,” Friedman said. “They’re one of the very few national retailers that are on a massive expansion program.”
The local growth will include new development, leases, acquisitions and conversions of other retail outlets to 7-Eleven operations, Porter said. In addition, the company is looking for sites in shopping centers and downtown buildings for urban-walkup locations.
About half of the growth will come from converting or acquiring existing stores, 10% will come from ground-up development and the rest will be leases, Porter said.
The company also plans to remodel 3,000 stores nationwide, including many in North Texas, over the next two to three years, at a cost or $160,000 to $180,000 per store.
Strong balance sheet
Porter said 7-Eleven is able to expand in this economy because the company has reduced its debt and remained profitable despite the economic downturn. Though the private company does not release specifics about its finances, 7-Eleven’s total debt is about one-third what it was in 1999, Porter said.
“Strong companies continue to grow and take advantage of the market opportunities whether the economic times are good or bad,” Porter said. “We’ve brought down our debt over the years, and, with real estate values down and other retailers contracting, it’s a very good time to grow.”
The number of convenience stores in the United States fell by about 1,000 last year to 144,875, said Jeff Lenard of the Alexandria, Va.-based National Association of Convenience Stores. It was only the third time in 15 years that the store count has dropped, he said. Lenard expects store count will be flat or down slightly in 2009.
The drop in 2008 was caused by skyrocketing gas prices, which cut into retailers’ profit margin in the first half of the year, and the recession and credit crisis, which intensified in the second half, Lenard said. Now, companies that have cash and relatively little debt, including 7-Eleven, are positioned to grow, he said.
“With 7-Eleven and other companies, we’re seeing that since they have a clean balance sheet and they have some capital, they’re able to either acquire stores in distress very economically, or build their own new stores,” Lenard said.
Another advantage for 7-Eleven is that it doesn’t rely heavily on gas sales, like many of its competitors, Lenard said. Nationwide, convenience store sales, excluding gas, have increased slightly during the recession.
“That’s because convenience stores, above all, sell immediate consumption, and that’s the last thing to be affected,” Lenard said. “When you’re thirsty, you get something to drink. You don’t look at your retirement fund.”
Despite the real estate slowdown, 7-Eleven will face competition for sites from other convenience stores that are growing, including QuikTrip and RaceTrac, said Earl Harris, senior vice president and director of project leasing for Dallas-based retail real estate firm The Weitzman Group.
“7-Eleven’s biggest challenge will be finding locations,” Harris said. “They’re a great tenant to have. I think landlords will get creative to get them into their centers.”
The Dallas-based convenience store giant will add more than 75 stores in North Texas over the next three years, as part of a fast-track plan triggered by opportunities created in the commercial real estate downturn. The company will add 550 stores nationwide and about 4,000 worldwide during the same period, CEO Joe DePinto said.
“We’ve really positioned ourselves for this,” DePinto said. “We have a strong balance sheet, real estate values are down, and a lot of other retailers aren’t growing right now, so there’s a lot of real estate available that would have been cost-prohibitive in the past.”
The new North Texas stores will be built in Dallas, Tarrant, Collin, Denton and Rockwall counties, with new-store investment valued at about $50 million through 2001. The Slurpee retailer has 266 stores in the area now.
“We’re seeing a lot of good opportunities for growth,” said Dan Porter, 7-Eleven’s vice president of real estate and new store development. “With the market being what it is, landlords want a national, [solid] credit tenant, and we bring that to the table. In today’s environment, they want someone they can trust to pay the bills every month.”
7-Eleven has increased its real estate staff in Texas and hired CB Richard Ellis Inc. as its local brokerage. This is the first time the company has used an exclusive broker for its expansion plans.
Mike Friedman, CBRE senior vice president and Naveen Jaggi, senior managing director for CBRE’s national retail group, will lead the site selection efforts in North Texas and Southern California, where CBRE also has an exclusive agreement with 7-Eleven.
7-Eleven looks for prime, high-profile corners with easy access and preferably a right-hand turn-in for drivers headed to work, Friedman said. Competition for those corners was fierce until about a year ago, with banks and drug stores vying for the same space. That’s not the case anymore, he said.
“(7-Eleven has) a corporate mandate that they want to open more stores, so the timing is perfect in this market,” Friedman said. “They’re one of the very few national retailers that are on a massive expansion program.”
The local growth will include new development, leases, acquisitions and conversions of other retail outlets to 7-Eleven operations, Porter said. In addition, the company is looking for sites in shopping centers and downtown buildings for urban-walkup locations.
About half of the growth will come from converting or acquiring existing stores, 10% will come from ground-up development and the rest will be leases, Porter said.
The company also plans to remodel 3,000 stores nationwide, including many in North Texas, over the next two to three years, at a cost or $160,000 to $180,000 per store.
Strong balance sheet
Porter said 7-Eleven is able to expand in this economy because the company has reduced its debt and remained profitable despite the economic downturn. Though the private company does not release specifics about its finances, 7-Eleven’s total debt is about one-third what it was in 1999, Porter said.
“Strong companies continue to grow and take advantage of the market opportunities whether the economic times are good or bad,” Porter said. “We’ve brought down our debt over the years, and, with real estate values down and other retailers contracting, it’s a very good time to grow.”
The number of convenience stores in the United States fell by about 1,000 last year to 144,875, said Jeff Lenard of the Alexandria, Va.-based National Association of Convenience Stores. It was only the third time in 15 years that the store count has dropped, he said. Lenard expects store count will be flat or down slightly in 2009.
The drop in 2008 was caused by skyrocketing gas prices, which cut into retailers’ profit margin in the first half of the year, and the recession and credit crisis, which intensified in the second half, Lenard said. Now, companies that have cash and relatively little debt, including 7-Eleven, are positioned to grow, he said.
“With 7-Eleven and other companies, we’re seeing that since they have a clean balance sheet and they have some capital, they’re able to either acquire stores in distress very economically, or build their own new stores,” Lenard said.
Another advantage for 7-Eleven is that it doesn’t rely heavily on gas sales, like many of its competitors, Lenard said. Nationwide, convenience store sales, excluding gas, have increased slightly during the recession.
“That’s because convenience stores, above all, sell immediate consumption, and that’s the last thing to be affected,” Lenard said. “When you’re thirsty, you get something to drink. You don’t look at your retirement fund.”
Despite the real estate slowdown, 7-Eleven will face competition for sites from other convenience stores that are growing, including QuikTrip and RaceTrac, said Earl Harris, senior vice president and director of project leasing for Dallas-based retail real estate firm The Weitzman Group.
“7-Eleven’s biggest challenge will be finding locations,” Harris said. “They’re a great tenant to have. I think landlords will get creative to get them into their centers.”
Wednesday, November 18, 2009
Dallas economist: Commercial real estate sector will experience decline, but not as deep as in the 1980s
Vacancies in the commercial real estate sector are high, and weak cash flows do suggest that Federal Reserve Chairman Ben Bernanke’s warning this week about the commercial real estate market is a valid one, but North Texas won't see a repeat of the late 1980s, a Dallas-Fort Worth area economist said Tuesday.
Federal Reserve Chairman Ben Bernanke said in a speech this week that demand for commercial property is down, causing a “sharp deterioration in the credit quality of commercial real estate loans on the banks' books and on loans that back commercial mortgage-backed securities.”
Bernanke said smaller regional banks and community banks that have higher concentrations of commercial real estate loans may feel a deep pinch, and the market for securitization backed by CRE loans has pretty much closed. Bernanke warned of banks facing decisions on whether they will have to roll over maturing debt or foreclose on loans.
Economist Bernard Weinstein of Southern Methodist University said Tuesday, “I don’t think there’s any question commercial real estate will be struggling for the next year.”
He added that lenders and regulators are going to have to come up with some type of forbearance -- or some type of program to deal with some of the troubles brewing for mortgage backed securities on the commercial side of the market.
“I don’t think the overhang of commercial real estate is as threatening to the economy or to financial institutions as all the residential mortgage backed securities, but it is still a big number," he said.
Chuck Dannis, president of Dallas real estate appraisal firm Crosson Dannis Inc., elaborated on the sector's struggles saying the problem lies in the fact that many mortgage-backed securities will be maturing in the next year or two. Generally, when they mature, someone comes in and refinances the loan, Dannis said. But a dilemma has developed in that the market for refinancing has essentially dried up, he added.
"The borrower has two options: Put a bunch of money in there to make up the gap or give the property back," he said. "What lenders are trying to do is give borrowers time ... extending the loan."
He added that Dallas-Fort Worth has less to worry about than other reasons. Dannis said D-FW will feel pain in the commercial sector, but not as much because the area is still better when it comes to providing jobs, which is what eventually lifts activity in the commercial sector.
Going forward, Weinstein said he hopes to see the economy growing again by 2011, which will allow commercial properties to benefit from more businesses demanding leasing arrangements and new activity in the commercial market.
Despite some of the gloom and doom, Weinstein said the commercial real estate sector will not face what the Dallas-Fort Worth market experienced in the 1980s. He remembers banks getting hit hard and closing down in the late 1980s when commercial loans became a problem. Looking forward, he says it’s “not as bad as it was back then. The commercial real estate sector will recover ... as the economy improves, demand for commercial real estate will improve.”
Federal Reserve Chairman Ben Bernanke said in a speech this week that demand for commercial property is down, causing a “sharp deterioration in the credit quality of commercial real estate loans on the banks' books and on loans that back commercial mortgage-backed securities.”
Bernanke said smaller regional banks and community banks that have higher concentrations of commercial real estate loans may feel a deep pinch, and the market for securitization backed by CRE loans has pretty much closed. Bernanke warned of banks facing decisions on whether they will have to roll over maturing debt or foreclose on loans.
Economist Bernard Weinstein of Southern Methodist University said Tuesday, “I don’t think there’s any question commercial real estate will be struggling for the next year.”
He added that lenders and regulators are going to have to come up with some type of forbearance -- or some type of program to deal with some of the troubles brewing for mortgage backed securities on the commercial side of the market.
“I don’t think the overhang of commercial real estate is as threatening to the economy or to financial institutions as all the residential mortgage backed securities, but it is still a big number," he said.
Chuck Dannis, president of Dallas real estate appraisal firm Crosson Dannis Inc., elaborated on the sector's struggles saying the problem lies in the fact that many mortgage-backed securities will be maturing in the next year or two. Generally, when they mature, someone comes in and refinances the loan, Dannis said. But a dilemma has developed in that the market for refinancing has essentially dried up, he added.
"The borrower has two options: Put a bunch of money in there to make up the gap or give the property back," he said. "What lenders are trying to do is give borrowers time ... extending the loan."
He added that Dallas-Fort Worth has less to worry about than other reasons. Dannis said D-FW will feel pain in the commercial sector, but not as much because the area is still better when it comes to providing jobs, which is what eventually lifts activity in the commercial sector.
Going forward, Weinstein said he hopes to see the economy growing again by 2011, which will allow commercial properties to benefit from more businesses demanding leasing arrangements and new activity in the commercial market.
Despite some of the gloom and doom, Weinstein said the commercial real estate sector will not face what the Dallas-Fort Worth market experienced in the 1980s. He remembers banks getting hit hard and closing down in the late 1980s when commercial loans became a problem. Looking forward, he says it’s “not as bad as it was back then. The commercial real estate sector will recover ... as the economy improves, demand for commercial real estate will improve.”
Balfour Beatty Construction agrees to acquire SpawMaxwell Co.
Balfour Beatty Construction has reached an agreement to acquire SpawMaxwell Co., the largest Texas interior construction contractor.
Dallas-based Balfour officials said in a statement Friday that the deal will enhance the $2.4 billion company’s growth in the vertical construction market. Balfour has 1,600 employees in 10 offices nationwide.
Houston-based SpawMaxwell, founded in 1998, reported record-setting revenue of $350 million in 2008 and employs 141 in three Texas offices.
Balfour will use SpawMaxwell’s Houston location as one of five full-service division headquarters in the country, including Dallas.
“We couldn’t be more excited about this opportunity,” said Steve Mechler, SpawMaxwell president. “As our clients’ needs evolve, we too are evolving — to offer a much broader array of services and a more diversified set of career opportunities for our people.”
While SpawMaxwell will retain its brand, it will begin immediately operating under “SpawMaxwell – a Balfour Beatty company.”
SpawMaxwell was created in 1998 after the consolidation of David Spaw Co. and Maxwell Co. Construction.
Dallas-based Balfour officials said in a statement Friday that the deal will enhance the $2.4 billion company’s growth in the vertical construction market. Balfour has 1,600 employees in 10 offices nationwide.
Houston-based SpawMaxwell, founded in 1998, reported record-setting revenue of $350 million in 2008 and employs 141 in three Texas offices.
Balfour will use SpawMaxwell’s Houston location as one of five full-service division headquarters in the country, including Dallas.
“We couldn’t be more excited about this opportunity,” said Steve Mechler, SpawMaxwell president. “As our clients’ needs evolve, we too are evolving — to offer a much broader array of services and a more diversified set of career opportunities for our people.”
While SpawMaxwell will retain its brand, it will begin immediately operating under “SpawMaxwell – a Balfour Beatty company.”
SpawMaxwell was created in 1998 after the consolidation of David Spaw Co. and Maxwell Co. Construction.
Adolphus Tower gains The Berry Firm as tenant
The Adolphus Tower has gained a new office tenant in The Berry Firm PLLC.
The firm will be moving in January from its current location at Market-Ross Place on Market Street.
The law firm will be moving into the Adolphus Tower’s 23rd floor and a portion of the 22nd floor, which sits adjacent to the Adolphus Hotel in downtown Dallas. Adolphus Tower offers 182,000 square feet of space in a 26-story office tower.
The building will become the law firm’s Dallas-Fort Worth headquarters.
“Our client liked the building and we were able to hand him a package of terms that were aggressive and satisfied not only his immediate needs, but also the firm's needs well into the future,” said Stephen LaMure of Dominus Commercial, who handled the transaction for the tenant.
Mark Boynton served as a leasing agent for the Adolphus Tower.
The firm will be moving in January from its current location at Market-Ross Place on Market Street.
The law firm will be moving into the Adolphus Tower’s 23rd floor and a portion of the 22nd floor, which sits adjacent to the Adolphus Hotel in downtown Dallas. Adolphus Tower offers 182,000 square feet of space in a 26-story office tower.
The building will become the law firm’s Dallas-Fort Worth headquarters.
“Our client liked the building and we were able to hand him a package of terms that were aggressive and satisfied not only his immediate needs, but also the firm's needs well into the future,” said Stephen LaMure of Dominus Commercial, who handled the transaction for the tenant.
Mark Boynton served as a leasing agent for the Adolphus Tower.
Private investors buy Abrams Road building
A Dallas-based private investor group has purchased Comerica Bank Building, a 72,000-square-foot office property at 6510 Abrams Road in Dallas.
The purchase price was not disclosed. The property is appraised at $2.55 million on the Dallas Central Appraisal District tax roll.
Craig Lewin and Patrick Giles, investment specialists in Marcus & Millichap Real Estate Investment Service's Dallas office, represented the seller, Miranda Parters, a Dallas-based private investor partnership that had owned the building since 1992.
The building is about 55% occupied, with Comerica on the ground floor and assorted smaller businesses including insurance offices, accountants and lawyers spread throughout, Lewin said. More than 30 tenants occupy the building, he said.
Seven buyers made offers on the building during the six months it was on the market, Giles said. The sale closed Oct. 30.
The sale is one of only a handful of multi-tenant office buildings 10,000 square feet or larger to trade in the Dallas area this year, Giles said. More than 200 buildings in that category change hands in the area in a typical year, but the recession and lack of lender financing have put the kibosh on commercial property sales this year, he said.
Despite the slow market, the sale is the second for Lewin and Giles in recent weeks. Last month, the duo sold La Sierra Medical Office, a 58,500-square-foot office building at 5445 La Sierra Drive. They represented Miranda Partners in that sale as well.
"The market is definitely not picking up, but we've been able to find ways to move product," Giles said. "There's not a lot of debt (financing) available, but there's a ton of equity, and I think it's just about matching up the right buyer with the right piece of real estate."
The building was constructed in 1980 and sits on 2.7 acres north of Northwest Highway on Abrams Road.
The purchase price was not disclosed. The property is appraised at $2.55 million on the Dallas Central Appraisal District tax roll.
Craig Lewin and Patrick Giles, investment specialists in Marcus & Millichap Real Estate Investment Service's Dallas office, represented the seller, Miranda Parters, a Dallas-based private investor partnership that had owned the building since 1992.
The building is about 55% occupied, with Comerica on the ground floor and assorted smaller businesses including insurance offices, accountants and lawyers spread throughout, Lewin said. More than 30 tenants occupy the building, he said.
Seven buyers made offers on the building during the six months it was on the market, Giles said. The sale closed Oct. 30.
The sale is one of only a handful of multi-tenant office buildings 10,000 square feet or larger to trade in the Dallas area this year, Giles said. More than 200 buildings in that category change hands in the area in a typical year, but the recession and lack of lender financing have put the kibosh on commercial property sales this year, he said.
Despite the slow market, the sale is the second for Lewin and Giles in recent weeks. Last month, the duo sold La Sierra Medical Office, a 58,500-square-foot office building at 5445 La Sierra Drive. They represented Miranda Partners in that sale as well.
"The market is definitely not picking up, but we've been able to find ways to move product," Giles said. "There's not a lot of debt (financing) available, but there's a ton of equity, and I think it's just about matching up the right buyer with the right piece of real estate."
The building was constructed in 1980 and sits on 2.7 acres north of Northwest Highway on Abrams Road.
Tuesday, November 17, 2009
32 tenants added to Village at Fairview
Despite a difficult economy for many retailers, Dallas-based shopping center developer The MGHerring Group has lined up 32 new stores and restaurants that will open as part of the second phase of its Village at Fairview project beginning in March 2010.
The leasing flurry is being driven by strong sales by existing retailers and a good location, said Gar Herring, president of The MGHerring Group.
“The economy in Fairview and Allen is probably about as good as it gets in the entire United States,” Herring said. “The project really sticks to the fundamentals of what makes shopping centers successful — great demographics, strong access, large anchors, convenience.”
The Village at Fairview, at the northeast corner of U.S. 75 and Stacy Road in Fairview, is being developed in conjunction with The Village at Allen, which opened in October 2008. The two village centers, separated by Stacy Road, were designed and are being developed as one project. Upon completion, the 400-acre project will include 2 million square feet of retail and 1 million square feet of office, residential and hotel space.
The total square footage of the 32 new leases at The Village at Fairview is about 112,000 square feet.
“To be able to announce this many tenants right now is very exciting,” Herring said.
The leases show strong demand for retail in the Fairview and Allen area, which is good because it has a large amount of space to fill, said Steve Lieberman, CEO of The Retail Connection.
“What you’re basically seeing is the natural progression of a cycle where first the anchors open up, and now the small shops that are going to live off of those anchors are falling into place,” Lieberman said. “It shows there’s good underlying support and they’re getting some traction.”
Retailers that have already opened in the area are experiencing strong sales, attracting others, Lieberman said. But not all of the newcomers will flourish, he said: “I think that market will have a hard time supporting everything that’s being built there.”
The first phase of The Village at Fairview opened last ye ar with anchor stores J.C. Penney Co. Inc. and Macy’s. Previously announced second-phase anchors include Dillard’s, The Container Store, Village Roadshow Gold Class Cinemas and Whole Foods Market.
Exterior construction is almost compete on phase two, landscaping is being completed, and the shops and restaurants will soon be turned over to tenants for interior construction, Herring said.
Across Stacy Road, 11 new tenants opened at The Village at Allen this fall, and four more will open by the end of 2009. The Village at Allen is anchored by Best Buy, Dick’s Sporting Goods, Super Target and Toys“R”Us.
MGHerring Group also is having good luck on the south side of Dallas-Fort Worth. Uptown Village at Cedar Hill, a 615,000-square-foot center in Cedar Hill that opened in March, will add its fourth anchor, Old Navy, and 12 new retail stores and restaurants in November. The new tenants bring the total of 2009 openings at Uptown Village to more than 30 stores and restaurants.
DBJ
The leasing flurry is being driven by strong sales by existing retailers and a good location, said Gar Herring, president of The MGHerring Group.
“The economy in Fairview and Allen is probably about as good as it gets in the entire United States,” Herring said. “The project really sticks to the fundamentals of what makes shopping centers successful — great demographics, strong access, large anchors, convenience.”
The Village at Fairview, at the northeast corner of U.S. 75 and Stacy Road in Fairview, is being developed in conjunction with The Village at Allen, which opened in October 2008. The two village centers, separated by Stacy Road, were designed and are being developed as one project. Upon completion, the 400-acre project will include 2 million square feet of retail and 1 million square feet of office, residential and hotel space.
The total square footage of the 32 new leases at The Village at Fairview is about 112,000 square feet.
“To be able to announce this many tenants right now is very exciting,” Herring said.
The leases show strong demand for retail in the Fairview and Allen area, which is good because it has a large amount of space to fill, said Steve Lieberman, CEO of The Retail Connection.
“What you’re basically seeing is the natural progression of a cycle where first the anchors open up, and now the small shops that are going to live off of those anchors are falling into place,” Lieberman said. “It shows there’s good underlying support and they’re getting some traction.”
Retailers that have already opened in the area are experiencing strong sales, attracting others, Lieberman said. But not all of the newcomers will flourish, he said: “I think that market will have a hard time supporting everything that’s being built there.”
The first phase of The Village at Fairview opened last ye ar with anchor stores J.C. Penney Co. Inc. and Macy’s. Previously announced second-phase anchors include Dillard’s, The Container Store, Village Roadshow Gold Class Cinemas and Whole Foods Market.
Exterior construction is almost compete on phase two, landscaping is being completed, and the shops and restaurants will soon be turned over to tenants for interior construction, Herring said.
Across Stacy Road, 11 new tenants opened at The Village at Allen this fall, and four more will open by the end of 2009. The Village at Allen is anchored by Best Buy, Dick’s Sporting Goods, Super Target and Toys“R”Us.
MGHerring Group also is having good luck on the south side of Dallas-Fort Worth. Uptown Village at Cedar Hill, a 615,000-square-foot center in Cedar Hill that opened in March, will add its fourth anchor, Old Navy, and 12 new retail stores and restaurants in November. The new tenants bring the total of 2009 openings at Uptown Village to more than 30 stores and restaurants.
DBJ
Wednesday, November 11, 2009
Commercial Real Estate Debt Won't Be the Next Shoe to Drop, Economists Say
For months, the buzz has been that commercial real estate—with $3.4 trillion in outstanding debt, $1.4 trillion of which is coming due by the end of 2012—would precipitate the next leg in the credit crisis and possibly derail the broader economic recovery. To some, that mountain of debt coming due represents a clear parallel to the trillions of dollars in residential loans that helped destroy more than 100 banks and made the current recession the deepest and longest since the Great Depression.
The situation seems especially ominous given that commercial real estate values are off 40 percent from market peaks and credit markets are barely out of hibernation mode. That means indebted owners can't sell a property and repay their mortgage with deal proceeds. It also makes refinancing difficult. Today, borrowers have to put more of their own equity into a deal and lenders have tighter standards. Loan-to-value (LTV) ratios are not only lower than they were at market peaks, but have to be based on the current value of the property, which is lower than it was a few years back. That means a bank might want to replace an 80 percent LTV mortgage on a property once worth $10 million with a 60 percent LTV mortgage on a property now worth $6 million. To some people, this is sending off warning bells that commercial real estate may do as much damage to our financial system as residential mortgages did in 2007 and 2008.
Yet according to many real estate economists, this fear is largely misplaced. Commercial real estate debt will likely stall the recovery in the credit markets, they note, but because of a combination of factors, including the limited impact of commercial real estate loans on the overall economy, it won't bring about the same wave of distress as the housing downturn did.
"As far as the impact of commercial real estate on the overall economy, I don't think it's going to be the next shoe to drop," says Robert Bach, senior vice president and chief economist with Grubb & Ellis, a global commercial real estate services firm. "These problems are focused in regional banks and the Federal Deposit Insurance Corp. (FDIC) has a tested method of shutting those down on Friday and opening them on a Monday under the auspices of a bigger bank. These are not too big to fail banks. I don't see [commercial real estate] as an unmitigated disaster—I see it as a repeat of what happened in the 1990s, but the economy can handle it."
The FDIC, however, faces some concerns. A recent analysis by the agency's Office of Inspector General found that during the peak of the real estate market many banks ignored FDIC's 2006 recommendation that they keep commercial real estate holdings at less than 300 percent of total capital. Meanwhile, after dealing with 100 bank bankruptcies last year, today the agency is facing a deficit for the first time since 1933 and might lack the funds to deal with the potential fallout of a commercial real estate crisis.
In 2009, bank failures cost the agency $25 billion on top of the $20 billion it doled out in 2008. To deal with the money shortage, the FDIC is requiring banks to prepay $45 billion of insurance premiums by the end of this year. The premiums would cover the fourth quarter of this year and all of 2010, 2011 and 2012. Overall, the agency is projecting that bank failures between 2009 and 2013 will cost it $70 billion.
Meanwhile, more than $1.4 trillion in commercial real estate loans are scheduled to mature between 2009 and 2012, including $320 billion next year, according to ING Clarion Real Estate, a real estate investment management firm. That's coming at a time when new sources of refinancing remain scarce and valuations of commercial real estate properties are getting battered by weakening fundamentals. In the first half of 2009, the volume of distressed commercial assets grew 122 percent, ING reports, to $138 billion, including $32 billion in the retail sector.
The good news is that total volume of commercial real estate debt is about a third of the total amount of outstanding residential mortgage debt, which stands at approximately $10.9 trillion, according to the Federal Reserve Board's figures.
What's more, because the residential mortgage crisis affected almost every homeowner in a country with a homeownership rate of 67 percent, it had a devastating impact on consumer spending, which makes up about 70 percent of U.S. GDP. During the housing boom, Americans would refinance their homes and use the proceeds to shop till they dropped. Once refinancing became impossible, consumer spending dried up. By contrast, troubles in the commercial real estate industry might cause damage to banks and large institutions, but will have a limited effect on Main Street, says Clint Myers, strategist with Property & Portfolio Research, a Boston-based real estate research firm.
Any potential damage will also be mitigated by the fact that commercial real estate debt has been largely concentrated on the balance sheets of regional banks, rather than the big national players, and that most of the loans issued before 2005 feature solid underwriting, adds David J. Lynn, managing director with ING Clarion Real Estate.
Today, 54 percent of all commercial real estate loan defaults come from loans sponsored through commercial mortgage-backed securities (CMBS), which were a major source of real estate debt between 2005 and 2007. Loans issued by national and regional banks account for only 12 percent and 11 percent of all defaults, respectively.
After the collapse of Lehman Brothers, the government isn't likely to let another big national lending institution go under, so most of the damage from bad commercial real estate loans will be contained in the regional bank sector, Lynn notes. And the financial system could withstand the failure of several hundred regional banks without toppling over, adds Myers.
That's not to say that all those commercial loans won't cause serious problems in the credit markets. As long as banks avoid realizing losses on commercial mortgages, commercial asset values will remain artificially high, Myers says. That, in turn, will likely limit the flow of new credit into the commercial real estate market, leaving some owners cash-strapped.
Myers doubts the possibility of another large bankruptcy in the public REIT sector, since REITs have proven they can raise enough funds to survive through equity offerings. But there will likely be added pressure on privately-held real estate investment firms.
"The real stress in the system [will be on] the banks," he says. "The pace at which regional banks fail will probably accelerate from this year to the next. And what it will mean is that there will be very little new lending activity for commercial real estate and it's going to be very hard to grow." --Elaine Misonzhnik
The situation seems especially ominous given that commercial real estate values are off 40 percent from market peaks and credit markets are barely out of hibernation mode. That means indebted owners can't sell a property and repay their mortgage with deal proceeds. It also makes refinancing difficult. Today, borrowers have to put more of their own equity into a deal and lenders have tighter standards. Loan-to-value (LTV) ratios are not only lower than they were at market peaks, but have to be based on the current value of the property, which is lower than it was a few years back. That means a bank might want to replace an 80 percent LTV mortgage on a property once worth $10 million with a 60 percent LTV mortgage on a property now worth $6 million. To some people, this is sending off warning bells that commercial real estate may do as much damage to our financial system as residential mortgages did in 2007 and 2008.
Yet according to many real estate economists, this fear is largely misplaced. Commercial real estate debt will likely stall the recovery in the credit markets, they note, but because of a combination of factors, including the limited impact of commercial real estate loans on the overall economy, it won't bring about the same wave of distress as the housing downturn did.
"As far as the impact of commercial real estate on the overall economy, I don't think it's going to be the next shoe to drop," says Robert Bach, senior vice president and chief economist with Grubb & Ellis, a global commercial real estate services firm. "These problems are focused in regional banks and the Federal Deposit Insurance Corp. (FDIC) has a tested method of shutting those down on Friday and opening them on a Monday under the auspices of a bigger bank. These are not too big to fail banks. I don't see [commercial real estate] as an unmitigated disaster—I see it as a repeat of what happened in the 1990s, but the economy can handle it."
The FDIC, however, faces some concerns. A recent analysis by the agency's Office of Inspector General found that during the peak of the real estate market many banks ignored FDIC's 2006 recommendation that they keep commercial real estate holdings at less than 300 percent of total capital. Meanwhile, after dealing with 100 bank bankruptcies last year, today the agency is facing a deficit for the first time since 1933 and might lack the funds to deal with the potential fallout of a commercial real estate crisis.
In 2009, bank failures cost the agency $25 billion on top of the $20 billion it doled out in 2008. To deal with the money shortage, the FDIC is requiring banks to prepay $45 billion of insurance premiums by the end of this year. The premiums would cover the fourth quarter of this year and all of 2010, 2011 and 2012. Overall, the agency is projecting that bank failures between 2009 and 2013 will cost it $70 billion.
Meanwhile, more than $1.4 trillion in commercial real estate loans are scheduled to mature between 2009 and 2012, including $320 billion next year, according to ING Clarion Real Estate, a real estate investment management firm. That's coming at a time when new sources of refinancing remain scarce and valuations of commercial real estate properties are getting battered by weakening fundamentals. In the first half of 2009, the volume of distressed commercial assets grew 122 percent, ING reports, to $138 billion, including $32 billion in the retail sector.
The good news is that total volume of commercial real estate debt is about a third of the total amount of outstanding residential mortgage debt, which stands at approximately $10.9 trillion, according to the Federal Reserve Board's figures.
What's more, because the residential mortgage crisis affected almost every homeowner in a country with a homeownership rate of 67 percent, it had a devastating impact on consumer spending, which makes up about 70 percent of U.S. GDP. During the housing boom, Americans would refinance their homes and use the proceeds to shop till they dropped. Once refinancing became impossible, consumer spending dried up. By contrast, troubles in the commercial real estate industry might cause damage to banks and large institutions, but will have a limited effect on Main Street, says Clint Myers, strategist with Property & Portfolio Research, a Boston-based real estate research firm.
Any potential damage will also be mitigated by the fact that commercial real estate debt has been largely concentrated on the balance sheets of regional banks, rather than the big national players, and that most of the loans issued before 2005 feature solid underwriting, adds David J. Lynn, managing director with ING Clarion Real Estate.
Today, 54 percent of all commercial real estate loan defaults come from loans sponsored through commercial mortgage-backed securities (CMBS), which were a major source of real estate debt between 2005 and 2007. Loans issued by national and regional banks account for only 12 percent and 11 percent of all defaults, respectively.
After the collapse of Lehman Brothers, the government isn't likely to let another big national lending institution go under, so most of the damage from bad commercial real estate loans will be contained in the regional bank sector, Lynn notes. And the financial system could withstand the failure of several hundred regional banks without toppling over, adds Myers.
That's not to say that all those commercial loans won't cause serious problems in the credit markets. As long as banks avoid realizing losses on commercial mortgages, commercial asset values will remain artificially high, Myers says. That, in turn, will likely limit the flow of new credit into the commercial real estate market, leaving some owners cash-strapped.
Myers doubts the possibility of another large bankruptcy in the public REIT sector, since REITs have proven they can raise enough funds to survive through equity offerings. But there will likely be added pressure on privately-held real estate investment firms.
"The real stress in the system [will be on] the banks," he says. "The pace at which regional banks fail will probably accelerate from this year to the next. And what it will mean is that there will be very little new lending activity for commercial real estate and it's going to be very hard to grow." --Elaine Misonzhnik
Owners Increasingly Seeking LEED Certification for Existing Buildings
Despite the economic challenges of today’s market and economy, developer interest in the U.S. Green Building Rating System’s Leadership in Energy and Environmental Design program is on the rise. Notably, while still not quite as prevalent as LEED certification for new construction, LEED retrofitting of existing building continues to grow.
“LEED for Existing Building is a growing rating system,” a USGBC spokesperson told CPE. “Retrofitting buildings ideally would be most green, not having to tear-down and rebuild or build from scratch, but rather greening the existing stock of buildings which so desperately need energy retrofits, et cetera.”
As of Aug. 4 figures, which are the most recent available, there were 290 certified LEED for Existing Buildings projects, the spokesperson said.
Riverside Commons Building No. 2 – in the Dallas suburb of Irving, Texas – is one of those refurbished projects to earn the LEED certification as the first of its kind LEED-CS (core and shell) in the Dallas area.
Leadership at the Dallas-based Westmount Realty Capital L.L.C. already planned a $2 million building remodel when the idea to seek LEED certification arose. During the renovation project, the firm got an unexpected offer to buy the six-building complex form one of its tenants.
On Jan. 21, CPE reported on the sale of the 460,300-square-foot Class A property to two-year tenant Research in Motion, the Ontario, Canada-based maker of BlackBerry wireless devices. Riverside Commons is the location for the firm’s U.S. headquarters.
Following the sale, Westmount executives continued to pursue the LEED certification for the property, which was achieved for a minimal amount of additional expense of above the approximately $2 million of an already planned building remodel, Steve Kanoff, Westmount’s executive vice president and partner, told CPE.
“Not only was [seeking LEED certification] the right thing to do, but we felt at that time that it would also give us a competitive edge with other space in the marketplace,” Kanoff said. “We busted a common myth that building to LEED certification would be too costly. It is a common misconception that it is economically infeasible. The belief is that it is harder to achieve that certification in a cost efficient manner, but we proved that was not the case.”
Kanoff said the six-building complex had large floor plans and was seeking out larger tenants, many of whom would be required by policy to seek out green office space.
“Many of those larger corporations which would occupy that space are more likely to have green mandates,” he said. “Since we determined that going green would add only a slight premium to the refurbishment, we sought to make the project stand out in the crowd versus other available office space. If you aren’t green, you’re narrowing your potential pool of tenants and you’re not going to be competitive.”
“I think we did the right thing,” he said. “It was very little premium associated with it, too. If you’re not LEED compliant, you are eliminating a large pool of potential tenants especially when you realize that going green is not cost prohibitive,” Kanoff said. “Tenants have an infinite number of choices for office space in Dallas and we wanted to distinguish our property from the competition.”
“LEED for Existing Building is a growing rating system,” a USGBC spokesperson told CPE. “Retrofitting buildings ideally would be most green, not having to tear-down and rebuild or build from scratch, but rather greening the existing stock of buildings which so desperately need energy retrofits, et cetera.”
As of Aug. 4 figures, which are the most recent available, there were 290 certified LEED for Existing Buildings projects, the spokesperson said.
Riverside Commons Building No. 2 – in the Dallas suburb of Irving, Texas – is one of those refurbished projects to earn the LEED certification as the first of its kind LEED-CS (core and shell) in the Dallas area.
Leadership at the Dallas-based Westmount Realty Capital L.L.C. already planned a $2 million building remodel when the idea to seek LEED certification arose. During the renovation project, the firm got an unexpected offer to buy the six-building complex form one of its tenants.
On Jan. 21, CPE reported on the sale of the 460,300-square-foot Class A property to two-year tenant Research in Motion, the Ontario, Canada-based maker of BlackBerry wireless devices. Riverside Commons is the location for the firm’s U.S. headquarters.
Following the sale, Westmount executives continued to pursue the LEED certification for the property, which was achieved for a minimal amount of additional expense of above the approximately $2 million of an already planned building remodel, Steve Kanoff, Westmount’s executive vice president and partner, told CPE.
“Not only was [seeking LEED certification] the right thing to do, but we felt at that time that it would also give us a competitive edge with other space in the marketplace,” Kanoff said. “We busted a common myth that building to LEED certification would be too costly. It is a common misconception that it is economically infeasible. The belief is that it is harder to achieve that certification in a cost efficient manner, but we proved that was not the case.”
Kanoff said the six-building complex had large floor plans and was seeking out larger tenants, many of whom would be required by policy to seek out green office space.
“Many of those larger corporations which would occupy that space are more likely to have green mandates,” he said. “Since we determined that going green would add only a slight premium to the refurbishment, we sought to make the project stand out in the crowd versus other available office space. If you aren’t green, you’re narrowing your potential pool of tenants and you’re not going to be competitive.”
“I think we did the right thing,” he said. “It was very little premium associated with it, too. If you’re not LEED compliant, you are eliminating a large pool of potential tenants especially when you realize that going green is not cost prohibitive,” Kanoff said. “Tenants have an infinite number of choices for office space in Dallas and we wanted to distinguish our property from the competition.”
Tuesday, November 10, 2009
lauckgroup leases downtown space for HQ
Dallas-based interior architecture firm lauckgroup has signed a long-term lease in downtown Dallas for its headquarters.
The firm recently signed a lease for an 8,400-square-foot, first-floor office in Energy Plaza at 1601 Bryan St. The firm had been subleasing space on the 12th floor of Energy Plaza before moving to the first floor this week, said Anne Kniffen, principal-in-charge. Before moving to Energy Plaza, lauckgroup was at 2828 Routh St. in Uptown Dallas for seven years.
The new office is designed to house up to 25 employees.
lauckgroup has moved several times in its 25-year history. In 1984, it was located at 1900 N. Akard St. on the edge of downtown.
The completion of projects in the city's Arts District and the construction of the Woodall Rodgers Deck Park have created new excitement about being downtown, Kniffen said.
“It feels very good to be back in Dallas’ downtown core," Kniffen said. "This move really reflects our culture and personality."
lauckgroup’s new office is directly off of Energy Plaza’s central lobby and has views of Thanksgiving Square. The new space has been designed to serve as a test lab showcasing various product finishes, lighting and other elements used in office design, Kniffen said.
lauckgroup also has an office in Austin. The firm has recently completed interior spaces for Energy Future Holdings Corp., Sonnenschein Nath & Rosenthal law firm and Lincoln Property Co. in Dallas, as well as Hunton & Williams LLP in Austin and Dallas, and Caris Diagnostics Inc. in Irving.
Dallas Business Journal
The firm recently signed a lease for an 8,400-square-foot, first-floor office in Energy Plaza at 1601 Bryan St. The firm had been subleasing space on the 12th floor of Energy Plaza before moving to the first floor this week, said Anne Kniffen, principal-in-charge. Before moving to Energy Plaza, lauckgroup was at 2828 Routh St. in Uptown Dallas for seven years.
The new office is designed to house up to 25 employees.
lauckgroup has moved several times in its 25-year history. In 1984, it was located at 1900 N. Akard St. on the edge of downtown.
The completion of projects in the city's Arts District and the construction of the Woodall Rodgers Deck Park have created new excitement about being downtown, Kniffen said.
“It feels very good to be back in Dallas’ downtown core," Kniffen said. "This move really reflects our culture and personality."
lauckgroup’s new office is directly off of Energy Plaza’s central lobby and has views of Thanksgiving Square. The new space has been designed to serve as a test lab showcasing various product finishes, lighting and other elements used in office design, Kniffen said.
lauckgroup also has an office in Austin. The firm has recently completed interior spaces for Energy Future Holdings Corp., Sonnenschein Nath & Rosenthal law firm and Lincoln Property Co. in Dallas, as well as Hunton & Williams LLP in Austin and Dallas, and Caris Diagnostics Inc. in Irving.
Dallas Business Journal
Mutual of Omaha Bank opening new state headquarters in Dallas
Mutual of Omaha Bank said Thursday that it will open a new Texas headquarters in Dallas' Preston Center business district.
The bank leased 14,000 square feet of space in the lobby of the 5950 Sherry Lane building, which overlooks the Dallas North Tollway. Mutual of Omaha will open the facility next month.
"Our new Texas headquarters will serve as a focal point for our expansion in this high-growth area," said Robert Strong, president of Mutual of Omaha Bank's Texas market.
"North Dallas is a vibrant community where some of the area's leading companies are located, making it an ideal location for our Texas headquarters as well as our commercial banking operation."
Mutual of Omaha Bank is a subsidiary of the well-known insurance and financial services company of the same name. It does business in Arizona, California, Colorado, Nebraska, Nevada and Texas.
Greg Trout of Henry S. Miller negotiated the lease. Other tenants in the building include UBS PaineWebber and Chase Home Finance.
The Dallas Morning News
The bank leased 14,000 square feet of space in the lobby of the 5950 Sherry Lane building, which overlooks the Dallas North Tollway. Mutual of Omaha will open the facility next month.
"Our new Texas headquarters will serve as a focal point for our expansion in this high-growth area," said Robert Strong, president of Mutual of Omaha Bank's Texas market.
"North Dallas is a vibrant community where some of the area's leading companies are located, making it an ideal location for our Texas headquarters as well as our commercial banking operation."
Mutual of Omaha Bank is a subsidiary of the well-known insurance and financial services company of the same name. It does business in Arizona, California, Colorado, Nebraska, Nevada and Texas.
Greg Trout of Henry S. Miller negotiated the lease. Other tenants in the building include UBS PaineWebber and Chase Home Finance.
The Dallas Morning News
Design District building bought
A local investor has purchased a commercial building in the Dallas Design District at Edison Street and Interstate 35E.
The building is across the highway from Victory Park and next to a new apartment community.
Bill Tinsley of Ellis & Tinsley negotiated the sale.
The 27,824-square-foot building at 1550 Edison St. is on just under an acre of land.
The Dallas Morning News
The building is across the highway from Victory Park and next to a new apartment community.
Bill Tinsley of Ellis & Tinsley negotiated the sale.
The 27,824-square-foot building at 1550 Edison St. is on just under an acre of land.
The Dallas Morning News
Monday, November 2, 2009
First Baptist Dallas details $130M building plan
First Baptist Dallas announced plans Sunday for a $130 million capital campaign that would pay for what it claims will be the largest church construction project in U.S. history. Plans call for a state-of-the-art campus in the heart of downtown.
Sketches of the planned facility were revealed to members of First Baptist Dallas for the first time during Sunday services.
Dr. Robert Jeffress, senior pastor of First Baptist Dallas, told church members that prior to the Sunday launch of the capital campaign the church already had secured $62 million in pledges from donors—nearly half of what is needed to complete the project.
Dallas Mayor Tom Leppert, a member of the congregation, started Sunday services with a prayer session. During a press conference after the service, Leppert told members of the media the church is an integral part of the city’s plan to rejuvenate downtown Dallas.
“This is an important investment in downtown Dallas,” Leppert said. “It will be part of what we are trying to accomplish in creating an urban setting.”
Plans call for a new 3,000-seat worship center complete with state-of-the-art audio-visual technology, a fountain plaza with a highly visible cross at the center of a cascading fountain, a sixth-floor education building, two gymnasiums, an outdoor patio, green areas and a skywalk connecting the campus’ buildings.
Other facets of the project include a new parking garage with more than 500 additional spaces, a roof-top green area for outside concerts and events and a transparent glass-design that will illuminate the church’s various walkways and the historic First Baptist Church sanctuary. That worship area will remain standing and in full view of members walking inside the church as well as to downtown visitors who are driving past the campus.
Artist renderings and plans also indicate the original sanctuary’s steeple will be rebuilt to highlight the historical relevance of First Baptist, which was founded in 1868, to downtown Dallas.
The deacons of the church and the planning and development committee unanimously voted for the project, Jeffress said.
During Sunday’s services, Jeffress highlighted the benefits of building a significant structure in a down economy. Pricing in the current economy is attractive, he indicated, with the church estimating that for every $1 spent it will be getting $1.30 in construction value.
Jeffress said church leadership will present the final project to the congregation only if it meets capital goals by spring 2010. Anything short could result in some type of phasing in the project, Jeffress said. But with half the money already secured, Leppert and fellow First Baptist member Dr. Ron Anderson, who is CEO of Parkland Health & Hospital System, told the Dallas Business Journal in an interview they’re confident the church will be able to complete the project in one phase.
Anderson described the current down economy and the lower construction costs associated with it as a “window of opportunity” for the church, just as it is for Parkland Hospital, which is in the midst of rebuilding its campus in an effort scheduled to total more than a billion dollars.
“Phasing may end up costing more” for the First Baptist project, Anderson said. With this in mind, Anderson said the church thought carefully and decided it would be best to complete everything in one phase.
Citing research from an independent consultant, Jeffress said the largest church capital campaign in U.S. history had been valued at $80 million, making First Baptist's effort the largest.
The plan is coming at a time when downtown Dallas is rebuilding itself, with a new performing arts center now open for residents and visitors and plans in the works for the redevelopment of the Trinity River corridor.
But size and scope aren't First Baptist's only objectives.
“First Baptist’s building program is not an end in itself,” said Jeffress. “It is a means to an end — to better minister to and meet the needs of the community. First Baptist is firmly committed to spreading the message of God’s transforming love downtown.”
The Dallas-based architectural firm The Beck Group is designing the project and expects that, when completed, the First Baptist project will be certified to meet Leadership in Energy and Environmental Design's silver standard.
Q. How has pricing been affected by the sharp drop-off in sales volume?
Alvarado: Price discovery continues to be delayed as sellers are largely unwilling to accept current bids in the absence of a strong motivation to sell. Cap rates have generally increased by an estimated 250 basis points, at a minimum, across major U.S. markets, including Dallas, although direct transaction evidence to support the precise measure of expansion remains scarce. The higher cap rates and the resulting lower pricing are the result of the higher cost and decreased ability to leverage transactions, the deteriorating market fundamentals and the increased perception of risk.
While the market is still facing real hurdles to recovery, for the first time this year, we’re seeing more proper alignment between seller and buyer expectations. We’re hopeful that more U.S. owners and buyers adjust pricing to realistic levels. In Dallas, we are already seeing both distressed sales offerings as well as nondistressed sales that exhibit the new pricing paradigm.
Gillespie: Due to historically low transaction volumes, uncertainty reins regarding property values. Market values are difficult to establish when sales comparables are not available, and this contributes to the spread between bid and ask prices. Only distressed owners have a compelling motivation to sell during a severe market dislocation such as we are experiencing now. However, potential value compression is very market- and property-specific. The properties that are most likely to retain their value are core, stabilized assets located in desirable locations in major metros with high-growth potential.
Greene: Pricing an asset in this environment is very difficult. There have been very few transactions, and therefore it is difficult to derive a suitable list of comparables. So, my first response is that pricing has been thrown into disarray because of the lack of transactions. However, a lack of transactions has minimally impacted property values. A lack of transactions is the symptom, not the illness in today’s environment. The lack of volume has removed transparency and therefore increased perceived risk. People do not know what “market” pricing is at this time. Lack of volume is a symptom, albeit a symptom with consequences.
Prices are falling for two primary reasons. The first is eroding real estate fundamentals. The second is the absolute termination of available debt capital at terms such as 10 years, interest only, under 6% fixed rate, 85% loan to value that allowed buyers to pay high prices for properties and still have the numbers work.
Hardage: Real Capital Analytics and other sources tell us overall values have declined by 25% to 30%. We believe in some cases, even more than that, depending on an asset’s rent roll exposure to rollover and credit (meaning questionable or lack thereof). Acquisition cap rates for Dallas office properties are reported to average 9%. I believe these numbers are misleading because we haven’t had enough sales in 2009 to truly frame up where average values and cap rates are. Our firm has had stabilized assets in the market where all offers came in above a 9% cap rate and the seller wasn’t willing to sell. I believe that until more “distressed” sales actually occur where buyers achieve a high 9 or even double-digit cap rate at price-per-foot values of 50% or more below replacement cost, we will continue to witness a very lethargic sales market dotted with occasional, significantly discounted “trophy” assets that fit re-emerging REIT portfolios or long-term, institutional or private holders.
Kartalis: Pricing has really been affected by an oversupply of properties of all kinds and the fact that many of the properties are not performing well enough currently to attract buyers willing to pay 2007 prices. Again, recourse borrowing, high equity requirements, overbuilding and property performance have impacted sales volumes negatively. To make their numbers work, investors have driven cap rates up about 20% from 2007, higher or lower depending upon the type of property.
While the market is still facing real hurdles to recovery, for the first time this year, we’re seeing more proper alignment between seller and buyer expectations. We’re hopeful that more U.S. owners and buyers adjust pricing to realistic levels. In Dallas, we are already seeing both distressed sales offerings as well as nondistressed sales that exhibit the new pricing paradigm.
Gillespie: Due to historically low transaction volumes, uncertainty reins regarding property values. Market values are difficult to establish when sales comparables are not available, and this contributes to the spread between bid and ask prices. Only distressed owners have a compelling motivation to sell during a severe market dislocation such as we are experiencing now. However, potential value compression is very market- and property-specific. The properties that are most likely to retain their value are core, stabilized assets located in desirable locations in major metros with high-growth potential.
Greene: Pricing an asset in this environment is very difficult. There have been very few transactions, and therefore it is difficult to derive a suitable list of comparables. So, my first response is that pricing has been thrown into disarray because of the lack of transactions. However, a lack of transactions has minimally impacted property values. A lack of transactions is the symptom, not the illness in today’s environment. The lack of volume has removed transparency and therefore increased perceived risk. People do not know what “market” pricing is at this time. Lack of volume is a symptom, albeit a symptom with consequences.
Prices are falling for two primary reasons. The first is eroding real estate fundamentals. The second is the absolute termination of available debt capital at terms such as 10 years, interest only, under 6% fixed rate, 85% loan to value that allowed buyers to pay high prices for properties and still have the numbers work.
Hardage: Real Capital Analytics and other sources tell us overall values have declined by 25% to 30%. We believe in some cases, even more than that, depending on an asset’s rent roll exposure to rollover and credit (meaning questionable or lack thereof). Acquisition cap rates for Dallas office properties are reported to average 9%. I believe these numbers are misleading because we haven’t had enough sales in 2009 to truly frame up where average values and cap rates are. Our firm has had stabilized assets in the market where all offers came in above a 9% cap rate and the seller wasn’t willing to sell. I believe that until more “distressed” sales actually occur where buyers achieve a high 9 or even double-digit cap rate at price-per-foot values of 50% or more below replacement cost, we will continue to witness a very lethargic sales market dotted with occasional, significantly discounted “trophy” assets that fit re-emerging REIT portfolios or long-term, institutional or private holders.
Kartalis: Pricing has really been affected by an oversupply of properties of all kinds and the fact that many of the properties are not performing well enough currently to attract buyers willing to pay 2007 prices. Again, recourse borrowing, high equity requirements, overbuilding and property performance have impacted sales volumes negatively. To make their numbers work, investors have driven cap rates up about 20% from 2007, higher or lower depending upon the type of property.
Q. What needs to happen, in terms of lending practices and the supply-demand picture, for investment property sales to rebound?
Alvarado: The unprecedented level of public policy support, with $4 trillion already provided of $12 trillion pledged to restore the financial markets and create economic stimulus, has effectively halted an economic free fall, but it has also stalled a recovery in the commercial real estate capital markets as banks continue to extend maturities for their borrowers, avoiding foreclosure in a practice jokingly known as “delay and pray.” Banks need to write off or dispose of these loans to clear their balance sheets and create the capacity to write new loans. We also need to restart the CMBS market, which will require new standards for underwriting and for the rating of underlying securities.
A recovery in values could be delayed until 2012 and beyond, based upon the lag effect typically seen in the investment property market. The market will first need to see positive results in corporate earnings growth, followed by rehiring, which will lead to absorption of surplus lease space and, ultimately, leasing and absorption of new commercial space.
Dallas is faring better than most markets because it entered the down cycle with significantly better economic and real estate fundamentals than during any previous downturn. The Dallas economy is well-diversified and did not sustain the massive layoffs seen in other markets that have heavy concentrations in manufacturing or financial services. The market also had a historically low amount of commercial space under construction this time, which will limit the amount of oversupply. Finally, the Dallas market did not experience the exuberance seen in coastal markets where rents and prices doubled in less than five years.
Gillespie: Tenant demand will be the primary market driver for most commercial property types. Recovery in sales volume will require improvement in employment rates, leading to positive space absorption, which will spark some market optimism. As long as new construction remains controlled, we can expect low to moderate supply-side pressure on rents. Although access to capital is advantageous, we do not expect more favorable underwriting standards to be the primary market catalyst — it’s jobs.
Although there has been some slight movement recently, we expect underwriting standards to remain conservative when compared to the standards in place during the market peak. Moreover, we are not expecting lending practices to relax to their previous standards. Potential investors will have to adjust to the “new normal” characterized by lower loan to value (LTV) rates, higher debt service coverage requirements and higher implied cap rates. Investors with ready access to cash as well as the ability to rely on longstanding relationships with a more diverse group of lending sources will be in an advantaged position.
Greene: Those life (insurance) companies that have not re-entered the market as lenders need to do so. Also, the Fed must recognize that the commercial banks play a critical role in providing commercial real estate mortgages, especially short and intermediate term. To dramatically curtail their lending at this time would be a further detriment to an already difficult situation.
Long term, we must have an active commercial mortgage backed securities platform. The life companies and commercial banks combined do not have the capacity sufficient to fund the need for commercial mortgages. At least one major investment bank has announced its attempt to reintroduce a CMBS platform in 2010. It would be in an improved structure in which the originator retains a portion of the risk of the loan made. This would be a definite enhancement to the previous CMBS model.
We all know many lenders got too aggressive in underwriting loans back in the 2006-2007 time frame. Now, the pendulum has swung too far in the other direction, with underwriting being too conservative. Most lenders are looking to conservatively finance the same deal — institutional quality real estate with strong cash flow, great tenants, minimal vacancy and near-term rollover, etc. — the “very low risk” deal. Underwriting will eventually settle somewhere in the middle of these extremes, and this is already starting to occur. More real estate transactions will close in 2010 due to greater availability of viable financing.
Hardage: I understand the financial institutions wanting to delay and extend their troubled loans in hopes of an economic rebound that will slowly lift all boats. But until they and we “take the pain,” acknowledge the loss in value of a huge number of commercial loans and assets, then discount and sell those assets at pricing that attracts the mass of private equity that has been assembled, it doesn’t seem the market can heal, or that transaction volume will return. The expeditious formation of an “Resolution Trust Corp. No. 2” that can absorb and redistribute these assets is a concept that I believe must occur in order to free up or remake the lending institutions and restart transaction activity as well as new lending.
Kartalis: Well, everyone will tell you that the CMBS market or something similar must reappear on the radar screen or buyers will be limited on how much they can buy. There are institutions lending today, but loan-to-value ratios are low and personal guarantees are required. This means more cash is required up-front and personal guarantees pollute your financial statements as guarantees that reduce your borrowing power. Without non-recourse loans, large transactions will be difficult for all except institutions.
A recovery in values could be delayed until 2012 and beyond, based upon the lag effect typically seen in the investment property market. The market will first need to see positive results in corporate earnings growth, followed by rehiring, which will lead to absorption of surplus lease space and, ultimately, leasing and absorption of new commercial space.
Dallas is faring better than most markets because it entered the down cycle with significantly better economic and real estate fundamentals than during any previous downturn. The Dallas economy is well-diversified and did not sustain the massive layoffs seen in other markets that have heavy concentrations in manufacturing or financial services. The market also had a historically low amount of commercial space under construction this time, which will limit the amount of oversupply. Finally, the Dallas market did not experience the exuberance seen in coastal markets where rents and prices doubled in less than five years.
Gillespie: Tenant demand will be the primary market driver for most commercial property types. Recovery in sales volume will require improvement in employment rates, leading to positive space absorption, which will spark some market optimism. As long as new construction remains controlled, we can expect low to moderate supply-side pressure on rents. Although access to capital is advantageous, we do not expect more favorable underwriting standards to be the primary market catalyst — it’s jobs.
Although there has been some slight movement recently, we expect underwriting standards to remain conservative when compared to the standards in place during the market peak. Moreover, we are not expecting lending practices to relax to their previous standards. Potential investors will have to adjust to the “new normal” characterized by lower loan to value (LTV) rates, higher debt service coverage requirements and higher implied cap rates. Investors with ready access to cash as well as the ability to rely on longstanding relationships with a more diverse group of lending sources will be in an advantaged position.
Greene: Those life (insurance) companies that have not re-entered the market as lenders need to do so. Also, the Fed must recognize that the commercial banks play a critical role in providing commercial real estate mortgages, especially short and intermediate term. To dramatically curtail their lending at this time would be a further detriment to an already difficult situation.
Long term, we must have an active commercial mortgage backed securities platform. The life companies and commercial banks combined do not have the capacity sufficient to fund the need for commercial mortgages. At least one major investment bank has announced its attempt to reintroduce a CMBS platform in 2010. It would be in an improved structure in which the originator retains a portion of the risk of the loan made. This would be a definite enhancement to the previous CMBS model.
We all know many lenders got too aggressive in underwriting loans back in the 2006-2007 time frame. Now, the pendulum has swung too far in the other direction, with underwriting being too conservative. Most lenders are looking to conservatively finance the same deal — institutional quality real estate with strong cash flow, great tenants, minimal vacancy and near-term rollover, etc. — the “very low risk” deal. Underwriting will eventually settle somewhere in the middle of these extremes, and this is already starting to occur. More real estate transactions will close in 2010 due to greater availability of viable financing.
Hardage: I understand the financial institutions wanting to delay and extend their troubled loans in hopes of an economic rebound that will slowly lift all boats. But until they and we “take the pain,” acknowledge the loss in value of a huge number of commercial loans and assets, then discount and sell those assets at pricing that attracts the mass of private equity that has been assembled, it doesn’t seem the market can heal, or that transaction volume will return. The expeditious formation of an “Resolution Trust Corp. No. 2” that can absorb and redistribute these assets is a concept that I believe must occur in order to free up or remake the lending institutions and restart transaction activity as well as new lending.
Kartalis: Well, everyone will tell you that the CMBS market or something similar must reappear on the radar screen or buyers will be limited on how much they can buy. There are institutions lending today, but loan-to-value ratios are low and personal guarantees are required. This means more cash is required up-front and personal guarantees pollute your financial statements as guarantees that reduce your borrowing power. Without non-recourse loans, large transactions will be difficult for all except institutions.
Q. Commercial property sales dropped dramatically nationally, and in North Texas, in the first half of this year. When do you expect investment proper
Alvarado: It is likely that national transaction activity reached its absolute bottom in early 2009 and is now very gradually gaining momentum, with small quarter-on-quarter gains. Volume for office properties in third-quarter 2009 may surpass $10 billion, which would be the highest U.S. total since fourth-quarter 2008 when sales volume totaled $15 billion. Still, if current trends hold, overall transaction volume for office properties in 2009 may only reach approximately $40 billion, which would be the lowest total on record. The Dallas area has experienced a substantial decrease in sales, similar to the national trend. Through second-quarter 2009 sales volume for office properties in Dallas reached approximately $211 million compared with $855 million and $2.4 billion during the same periods in 2008 and 2007, respectively.
Our expectation is that sales volume will begin to increase at a faster pace in the second half of 2010 as larger pools of commercial mortgage-backed securities (CMBS) and commercial bank loans begin to mature. There has already been a significant number of assets entering the workout or special servicing stage, which should result in increased sales in 2010. We also expect the credit markets to ease in 2010 with new commercial and CMBS loan investment allocations.
Gillespie: Commercial property sales, both nationally and locally, can be expected to rebound in accordance with macroeconomic recovery. Comparing conditions in North Texas to many other commercial real estate markets in the United States, we are fortunate to have escaped the worst impact of the recession. However, like the national market, our local market continues to experience a general stalemate between bid and ask prices. Increased visibility of an economic recovery will be needed to significantly jump-start trading in commercial properties. When capital (investors) believe we are on the cusp of a recovery, transactions will resume.
Greene: Sales will rebound when buyers and sellers can agree on value and debt capital is more readily available to finance the transactions. Over time, sellers will feel more pressure to transact than buyers, so combined with deteriorating fundamentals, expect continued price reductions in the near and intermediate term. There is a human element to the sales equation as well. When there is an abrupt shift in value to the downside, it takes time for existing owners to get comfortable with the new environment. Over time, the peak valuation recedes into memory and people begin to focus again on what it takes to transact in the current environment. I believe that 2010 will be that transition year, so expect a very modest, restrained rebound relative to the 2009 bottom.
Also, the sales transaction rebound is being delayed by the lenders. Many lenders are opting to not foreclose on loans that come due but can not be paid off due to the borrower’s inability to sell or refinance. The loan may be at 100% loan-to-value or more, but the borrower can still meet debt service. So, the lenders are choosing the least painful path — extend the loan and hope for the best in the interim. This may simply prolong the problem, but short of federal intervention, this practice will likely remain for loans that can continue to meet debt service. This practice is curtailing the sales rebound, but the lenders’ actions are understandable.
Regarding debt availability, we already see some life insurance companies increasing their allocations for the remainder of 2009. The commercial banks remain under pressure from the Fed, but many continue to conservatively lend on commercial real estate.
Hardage: When we speak of sales activity, I think it goes without saying, we’re talking about “distressed” or “significantly discounted” sales activity. A majority of our industry seems to think it will be the middle of 2010 before significant transaction activity begins. I originally believed it would be the fourth quarter of 2009, but the banks and special servicers appear to be doing everything in their power to push the problems out into the future, most likely to 2011 or 2012. We know that approximately $236 billion of CMBS loans mature by 2013 and many of these will be maturity defaults or operating defaults that will not qualify for refinancing or extension. There is currently $49 billion of CMBS that has been handed to the special servicers, the policing entity that takes over when a loan gets into trouble or appears imminently headed that way. Of this $49 billion, more than $26 billion or 53% of these loans are currently delinquent — so you can see the problems are mounting. Banks hold more than twice the amount of mortgages as the CMBS market at a reported $1.7 billion. While bank loans are much harder to track than CMBS loans, most experts believe that bank loans are every bit as stressed as CMBS loans and their numbers are growing. Suffice it to say there are a lot of troubled loans that are going to have to be dealt with.
Kartalis: Actually, I’ve already seen a “glimmer” of a rebound beginning, and I think it will accelerate beginning in the fourth quarter. The Miller family sold Highland Park Village, a major investment property; our company recently syndicated and purchased an anchored retail center in Houston for its portfolio; and quite a few sales of smaller properties have been completed by our associates of freestanding pads and industrial buildings. Sellers are getting more realistic of their pricing.
Q. What needs to happen, in terms of lending practices and the supply-demand picture, for investment property sales to rebound?
Alvarado: The unprecedented level of public policy support, with $4 trillion already provided of $12 trillion pledged to restore the financial markets and create economic stimulus, has effectively halted an economic free fall, but it has also stalled a recovery in the commercial real estate capital markets as banks continue to extend maturities for their borrowers, avoiding foreclosure in a practice jokingly known as “delay and pray.” Banks need to write off or dispose of these loans to clear their balance sheets and create the capacity to write new loans. We also need to restart the CMBS market, which will require new standards for underwriting and for the rating of underlying securities.
A recovery in values could be delayed until 2012 and beyond, based upon the lag effect typically seen in the investment property market. The market will first need to see positive results in corporate earnings growth, followed by rehiring, which will lead to absorption of surplus lease space and, ultimately, leasing and absorption of new commercial space.
DBJ
Our expectation is that sales volume will begin to increase at a faster pace in the second half of 2010 as larger pools of commercial mortgage-backed securities (CMBS) and commercial bank loans begin to mature. There has already been a significant number of assets entering the workout or special servicing stage, which should result in increased sales in 2010. We also expect the credit markets to ease in 2010 with new commercial and CMBS loan investment allocations.
Gillespie: Commercial property sales, both nationally and locally, can be expected to rebound in accordance with macroeconomic recovery. Comparing conditions in North Texas to many other commercial real estate markets in the United States, we are fortunate to have escaped the worst impact of the recession. However, like the national market, our local market continues to experience a general stalemate between bid and ask prices. Increased visibility of an economic recovery will be needed to significantly jump-start trading in commercial properties. When capital (investors) believe we are on the cusp of a recovery, transactions will resume.
Greene: Sales will rebound when buyers and sellers can agree on value and debt capital is more readily available to finance the transactions. Over time, sellers will feel more pressure to transact than buyers, so combined with deteriorating fundamentals, expect continued price reductions in the near and intermediate term. There is a human element to the sales equation as well. When there is an abrupt shift in value to the downside, it takes time for existing owners to get comfortable with the new environment. Over time, the peak valuation recedes into memory and people begin to focus again on what it takes to transact in the current environment. I believe that 2010 will be that transition year, so expect a very modest, restrained rebound relative to the 2009 bottom.
Also, the sales transaction rebound is being delayed by the lenders. Many lenders are opting to not foreclose on loans that come due but can not be paid off due to the borrower’s inability to sell or refinance. The loan may be at 100% loan-to-value or more, but the borrower can still meet debt service. So, the lenders are choosing the least painful path — extend the loan and hope for the best in the interim. This may simply prolong the problem, but short of federal intervention, this practice will likely remain for loans that can continue to meet debt service. This practice is curtailing the sales rebound, but the lenders’ actions are understandable.
Regarding debt availability, we already see some life insurance companies increasing their allocations for the remainder of 2009. The commercial banks remain under pressure from the Fed, but many continue to conservatively lend on commercial real estate.
Hardage: When we speak of sales activity, I think it goes without saying, we’re talking about “distressed” or “significantly discounted” sales activity. A majority of our industry seems to think it will be the middle of 2010 before significant transaction activity begins. I originally believed it would be the fourth quarter of 2009, but the banks and special servicers appear to be doing everything in their power to push the problems out into the future, most likely to 2011 or 2012. We know that approximately $236 billion of CMBS loans mature by 2013 and many of these will be maturity defaults or operating defaults that will not qualify for refinancing or extension. There is currently $49 billion of CMBS that has been handed to the special servicers, the policing entity that takes over when a loan gets into trouble or appears imminently headed that way. Of this $49 billion, more than $26 billion or 53% of these loans are currently delinquent — so you can see the problems are mounting. Banks hold more than twice the amount of mortgages as the CMBS market at a reported $1.7 billion. While bank loans are much harder to track than CMBS loans, most experts believe that bank loans are every bit as stressed as CMBS loans and their numbers are growing. Suffice it to say there are a lot of troubled loans that are going to have to be dealt with.
Kartalis: Actually, I’ve already seen a “glimmer” of a rebound beginning, and I think it will accelerate beginning in the fourth quarter. The Miller family sold Highland Park Village, a major investment property; our company recently syndicated and purchased an anchored retail center in Houston for its portfolio; and quite a few sales of smaller properties have been completed by our associates of freestanding pads and industrial buildings. Sellers are getting more realistic of their pricing.
Q. What needs to happen, in terms of lending practices and the supply-demand picture, for investment property sales to rebound?
Alvarado: The unprecedented level of public policy support, with $4 trillion already provided of $12 trillion pledged to restore the financial markets and create economic stimulus, has effectively halted an economic free fall, but it has also stalled a recovery in the commercial real estate capital markets as banks continue to extend maturities for their borrowers, avoiding foreclosure in a practice jokingly known as “delay and pray.” Banks need to write off or dispose of these loans to clear their balance sheets and create the capacity to write new loans. We also need to restart the CMBS market, which will require new standards for underwriting and for the rating of underlying securities.
A recovery in values could be delayed until 2012 and beyond, based upon the lag effect typically seen in the investment property market. The market will first need to see positive results in corporate earnings growth, followed by rehiring, which will lead to absorption of surplus lease space and, ultimately, leasing and absorption of new commercial space.
DBJ
LEED Commercial Real Estate
I have high hopes for LEED/Green building to drive our future. I believe it allows a developer to have a huge market place as government regulations have started to require less water usage, energy usage and carbon emissions. My guess is that in the future this will not only be the general trend for new construction but existing buildings as well. It will allow existing buildings to sustain value. Very key areas that I see it most benefical is for attracting new tenants, building classification and saving investors on cost to rebuild older buildings to compete.
Areas like East Downtown will not be converted into parking lots as quickly inviting blight areas of town that once were. But rather maintain an even level of activity in older areas of development as it will make financial sense for commerce to continue in these ares. This could slow production but I think the major metropolitain are you march toward it will be the 1st area to sustain a continous rapid increase in population to sustain the "old" and the new development in its submarkets such as levels seen in early American migration like the gold rush.
Why? because of sustainability of the immediate enviornment for future generations to live in. We are in the information age now, that includes the hockey stick production curves in technology and rapid advancements in commerce never believed imaginable.
Our major set back is cost. Who will design the processes and source the work so to make LEED/Green development work in masses and become the best and highest use?
Here are some local Dallas opinions.
Q How has the economic downturn affected investor demand and tenant demand for “green” or Leadership in Energy and environmental design-certified buildings?
John Alvarado: Owners are more than ever interested in LEED certification and receiving high Energy Star scores. This is partly due to the economic downturn and partly despite it. Many tenants want to be in a green building but few are willing to pay a rent premium for it. When the leasing market was strong, most owners were unwilling to invest in LEED certification because they could not see a payback in terms of higher rent. With the economic downturn, owners are now concerned with attracting and retaining tenants, and sustainability is viewed as an important differentiator. Assuming that the rent and location of two competitive buildings are comparable, tenants will choose a green building over a traditional building. If sustainability means the difference between a fully leased building and one that is 25% vacant, the cost of LEED certification is negligible.
The problem for owners is that bringing an existing building up to LEED standards may require up-front cash that they don’t have, and have not been able to get in a credit-constrained market. Jones Lang LaSalle project managers are very busy conducting feasibility assessments, going through buildings to help owners quickly determine what level of certification is within reach and at what cost. In most well-run buildings, certification is affordable and owners give us the go-ahead to pursue certification.
Energy Star, the EPA’s energy benchmarking program, is also becoming very important to tenants making a location decision. A high Energy Star score translates into lower operating costs to the tenant. And owners are discovering that improving their Energy Star score does not have to cost much.
Sam Gillespie: When tenants select properties, cost and location are always the primary decision factors. A recession does little to alter these priorities. In all market cycles, tenants will use cost and location as their primary selection criteria. Sustainability becomes a factor only for tenants who need to further differentiate between properties that offer similar options in terms of cost and location. During a recession, green practices such as energy conservation can be a more important factor for owners striving to reduce operating costs than for tenants seeking a desirable space.
Greg Greene: The green movement continues to have legs, despite the economy. However, we see many instances where a tenant will prefer to be in the green building, but not at an occupancy cost premium. So, all things equal, tenants prefer the LEED certification and therefore investors will also. However, it does not appear the certification will translate to a significant increase in rents. It might attract the tenant that would otherwise go elsewhere.
P. Michael Hardage: To be honest, I’ve yet to have an investor request or even ask me if a building was green or LEED-certified. I understand that certain tenants are currently demanding that a building be LEED-certified, however management and leasing personnel tell us that most tenants want a green building but don’t want to pay extra for it. I definitely think it will become more important in the future, as it should. But in this environment, the most cost-effective option wins — green or no green.
Sam G. Kartalis: Other than the fact that new development/construction projects have “screeched” to a halt, the future will definitely be dominated by LEED-certified buildings.
DBJ
Areas like East Downtown will not be converted into parking lots as quickly inviting blight areas of town that once were. But rather maintain an even level of activity in older areas of development as it will make financial sense for commerce to continue in these ares. This could slow production but I think the major metropolitain are you march toward it will be the 1st area to sustain a continous rapid increase in population to sustain the "old" and the new development in its submarkets such as levels seen in early American migration like the gold rush.
Why? because of sustainability of the immediate enviornment for future generations to live in. We are in the information age now, that includes the hockey stick production curves in technology and rapid advancements in commerce never believed imaginable.
Our major set back is cost. Who will design the processes and source the work so to make LEED/Green development work in masses and become the best and highest use?
Here are some local Dallas opinions.
Q How has the economic downturn affected investor demand and tenant demand for “green” or Leadership in Energy and environmental design-certified buildings?
John Alvarado: Owners are more than ever interested in LEED certification and receiving high Energy Star scores. This is partly due to the economic downturn and partly despite it. Many tenants want to be in a green building but few are willing to pay a rent premium for it. When the leasing market was strong, most owners were unwilling to invest in LEED certification because they could not see a payback in terms of higher rent. With the economic downturn, owners are now concerned with attracting and retaining tenants, and sustainability is viewed as an important differentiator. Assuming that the rent and location of two competitive buildings are comparable, tenants will choose a green building over a traditional building. If sustainability means the difference between a fully leased building and one that is 25% vacant, the cost of LEED certification is negligible.
The problem for owners is that bringing an existing building up to LEED standards may require up-front cash that they don’t have, and have not been able to get in a credit-constrained market. Jones Lang LaSalle project managers are very busy conducting feasibility assessments, going through buildings to help owners quickly determine what level of certification is within reach and at what cost. In most well-run buildings, certification is affordable and owners give us the go-ahead to pursue certification.
Energy Star, the EPA’s energy benchmarking program, is also becoming very important to tenants making a location decision. A high Energy Star score translates into lower operating costs to the tenant. And owners are discovering that improving their Energy Star score does not have to cost much.
Sam Gillespie: When tenants select properties, cost and location are always the primary decision factors. A recession does little to alter these priorities. In all market cycles, tenants will use cost and location as their primary selection criteria. Sustainability becomes a factor only for tenants who need to further differentiate between properties that offer similar options in terms of cost and location. During a recession, green practices such as energy conservation can be a more important factor for owners striving to reduce operating costs than for tenants seeking a desirable space.
Greg Greene: The green movement continues to have legs, despite the economy. However, we see many instances where a tenant will prefer to be in the green building, but not at an occupancy cost premium. So, all things equal, tenants prefer the LEED certification and therefore investors will also. However, it does not appear the certification will translate to a significant increase in rents. It might attract the tenant that would otherwise go elsewhere.
P. Michael Hardage: To be honest, I’ve yet to have an investor request or even ask me if a building was green or LEED-certified. I understand that certain tenants are currently demanding that a building be LEED-certified, however management and leasing personnel tell us that most tenants want a green building but don’t want to pay extra for it. I definitely think it will become more important in the future, as it should. But in this environment, the most cost-effective option wins — green or no green.
Sam G. Kartalis: Other than the fact that new development/construction projects have “screeched” to a halt, the future will definitely be dominated by LEED-certified buildings.
DBJ
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