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April 2, 2007 E-mail this article
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Written by Mark Heschmeyer

CoStar Lead Street (April 1-7): Wind at Its Back

A Weekly Report on Future Trends and Plans, Acquisition/Disposition Strategies and Properties Under Contract

In CoStar Lead Street this week Leonard Sahling, head of research for ProLogis, says industrial demand is growing briskly, rents are ratcheting higher, and developers and their financing sources are exercising discipline and restraint. We also report on: major redevelopment plans in Manhattan, South Chicago and Detroit; Regency Centers; the latest facility opening decisions and properties under contract including 139 outpatient surgery centers in five states.

Industrial Markets: Wind at Its Back

ProLogis, a global provider of distribution facilities and services, released two semi-annual research reports on the state of the U.S. industrial property market.

The first, the company's U.S. Property Market Review, indicates continued strong market conditions for developers of industrial distribution space across the United States. The average industrial vacancy rate across the country's top 30 markets fell to 7.6% in the fourth quarter of 2006, compared to 8% the year before. Asking rents, meanwhile, increased 1.7% during the fourth quarter and 7.6% over the full year.

The second report, entitled U.S. Construction Pipeline Report, shows that new construction of warehouse/distribution facilities slowed during the last six months of 2006. New starts totaled 59 million square feet, compared with 81 million square feet in the first half of the year. For the year, total new starts equaled 2.7% of existing inventory.

"The nation's distribution property markets ended 2006 with the wind at their back," said Leonard Sahling, ProLogis first vice president of research. "Demand is growing briskly, rents are ratcheting higher, and developers and their financing sources are exercising discipline and restraint."

The two reports are based on market data compiled from a variety of sources, including ProLogis market officers, brokerage companies and data vendors. The information they contain covers the last six months of 2006 and the top 30 distribution markets across the U.S.

Detailed findings in the reports include the following,

· Net absorption totaled 33 million square feet during the fourth quarter, and 149 million square feet for the year. That translates into a 3.1% annual growth rate in total occupied space.
· Market conditions are so tight in some markets (e.g., Los Angeles, Las Vegas, South Florida and Tampa) that available space cannot meet the totality of existing demand, a fact that places a binding constraint on net absorption.
· The Los Angeles Basin remains the nation's healthiest distribution market, with an overall vacancy rate of about 3.5%. Other markets that posted significant improvements during the period were Atlanta, San Francisco, and Indianapolis.
· Speculative building accounted for 80% of total starts in the second half of the year, compared with 73% in the second half of 2005. And
· The run-up in construction costs has tapered off dramatically in recent months. Materials prices actually edged down by 1-2% during the second six months of 2006 after rising by 11% in the first half of the year.

"The nation's leasing markets for distribution facilities appear to be nearly fully recovered from the downturn triggered by the 2001-2002 recession," Sahling said. "Though some markets still have vacancy rates in the double-digit range, conditions are tight enough on average to maintain upward pressure on market rents and keep them growing at or above the rate of inflation."

Be Among the First To Read Lead Street

Nearly 2,500 people read CoStar Lead Street each week. If you want to be among the first to read each new CoStar Lead Street, e-mail me your name, title, company, city, state and e-mail address. You can reach me by clicking on the byline above or at mheschmeyer@costar.com

New York Acquires Farley Post Office in Penn Station Redevelopment

The Empire State Development Corp. acquired the James A. Farley Post Office Building from the United States Postal Service. The post office, a Beaux-Arts style building listed on the national historic register, will now become the gateway to the new Moynihan Station, a transit center that will improve on the existing Pennsylvania Station.

The James A. Farley Building, New York City's General Post Office, is at 421 Eighth Ave., between 31st and 33rd streets across the street from Pennsylvania Station and Madison Square Garden.

Farley will become a critical first component of the new Moynihan Station transportation hub that, when paired with a mixed-use private development, will open up Manhattan’s far West Side. The goal is to provide an improved commuter experience comparable to Grand Central Station, with enhanced connections to Amtrak, Long Island Railroad, New Jersey Transit and subway lines. Moynihan would also provide speedy rail access to two regional airports: John F. Kennedy and Newark Liberty.

The Landmark Farley Building is planned to be used as a new entrance and concourse for Penn Station by the Pennsylvania Station Redevelopment Corp., which is a subsidiary of the Empire State Development Corp. The expansion, supported in part by new retail space, is estimated to cost over $750 million.

The new "station" to be constructed within the historic James A. Farley Building is to be named after the late Sen. Daniel Patrick Moynihan.

New Jersey Transit would become the anchor tenant of the new Moynihan Station, slated to open to passengers in 2010. Moynihan Station will encompass 350,000 square feet of the historic James A. Farley Building, while the United States Postal Service will retain approximately 250,000 square feet.

In additions, plans are being drawn up for a new version of Madison Square Garden in Farley's western Annex. This building, which would face Ninth Avenue, would replace the current Garden a half-block away.

The approval by the PACB allows ESDC to borrow a mortgage loan - for up to $35 million - that will supplement other monies and was to allow Empire State to close on the acquisition by the end of March.

The total cost of the purchase is $230 million paid through an installment plan. Of that amount, the Port Authority of New York and New Jersey has committed $140 million. Another $35 million will come from the mortgage loan. ESDC has the remaining $55 million in place.

Southworks Acquires 118-Acre in South Chicago for Redevelopment

Southworks Development LLC will acquire approximately 118 acres of the former US Steel property currently owned by Solo Cup Co. The acquisition will add the parcel at 3333 E. 87th St. in Chicago to the adjacent land already under contract to Southworks.

The transaction is expected to close on Nov. 30, 2007.

Southworks, a joint venture between Lubert Adler Funds, McCaffery Interests Inc., and Westrum Development Co., will integrate the property into a comprehensive master plan that includes the nearly 400 additional acres of former US Steel land to the north.

Preliminary plans encompass a major shopping center and a variety of housing options including senior living, single-family and townhomes as well as high- and mid-rise multifamily units.

Southworks will also seek to attract institutional uses such as education, research, bio-medical and high technology facilities.

When Solo Cup purchased the property from US Steel in 2001, the company planned to build a new manufacturing facility on the site, but instead invested in the expansion of its 800,000-square-foot facility at 7575 S. Kostner following its acquisition of SF Holdings in 2004.

Detroit Lion's Former Stadium Goes up for Sale
By: Christopher Morgan

CB Richard Ellis Group Inc. has begun marketing the Pontiac Silverdome, the former home to the National Football League's Detroit Lions. The 127.5-acre property is in the heart of Oakland County, Michigan, one of the country's wealthiest communities.

The surrounding region offers a highly skilled labor force and currently is home to more than 600 domestic and international companies. The site possesses major transportation access via three large airports and highways M-59 and I-75. In addition, the Silverdome is in "Automation Alley," the United States' newest technology cluster, which houses more than 1,800 of the world's most dynamic and advanced technology-focused companies.

The large-scale parcel has substantial infrastructure already in place and is serviced by water, sanitary sewer, storm sewer, gas, electric, telephone and cable television. Though currently zoned residential, the site can be rezoned to accommodate the proposed development concept.

CBRE is managing the proposal solicitation process on behalf of the City of Pontiac. The firm expects significant interest from a wide range of regional, national, and international developers.

The CB Richard Ellis team of Michael Gerard, managing director, Mark Collins, senior vice president, Charles M. Ginster, senior vice president, Jeffrey Bell, first vice president, Paul W. Burke, vice president, and Myrna R. Burroughs, associate, will oversee the proposal process.

Regency Forms New Retail Fund

Regency Centers Corp. finalized the initial capital raise of Regency Retail Partners LP, an open-end, infinite-life fund with an additional $232 million of capital commitments, bringing total equity raised to $564 million, including Regency's contribution of $113 million. Regency's ownership in the fund is 20%.

The fund is expected to have a total capitalization of approximately $1.4 billion when fully invested with approximately 60% leverage.

Jacksonville, FL-based Regency anticipates that the $564 million in capital commitments will provide sufficient capital for Regency to fund its community shopping center development program for the next three years.

The fund will have the exclusive right to acquire all Regency-developed large format community centers upon stabilization that meet the fund's investment criteria.

Regency will act as the general partner of the fund and will receive asset management, property management and leasing fees consistent with its other institutional partnerships and will also have the potential for incentive performance participation.

At the second closing, Phases I and II of Vista Village were contributed into the fund at a purchase price of $61 million. Vista Village is a 184,000-square-foot center anchored by Krikorian Theaters, Staples, Sprouts Market and Linens 'N Things. The center is 100% leased.

M3 Capital Partners LLC and Eastdil Secured acted as financial advisors for Regency with respect to the fund. King & Spalding LLP acted as legal counsel to Regency.

Facility Locations, Expansions

To support its continued store growth, Citi Trends Inc. decided to expand its Darlington, SC, distribution center this year. This facility, which became fully operational in the first quarter of fiscal 2006, is approximately 285,000 square feet. Citi Trends will expand this facility by 250,000 square feet with an expected completion date of January 2008. With this expansion, its expects its distribution facilities will support store growth through 2010. "On distribution centers, we have for sometime in our longer-range plans contemplated that facilities would be Savannah, Darlington and some place in the Midwest," said Ed Anderson, CEO of Citi Trends. "Our Darlington facility has proved to be an extraordinarily productive facility for us. We like the property, the building, the labor force has just been very, very effective for us. And because we have 90 acres of land there and we're on two interstates, we think it makes a lot of sense for us to expand there. Our next expansion after Darlington will be into the Midwest, and that - we will start working on that sometime in 2009-2010."

Force Protection Inc. agreed to the rights and obligations of a lease on real and personal property at 57 Deming Way in Summerville, SC, from LATI USA Inc., in consideration for $4.1 million. LATI and Dorchester County, SC, were parties to the original facility lease, which covered approximately 24 acres. LATI has engaged Coppedge & Tisson/Cushman & Wakefield in the transaction.

Versant plans to move its corporate headquarters from Fremont, CA, to Redwood City, CA, on or about June 1, 2007. Versant's new headquarters will be at 255 Shoreline Drive, which the company will occupy under a 36-month lease. The facility will house the company's U.S. sales, marketing, support and administrative operations.

Be Among the First To Read Lead Street

Nearly 2,500 people read CoStar Lead Street each week. If you want to be among the first to read each new CoStar Lead Street, e-mail me your name, title, company, city, state and e-mail address. You can reach me by clicking on the byline above or at mheschmeyer@costar.com

Under Contract

HealthSouth Corp. agreed to sell its Surgery Division to TPG, a newly formed company, for approximately $945 million. The new company will be among the nation's largest providers of outpatient surgical services. HealthSouth's Surgery Division is comprised of a network of 139 outpatient surgery centers and three surgical hospitals that provide high quality surgical services to physicians and their patients across the country. The facilities are in 35 states, with a concentration of centers in California, Texas, Florida, North Carolina, and Alabama. The transaction should close in the third quarter 2007. Certain members of HealthSouth's senior management team including Mike Snow, chief operating officer, and Joe Clark, president of the surgery division, will be leaving HealthSouth to join the newly formed company, which is expected to remain headquartered in Birmingham, AL.

Crescent Real Estate Equities has amended its deal with Walton TCC Hotel Investors V LLC, to now include an Austin, TX, office building. Walton is acquiring the Fairmont Sonoma Mission Inn & Spa, the Sonoma Golf Club, the Ventana Inn & Spa, the Park Hyatt Beaver Creek Resort & Spa, the Omni Austin hotel, the Denver Marriott hotel and the Renaissance Houston hotel. Walton has now also agreed to buy an office property in Austin for another $75.5 million. It was not revealed which specific Crescent Austin office property listed for sale was now included in the deal:

· 301 Congress Ave., 418,338 SF, or
· 816 Congress Ave., 433,024 SF, or
· Austin Centre (701 Brazos St.), 343,664 SF.

Harvard Property Trust LLC assigned its rights to purchase a portfolio of three office buildings with approximately 456,000 of aggregate rentable square feet on approximately 22.8 acres in Santa Clara, CA, to Behringer Harvard Opportunity REIT I Inc. The seller is Sobrato Development Company No. 051, and Real Estate Trust at Community Foundation Silicon Valley. The contract price for Santa Clara Tech Center is $70 million. Santa Clara Tech Center consists of the following office buildings:

· A two-story office building containing approximately 153,000 rentable square feet;
· A two-story office building containing approximately 153,000 rentable square feet; and
· A one-story office building containing approximately 150,000 rentable square feet.

Arena Pharmaceuticals Inc. agreed to sell BioMed Realty LP, a Maryland limited partnership, property including: 6114 Nancy Ridge Drive, 6118 Nancy Ridge Drive, and 6154 Nancy Ridge Drive, and Arena's option to purchase 6122-6124-6126 Nancy Ridge Drive. All of the properties are in San Diego, CA. BioMed will pay about $50.15 million. In addition, if Arena elects to complete certain improvements on the properties, BioMed will pay an additional $16 million. The consummation of the sale of the properties and the purchase option is expected to occur in the second quarter of 2007 and is subject to the execution of lease agreements under which Arena would lease back the properties. The leases will be triple net leases for 20 years, and we will have two consecutive options to extend the terms of the leases for five years each. Initial base rent for the properties at 6114, 6118 and 6154 Nancy Ridge Drive is expected to be an aggregate of approximately $376,115 per month, which will be subject to an annual upward adjustment of 2.5% per year. Arena would continue to lease a portion of the property at 6122-6124-6126 Nancy Ridge Drive from the current owner through the expiration of the current lease, at which time it expects BioMed will exercise the purchase option and rent will commence under a lease with BioMed. In addition, Arena will have the option to repurchase the properties.

KBS Real Estate Investment Trust Inc. agreed to acquire two four-story office buildings containing 170,436 rentable square feet from CLPA-Kensington LP. The purchase price of the Kensington Office Buildings is $28 million plus closing costs. The Kensington Office Buildings are on approximately 9 acres at 1600 and 1650 Highway 6 South in Sugar Land, TX. They were completed in 1998 and are 85% leased by 35 tenants at March 2007, including Noble Drilling Services Inc. (12.6%), one of the largest offshore drilling contractors in the world. The current aggregate annual base rent is approximately $3 million. As of March 2007, the current weighted-average remaining lease term was approximately 2.6 years. The Noble Drilling Services lease expires in July 2011 and the average annual rental rate for the Noble Drilling Services lease over the remaining lease term is $21 per square foot. Noble Drilling Services has the right, at its option, to terminate its lease effective Nov. 30, 2009, with nine months notice and upon payment of a termination fee.

NNN Healthcare/Office REIT Inc. plans to acquire Yorktown Medical Center and Shakerag Medical Center in, Fayette County, GA. Originally built in 1987 and expanded in 1995, Yorktown Medical Center in Fayetteville is a two-story multi-tenant building on approximately 10 acres. Shakerag Medical Center in Peachtree City is a three-story multi-tenant building on approximately three acres and was originally built in 1994. The two buildings together contain approximately 115,000 square feet of gross leasable area, of which 85% is currently leased. Two subsidiaries of Piedmont Healthcare currently lease approximately 74,000 square feet, or 64%, of the buildings' gross leasable area. The buildings' other tenants consist primarily of health care providers. The purchase price for the Fayette property from Yorktown Building Holding Co. is $21.5 million. No price was available for Shakerag.

Sonesta International Hotels Corp. agreed to acquire Chateau Sonesta Hotel, in New Orleans, LA. The 250-room, full service hotel is at the corner of Iberville and Dauphine streets in New Orleans' French Quarter. Sonesta has operated the Hotel under a management agreement with the seller since it opened in April 1995. The purchase price for the property is estimated at approximately $18 million. As part of the transaction, the company will assume a ground lease with the Canal Street Development Corp. and other ground leases comprising the hotel. Current annual fixed rent payments due under these leases are approximately $500,000. The transaction is expected to close within 60 days.

South Hanley Road LLC, a Missouri limited liability company, agreed to purchase of the headquarters building of Tripos Inc. at 1699 South Hanley Road in Brentwood, MO. The deal is expected to close by April 11. The sale price for the building is $4.7 million. At closing, Tripos will enter into a 10-month lease for a portion of the building and will make a lump sum deposit of the full rental amount of $597,000.

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