Washington, D.C., Feeling Pain

Has Washington, D.C., been hit hard by the recession? It seems like it, according to a new report by Cassidy & Pinkard Colliers released last week. Also last week I wrote a story about the area market starting to feel some pains. Most cities are struggling in the midst of an economic downturn, but Washington, D.C. has thus far managed somewhat better than the rest of the country. Just last week, Barbra Murray wrote that while many office projects are delayed or halted all over the country, Duke Realty Corp. is going ahead with the development of the U.S. Department of Defense's 1.7 million-square-foot $1 billion office complex in Alexandria, Va. But according to the Colliers report, the D.C. metropolitan office sector met an overall negative net absorption of 817,000 square feet in the first quarter of 2009, up from negative 793,200 square feet in the fourth quarter of 2008. Vacancy rates, meanwhile, have grown in the D.C. region, registering at 11.7 percent and rents continued to fall across the region during the quarter. Other areas around the city are suffering as well. In Northern Virginia, net absorption was a negative 555,600 square feet in the first quarter, from negative 703,500 square feet in the fourth quarter. And in Suburban Maryland, net absorption was a negative 435,900 square feet in the first quarter, from negative 176,300 square feet in the fourth quarter.

But what does is all mean for the nation’s capital? Will the millions expected to flow into the city's coffers as a result of the federal government's stimulus efforts keep the market afloat by creating jobs and spurring development? Or will the recession continue to drag down the area market?

Atlanta Office Market Survives 2008 with Positive Absorption

By Tonie Auer, Southwest Correspondent

-- Despite the poor fourth quarter results and bleak economic news, Atlanta's office market ended 2008 with positive absorption of 391,300 square feet--but that's down more than 2.4 million square feet from the 2.9 million absorbed in 2007, according to figures from Atlanta-based Richard Bowers & Co.

The forth quarter saw a negative absorption 411,900 square feet--the first quarter of negative absorption in the market since the first quarter of 2006, according to a Richard Bowers & Co. fourth-quarter 2008 and year-end Atlanta office market report.

“The first quarter of negative absorption indicates we have a market in flux,” David Morgan, a broker in the office properties division of Richard Bowers & Co, told CPN. “That is to say we see some slowing in the amount of space that companies are ready to commit to leasing. My guess is that many groups see the general economic climate slowing and these companies are looking for ways to reduce the outflow of cash. We have just finished a year with many uncertain events from the cost of energy and credit to the settling of the political contest. Ultimately, all of this filters into the amount and price of office space.”

For 2008, the urban corridor significantly outperformed the suburbs with 308,900 square feet of positive absorption in the urban corridor and 82,300 square feet in the suburbs, according to the report. Downtown showed the greatest positive absorption for the urban corridor by more than 350,000 square feet at a total of 374,640 for the year, second in the Atlanta market only to the I-285/GA 400 submarket’s 376,800 square feet. The I-285/I-85/Northlake submarket absorbed 193,360 square feet, followed by the NE Expressway-North submarket at 120,080 square feet.

Over the past year, vacancy rates have edged up nearly a full percentage point from 15.48 percent in the fourth quarter of 2007 to 16.31 percent for fourth quarter of 2008. Average quoted rental rates have increased from $21.15 to $21.66 over the same time period, the report stated. While the effects of the global economic slowdown contributed in part to an increase in vacancy rates despite relatively few deliveries in 2008 (a slowdown not foreseen one year ago), average rental rates have indeed increased, though not by as large a margin as anticipated, the report stated.

As for the outlook for 2009, look for a bit of caution as many companies continue to cut costs and look for available credit sources, Morgan said. “Atlanta is positioned better (than other metropolitan areas) because our region has a balanced service economy. We are not tied to a particular industry and as a region, we are situated within two hours to almost two-thirds of the nation's population. In the second half of this New Year we may begin to see businesses and banks taking a more aggressive stance related to expanding their market share.”

The expectations of the new presidential administration and lower fuel costs will boost confidence in the business climate, Morgan added.

“This is a great time to be in the market if you need to extend or renew an office lease. The strongest landlords will have access to funds for tenant improvements and concessions. Look for leasing activity to start out slowly this year but ramp up quickly later in the year as pending federal assistance both in the finance and infrastructure arenas begins to take affect,” Morgan said. “Markets with the highest volume of available class A space should do well, along with the urban corridor and downtown in particular given its plethora of amenities and transportation access points. Traffic congestion around major retail centers in both the urban and suburban submarkets may become a more important consideration for companies considering relocation, particularly for new deliveries in those areas.”

Richard Bowers--the largest independently owned commercial real estate firm in metro Atlanta--was established in 1980 and represents clients and owners in office, retail, and industrial sales and leasing, land and investment sales, financial services, development, relocation services, interior design and construction management, and property management. In 2007, the company completed 323 property sales and leasing requirements totaling 2.67 million square feet of space.

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As Phoenix Light Rail Debuts, Will T.O.D. Get on Track?

By Eugene Gilligan, Senior Editor

-- Phoenix's $1.4 billion, 20-mile light rail system carried its first passengers on Dec. 27th, and real estate professionals believe that development opportunities around the line's 20 stations are significant; Valley Metro, which operates the system, projects the system will initially carry 26,000 passengers a day.

Phoenix is one of the last large American cities to open a mass transit rail system, but Mindy Korth, executive vice president in the Phoenix office of CB Richard Ellis Inc. believes this tardiness carries some benefits. “It’s going to allow the system to institute best practices from other cities,” Korth said, noting that developers should find many opportunities to build projects along the light rail corridor, which, in its first phase, runs through Mesa, Tempe and Phoenix. “They really have an unfinished canvas to work with.”

Indeed, Korth mentioned one project in Downtown Phoenix, One Central Park East, a 26-story office tower being developed by Mesirow Financial Real Estate Inc., that is in close proximity to a Downtown light rail station.

“There is a great potential for mixed-use development along the light rail corridor,” said Don Mortensen, owner & president of Light Rail Connect, which runs a Website featuring commercial real estate listings near the rail system. Mortensen got the idea for the database after hearing two lecturers speak of the important of specialization and the ripe future for transit-oriented development when he was a student in the master of real estate development program at Arizona State University.

Mortensen said he and his partner in the venture, Bryan Watkins, have been fielding numerous inquiries about development possibilities along the light rail route. “We have gotten a lot of calls from developers who have built T.O.D projects in other cities, who want to do it here,” Mortensen said.

But transit-oriented development is certain to face some challenges, Mortensen said. Although Phoenix city officials are publicly lauding the benefits of denser development, he said he knows of one developer who encountered difficulties with zoning officials when that developer unveiled plans to build a dense development.

Mixed-use development is actually moving faster in Tempe, he said, and one reason may be that the suburb has much to gain from light rail, as it connects Arizona State’s main campus with the school’s Downtown Phoenix campus.

In the near term, development along the light rail corridor is likely to be subdued due to the credit crisis and the economic recession. But, that is not so bad, Korth contends. “There is a slowdown in the development cycle,” Korth said. “That means there will be time that can be used for planning purposes. There is a silver lining to that.”

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Midwest Industry Hit by Recession

By Dees Stribling, Contributing Editor

-- Various international tempests and other factors, such as uncertainty over the price of oil, seemed to drive the markets down Monday, but only slightly. The Dow Jones index ended 31.62 points down, or 0.37 percent, while the S&P 500 was off 0.39 percent and the Nasdaq was down more--1.3 percent.

According to the Chicago Federal Reserve Bank, manufacturing in the Midwest is at its most sluggish pace in more than a decade (the Midwest in this case being Illinois, Indiana, Iowa, Michigan and Wisconsin, which form the seventh Federal Reserve district). In November, the Chicago Fed's Midwest factory index stood at a seasonally adjusted 96.4, down from 98.0 in October. The index reflects manufacturing activity in the region, with the year 2002 equaling 100 on its scale.

Compared with the same month last year, the manufacturing slowdown is especially dramatic--little surprise here--in the auto industry, which is down 24 points, compared with a decline for the entire index for the same period of 10.8 points.

Among property types, the industrial slowdown will most likely affect warehouse/distribution space directly, as demand for parts and other goods feeding the manufacturing process dries up. The roiling of distribution and logistics is sending industrial real estate owners and developers scrambling, such as when industrial property giant ProLogis suspended its new development pipeline last month. Shipping Digest reports that manufacturers and retailers are forming crisis-management teams "not only to cope with their own suddenly dimming financial picture, but those of their transportation and logistics partners as well... companies are racing to lock in financing and operating capacity as the economy deteriorates."

Right after Christmas, Statistics Canada, the government agency that keeps track of the Canadian economy, announced that Canada's GDP was down 0.1 percent in October compared with the month before. The downward movement is relatively slight when compared to the country's neighbor to the south, but does point to a softening even of the Canadian economy, which has proven more resilient than the U.S. or other industrialized economies recently.

Much of the decline is probably attributable to the fact that the United States is the largest market for Canadian goods. The most significant drop in Canadian output during October was in wholesale trade (down 0.2 percent) and manufacturing (down 0.7 percent), according to Statistics Canada.

"Our markets are closely aligned with the U.S. market," Sandra Pupatello, Ontario's Minister of International Trade and Investment, told CPN recently, adding that the country's economy nevertheless has considerable strengths. "Canada is ranked by the IMF as having the most stable financial system in the world. Long-term that will be good for Canada, but that doesn't mean that next year won't be tough."

In fact, the minister adds, despite the recession in the United States and economic weakness in Canada, both U.S. and Canadian companies are still interested in cross-border investment in each other's countries, with a particularly strong connection between the industrial U.S. heartland of the Midwest and the center of Canadian industry, Ontario. "The downturn won't last forever," she said. "This is the time to investigate opportunities for the long run."

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Port of Houston Planning $283M in Projects

By Tonie Auer, Southwest Correspondent

-- With more than $283 million in construction planned, the Port Commission of the Port of Houston Authority is working to assure Houston's emergence as the nation's busiest port is met with cutting edge facilities.

The Port of Houston has grown in the past few years with the expansion of the Bayport Container Terminal, which will ultimately increase capacity to 2.3 million TEUs, a jump of more than 200 percent, and allow Houston to market itself as a better alternative for shipping to other ports across the country. PHA achieved its eighth consecutive year of record-breaking revenue in 2007. Figures for 2008 were unavailable at press time.

In 2006, the port ranked first in the United States in foreign waterborne tonnage, second in the U.S. in total tonnage, and 10th in the world in total tonnage. A total of 211.7 million tons of cargo and 7,548 vessel calls were recorded in 2006.

The Port of Houston handles 69.6 percent of the containerized cargo market in the U.S. Gulf, and 95.5 percent of the containers moving through Texas. Much of that activity takes place at Barbours Cut Container Terminal, the largest container terminal on the U.S. Gulf Coast.

The Bayport Container Terminal opened its first phase in February 2007 and has a 15-year buildout plan for seven container berths, a 378-acre container yard and 2.3 million TEU capacity design. The Bayport Cruise Terminal opened its first cruise berth in 2008 with three cruise berths slated at buildout.

The Houston market is well positioned to attract more traffic directed away from West Coast ports through the Panama Canal, according to a Grubb & Ellis Co. report. “The Port of Houston is already handling a vast amount of the East Asia-U.S. Gulf Coast container trade and that container traffic is increasing every year,” a spokesperson for the Bay Area Houston Economic Partnership said.

Among the projects approved at the last two PHA meetings of the year were:

*$30 million for Bayport Container Terminal construction contracts including construction of a terminal administration building and a terminal maintenance and repair building
*$5 million for the Houston ship channel and beneficial use sites
*$10.6 million for Bayport Terminal administration building for a two-story, 30,000-square-foot building for operations, customs and future tenants
*$19.3 million construction contract for Bayport Terminal maintenance and repair building Phase I
*$2.2 million to purchase an optical character recognition (OCR) system for use at Bayport and Barbours Cut container terminals
*$40 million to $60 million for Bayport Terminal complex phase I stage 2 container yard for 48 acres of reinforced or roller compacted concrete pavement with a 30-year service life in a configuration that will enable flexible container operations during successive development phases of the Bayport project.
*$55 million to $66 million for the design of the phase II container yard at Bayport Terminal for an additional 55 acres of container yard storage to meet growing demands
*$10 million to construct a terminal administration building at Bayport Container Terminal and seek certification for it as a Leadership in Energy and Environmental Design (LEED) structure
*$19 million to construct a maintenance and repair building at Bayport
*$60 million in proposals for its container yard

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Clark Opens Pioneering Military Singles Property in San Diego

By Scott Baltic, Contributing Editor

-- At Naval Base San Diego, Clark Realty Capital and the Department of the Navy opened the doors of Pacific Beacon (pictured), the first of three 18-story luxury apartment buildings in the country's first large-scale housing privatization initiative for unmarried military personnel.

Open to service members ranking E4 (petty officer third class) and above, the privately owned and operated Pacific Beacon is intended to offer sailors a relaxed, upscale housing option with the convenience and security of an on-base location.

Nearly 100 sailors moved in on the first day. Under a first-resident program, they were able to choose their own apartments, and most chose fully furnished units. The building features a hotel-style lobby, rooftop pool, fitness center and Wi-Fi café.

“I am on the seventh floor in a corner unit with one bedroom facing the ocean and one facing downtown,” SKC (Chief Storekeeper) Abe Racela, was quoted in a prepared statement. “I’ve traveled extensively and stayed in many nice hotels, but I’ve never seen anything like what we have at Pacific Beacon.”

The project is being developed through a public-private venture between the Department of the Navy and CRC. A series of focus groups with sailors helped point CRC toward a resort-style setting with high-end finishes and common areas conducive to relaxation and convenience. Construction began in January 2007, and an official ribbon-cutting ceremony is scheduled to take place in March 2009, following the project’s completion.

An affiliate of the Clark Construction Group, the nation’s oldest and largest privately held general building contractor, Clark Realty Capital has participated in residential, office, retail and mixed-use developments with a total value of over $6.5 billion.

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Dallas OKs First TIF District Focused on Multi-Station Transit Development

By Gail Kalinoski, Contributing Editor

-- Millions of square feet of mixed-use development could be built near Dallas' light rail stations in the future as part of the city's first Tax Increment Financing district that links multiple stations and covers nearly 600 acres.

The TIF district was approved by the Dallas City Council for a 30-year term and will cover 559 acres, as well as public rights of way, stretching from the Lovers Lane/Mockingbird area to the Lancaster/VA Medical Center region. Real property values are expected to grow from $320 million in 2008 to $3.52 billion by 2038 with future developments. During the life of the TIF, the accrued incremental tax revenue is expected to be about $328 million.

“The primary focus of this effort is to encourage high-density, mixed-used, pedestrian-friendly developments around existing DART (Dallas Area Rapid Transit) Rail stations,” Dallas city manager Mary Suhm said in a news release. “The TIF provides an effective development tool to encourage the redevelopment of important, centralized areas of the city, as well as new development.”

The TIF came after four years of work between the city, DART, Southern Methodist University, Prescott Realty Group and other stakeholders in the region covered by the district, including Veterans Memorial Hospital, The Urban League and Urban Partners. The TIF is a financing method that uses taxes generated by a completed project to pay for development costs like land acquisition, according to an Aug. 1 CPN report about development near Dallas’ light rail system.

Jud Pankey, CEO of Prescott Realty Group, said the major goal was to improve access and connections between the stations and key Dallas amenities and locations including the SMU campus; the George W. Bush Presidential Library, which will be built at SMU; the VA hospital; the Convention Center area and Cedar Crest Golf Course.

Prescott Realty is planning two developments in the University Crossing area that would have a total taxable value of nearly $100 million and could begin contributing incremental taxes as soon as 2009. The Dallas firm’s projects in the TIF include The Shelby, which will have 55 residential lofts and 3,500 square feet of retail, and The Shamburger Lofts, which will have 400 residential units and 8,000 square feet of retail space.

In addition to the presidential library, SMU also has development plans in the University Crossing area. The university’s master plan calls for the campus to expand east past North Central Expressway into the TIF area, where it would eventually build graduate housing, academic offices and research facilities, according to the Dallas Business Journal.

Prescott Realty and other developers are building or planning $7 billion worth of DART-oriented projects in the region, according to the Aug. 1 CPN story. Lake Highlands Town Center, one of the city’s largest transit-oriented developments, is being built by Prescott for more than $300 million. It will cover 1.7 million to 2 million square feet of space and feature about 50,000 square feet of office space, 250,000 to 300,000 square feet of retail space and at least 1,000 residential units for sale and rent when completed, according to a March 22, 2007, CPN report. The project is expected to have a light rail station at the northeast corner of the development.

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Developers Break Ground on $210M Residential, Retail Project in Jersey City

By Gail Kalinoski, Contributing Editor

-- Construction has begun on a $210 million development in Jersey City, N.J., that will feature two 47-story towers with a total of 524 rental apartments and 11,000 square feet of ground-floor retail space. Monaco Towers, developed jointly by Roseland Properties of Short Hills, N.J., and Garden State Developers of Jersey City, had originally been planned as a condominium property but will now offer rental apartments.

Monaco South will have 281 units and 223 parking spaces while Monaco North will have 243 units and 187 parking spaces. The towers are being built on Washington Boulevard near the waterfront on a former parking lot of the Doubletree Hotel. Garden State Developers had built the Doubletree, then the city’s first waterfront hotel, in a joint venture about 10 years ago.

The developers had received a 20-year tax abatement from the Jersey City Council in November 2006, that called for payment in lieu of taxes of 16 percent of gross annual revenue, according to the Jersey Journal. Earlier this year, claiming the stalled project could not go forward if they did not get a better tax deal, the developers got a15-year abatement with payments based on 12 percent of the annual gross revenue.

The city required that construction be completed by 2011. The project will follow the city’s Project Labor Agreement, meaning that some jobs must go to city residents in apprenticeships with building trades unions. About 400 construction jobs are expected to be created. The developers will also contribute $700,000 to the city’s Affordable Housing Trust Fund, according to a City Hall news release.

“This project is a prime example of the resiliency of the Jersey City housing market,” Mayor Jeremiah Healy said in the release.

“The Monaco will provide a mix of residential and retail spaces and contribute to Jersey City’s status not just as a gateway to Manhattan but as a premier destination in its own right,” stated Carl Goldberg, a Roseland principal.

Jersey City continues to be an active site for mixed-use development. CPN reported Aug. 7, on plans to build a 564,000-square-foot mixed-use project on a 2.7-acre coastal brownfield site. EnviroFinance Group provided the financing for developer Statue of Liberty Harbor North Redevelopment Urban Renewal L.L.C. to acquire and clean up the property. Plans call for development of a 313-room luxury hotel and 470 condominium units for sale and rent. Completion is expected in 2012.

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Ruffin to Pay $775M for Vegas Strip's Treasure Island

By Michael Fickes, Contributing Correspondent

-- MGM Mirage has agreed, through its wholly owned subsidiary The Mirage Casino-Hotel, to sell the Treasure Island Hotel & Casino on the Las Vegas strip to Wichita-based Ruffin Acquisition L.L.C. for $775 million.

The reclusive billionaire Phil Ruffin owns Ruffin Acquisition. According to Alan Feldman, a spokesperson for MGM Mirage, a casino owner typically evaluates four criteria when considering an offer. First, is it a fair value offer? While declining to disclose a dollar figure, Feldman told CPN that the company expects to report a substantial gain on the sale.

A second criterion is the purchaser’s ability to get licensed. “Agreements are always contingent on licensing,” Feldman said. “And Mr. Ruffin has been licensed in Nevada before and should have no trouble with the process.”

Another key consideration involves the purchaser’s relationship with labor. “This is only really an issue when someone is hostile to labor,” Feldman continued. “Labor problems can wreck a sale, but Mr. Ruffin has an outstanding relationship with labor.” Of course the most important consideration, especially today, is whether or not a deal needs and can get financing. “This is all but an all cash offer,” Feldman said. “Most of the price is being paid up front.”

Under the terms of the agreement, Ruffin Acquisition will pay $500 million of the purchase price at closing. It will then issue $275 million in notes secured by the assets of Treasure Island to The Mirage Casino-Hotel. The notes will accrue interest at 10 percent, with $100 million payable within 175 days of closing and $175 million payable not later than 24 months after closing. The notes will be senior to any other financing. The parties expect the transaction to close in the second quarter of 2009.

Las Vegas-based MGM Mirage acquired Treasure Island as part of the merger between MGM Grand Inc. and Mirage Resorts Inc. in May 2000. Treasure Island features 2,885 guest rooms and suites, approximately 90,000 square feet of gaming space, a number of restaurants, the Sirens of TI, a pirate battle attraction and Mystere, the first permanent production in Las Vegas by Cirque du Soleil.

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Report Sees Gloomy 2009 for SoCal CRE

By Eugene Gilligan, Senior Editor

-- Business closures and slowing trade will negatively affect the office and industrial sectors well into 2009 in Southern California, according to a report released today by the Casden Forecast at the University of Southern California Lusk Center for Real Estate.

The report found that the pendulum has swung from landlords to tenants for the first time since 2003. The combination of an abundance of office space and slackened demand has put downward pressure on rents throughout the region, and the report sees high vacancy rates and reduced demand through the end of next year.

In Los Angeles County, the large amount of sublease space in the market will put pressure on office rents next year. Orange County’s 16 percent office vacancy rates are expected to continue in the near term, while the Inland Empire’s high unemployment rate will be a major contributor to the rising amount of empty office space.

In her time covering the Southern California commercial real estate sector, Delores Conway, director of the Casden Real Estate Economics Forecast, says she is seeing some new and unwelcome signs in the market. “I’ve never seen negative office absorption in all of Southern California’s submarkets,” Conway said. Layoffs and consolidation at financial services firms have hit the Los Angeles County office market hard, and the market is going through the pain that Orange County went through last year. Some rock solid submarkets are seeing a great deal more sublease space entering the market. Conway notes, for example, that about one-third of available office space in West Los Angeles is sublease space.

However, the report did find something of a silver lining, as limited office construction in recent years has tempered the rise in vacancy in Los Angeles. In the industrial sector, vacancy rates moved higher, but are still very low, and the report predicted that rents should stabilize in the near term.

The Orange County office market should continue to be weighed down next year from the large amount of sublease space entering the market from distressed financial firms. But the minimal amount of new construction should help vacancies level off towards the end of next year. While Orange County saw 2.2 million square feet of new office product enter the market in 2007, there is only 159,000 square feet of office space now under construction. As for the county’s industrial sector, vacancy is predicted to hover around the 5 percent threshold, with rents likely to remain steady due to slowing demand.

An abundance of new office space will take time to be absorbed in the Inland Empire. For an area with a population of four million people, the Inland Empire was “under-officed.” But with 2.3 million square feet being completed last year, and with 1.5 million square feet delivered this year. new office space has come on the market just as the area faces severe economic problems. Conway said healthcare companies have helped some, and have been fairly active in leasing space. The high level of industrial development activity in the Inland Empire will slow due to the slowing global economy. The absorption rate of speculative warehouse space is a concern, due to the combination of new supply and softer demand. With decelerating leasing and sales activity, developers are putting new projects on hold, and rents overall should stabilize around the current level.

Conway said that unemployment levels, now at 8.4 percent in Los Angeles County: 6 percent in Orange County: and 9 percent in Riverside and 10 percent in San Bernadino Counties, which comprise the Inland Empire, is now higher than the 2001-2002 recession, and are approaching those of the 1990 downturn.

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