Write it on your heart that every day is the best day in the year.
Ralph Waldo Emerson
MARK HESCHMEYER, EDITOR DECEMBER30, 2013
IN THIS WEEK’S ISSUE:
Crystal Balls Proved Reliable for Predicting CRE Market Performance in 2013…………………………………………………………………….. 1
NorthStar Realty Invest $340 Mill. in RXR Realty ……………………………………….. 2
Prologis Forms $1 Bil. JV with Norges Bank in the U.S. …………………………….. 3
Essex, BRE Finally Come to Terms On $4.3B Merger …………………………… 4
Citi Renews 2.6 Mil SF of Manhattan Leases Through 2035…………………………. 5
We‟ve Hit the Halfway Point for Vintage CMBS …………………. 5
Edens Gets $1.5 Billion Equity Backing from Blackstone, Others ……. 6
Sports Bar Operator Files Ch. 11; Plans to Cancel Vacated Leases …………. 7
Darden Cutting Number of New Restaurants; Spinning Off Red Lobster ………… 8
Tech, Energy at the Heart of 2013‟s Best-Performing Cities ……………… 9
U.S. Homes Projected to Increase $1.9 Trillion in Value in 2013; Largest Gain Since 2005 …….. 9
Capital Markets Round-Up ……………………………………………………………………………………………………. 10
Crystal Balls Proved Reliable for Predicting CRE Market Performance in 2013
Despite Substantial Worries to the Contrary, Predictions of a Strong CRE Rebound Proved More
As the end of 2013 approaches, we thought it would be interesting to check back in on some commercial real estate predictions we highlighted at the start of the year. As it turns out, there were some pretty reliable soothsayers.
Predicting the year was by no means an easy task a year ago when the rattle of collapsed economy was still reverberating and lots of doubts lingered over the strength of a recovery.
Among the more prescient predictions we highlighted in January were ones from Jones Lang LaSalle, Cushman & Wakefield, Blackstone Group President and CEO Tony James, the Robert W. Baird investment firm, and (in our humble opinion) CoStar Group.
Prediction: 2013 was expected to be a turning point for the economy and the CRE industry, according to Cushman & Wakefield‟s Global Economic Pulse Forecast. While 2013 started off with the same slow pace in keeping with the slowest economic recovery on record, C&W said the stage was set for a significant turn-up in market sentiment by year end, setting the stage for a strong global rebound in 2014 and beyond.
Reality: It didn‟t take long for the CRE turn-up to begin. First quarter sales were up notably from the year earlier. But as predicted, market strength picked up notably as the year went on. In fact, third quarter sales totaled more than $103 billion — an accomplished that hadn‟t happened since 2006 for a non fourth quarter period.
Prediction: The CRE industry’s measured and steady recovery was expected to bolster a 20% growth in the investment market with demand up particularly in multifamily, office and industrial sectors, according to Jones Lang LaSalle’s 2013 Cross Sector Survey.
Reality: Through the third quarter of this year, investment sales were up 27%, according to CoStar COMPs data. Industrial investments were up 56% and office up 27%; however, multifamily investments tapered off this year and were actually down about 6%.
Prediction: The earliest buyers in the Great Recession would be the sellers in 2013, according Blackstone‟s James.
Reality: James obviously had some insider knowledge on this prediction, but isn‟t that what experts rely on? Institutional selling was strong in 2013. Just as The Blackstone Group kept the capital markets busy in 2011 and 2012 raising more than $16 billion through private fundraising efforts, it also kept them equally busy this year cashing in on those investments mainly through the public markets. Blackstone Group cashed out on at least six investments by taking them public in 2013.
Prediction: Prospects for 2013 were strong, particularly for real estate investment trusts looking to raise capital by going public and for a pickup in secondary and tertiary market activity, the real estate banking team at the investment firm Robert W. Baird predicted.
Reality: Again, just look at the initial public offerings Blackstone undertook in 2013. But also with the economy continuing to strengthen, more opportunistic investors – in many cases priced out of the top coastal markets like San Francisco, New York City and Washington, DC,. — went seeking higher yields in secondary markets where job growth and business conditions have accelerated during the economic recovery. Markets such as Nashville, Salt Lake City Indianapolis, Phoenix, and Jacksonville and Tampa, FL, were noted in CoStar stories this year.
Prediction: CoStar ran two stories early this year predicting 25 of the most likely publicly held companies that would be buying property this year and 25 of the most likely publicly held sellers.
Reality: It was easier to predict the buyers than the sellers. Overall, the 25 sellers we identified received net proceeds of more than $11.8 billion from the disposal of properties through the first nine months of the year. True, though, they also paid out more than $11.3 billion in cash for new investments. Still, only eight of the 25 firms we identified were net buyers of properties and we also picked out eight firms that showed no cash outlay for new properties this year.
On the buy side, the 25 firms we identified paid out more than $15 billion for new property investments in the first nine months; they received only about $2 billion in net proceeds from property sales.
Not every prediction we highlighted turned out so accurately; this was particularly true when it came to the stock-and-bond markets.
We won‟t single out those who didn‟t do as well on their predictions, but will point out that the commercial mortgage-backed securities bond market went viral with new issuance levels greatly exceeding predicted levels. The expanded investment activity, the greater appetite for risk and interest in smaller markets among investors drove competition among conduit lenders.
Also, while REIT stocks, which had been riding a long bull market going into this year and did manage to continue their upward momentum through May, since then REIT stock prices have steadily declining, according to most REIT indexes, reflecting in part investor concerns over rising interest rates and the prospects for more rate increases in 2014.
But predictions for 2014 are another story entirely; stay tuned.
NorthStar Realty Invest $340 Mill. in RXR Realty
Deal Will Help Seed New Asset Management REIT
NorthStar Realty Finance Corp. closed on a strategic $340 million investment in RXR Realty, a leading real estate operating and investment management company focused on the New York City Tri-State area. The investment includes a combination of corporate debt, preferred equity and common stock in RXR which provides NorthStar with a 30% ownership interest in RXR.
RXR was formed in 2007 by the former management team of Reckson Associates Realty Corp. (“Reckson”) after it sold Reckson to SL Green Realty in January 2007 for $6.5 billion.
Since its formation RXR has raised more than $3 billion of institutional capital and accumulated interests in $6.5 billion of assets comprised of 108 operating properties and approximately 20 million square feet.
RXR began reinvesting in the Manhattan market in 2009 and has been one of the most prolific investors assembling a portfolio of trophy assets that include 75 Rockefeller Plaza, 237 Park Ave., 340 Madison Ave., 450 Lexington Ave.,, 620 Avenue of the Americas, The Starrett Lehigh Building and 1330 Avenue of the Americas.
“Given RXR management’s track record in both the public and private markets, its high quality real estate portfolio and its growing asset management business, they are a perfect fit for NorthStar, both in terms of further diversifying NorthStar’s asset base with trophy properties in New York City, and growing NorthStar’s asset management business,” said David Hamamoto, chairman and CEO of NorthStar.
“In connection with the recently announced planned spin-off of NorthStar Asset Management, we will be evaluating alternatives for including NorthStar’s portion of RXR’s asset management business as part of the assets that NorthStar Asset Management will receive in the spin-off,” Hamamoto said.
NorthStar Realty previously approved a plan to spin-off its asset management business into a separate publicly traded (NorthStar Asset Management Corp.), which is expected to be listed on the New York Stock Exchange.
“This transaction with RXR is the first of many opportunities that we hope to execute on as we begin to scale our asset management business,” Hamamoto said.
As part of the investment, NorthStar and RXR intend to immediately begin working together on raising capital through NorthStar’s distribution network to complement the activities of RXR’s current investment vehicles and future funds.
NorthStar Asset Management will be entitled to 50% of the asset management fees from any capital raised through its distribution network and will be entitled to additional asset management fees through its proportionate ownership interest in RXR.
NorthStar Realty Finance Corp. had previously commenced an underwritten public offering of common stock expecting to raise more than $580 million. The company intends to use those net proceeds to fund the RXR investment.
It also closed on $345 million of an $400 million manufactured housing portfolio comprised of 16 communities containing 5,900 pad rental sites primarily in Denver, CO; and Austin and Dallas, TX. Inclusive of this portfolio, since 2012 NorthStar has accumulated an approximately $1.6 billion manufactured housing portfolio comprised of 123 communities containing over 29,000 pad rental sites.
Prologis Forms $1 Bil. JV with Norges Bank in the U.S.
Just weeks after closing a multi-million U.S. office joint venture, Oslo, Norway-based Norges Bank has formed a $1 billion joint venture in U.S. industrial properties with Prologis Inc. The two signed a definitive agreement to form Prologis U.S. Logistics Venture (USLV). Prologis’ partner is Norges Bank Investment Management (NBIM), which is the manager of the Norwegian Government Pension Fund Global. USLV will be structured as a 55/45 venture with 55% owned by Prologis and 45% by NBIM.
“Following our joint venture in Europe earlier this year, we are pleased to extend our relationship with NBIM into the U.S.,” said James W. Green, managing director global client relations at Prologis.
Upon closing, the venture will acquire a $1 billion stabilized portfolio of 66 logistics facilities totaling 12.8 million square feet across the U.S. The portfolio will comprise a portion of assets from Prologis’ former North American Industrial Fund III and Prologis Institutional Alliance Fund II. The venture is expected to close in January 2014.
The 66 properties are located throughout the United States in eight states across nine markets including Southern California, Pennsylvania, the San Francisco Bay Area, New Jersey, Las Vegas, Chicago, Seattle, Atlanta, and Miami.
“The formation of this venture is consistent with our joint long-term focus of investing in high-quality assets in key global markets,” said Eugene F. Reilly, CEO of Prologis Americas. “USLV is expected to grow in the future, including through acquiring strategic portfolios and, where appropriate, properties that complement the existing asset base.”
Earlier this month, Norges Bank and MetLife Inc. formed a new joint venture to buy high quality office properties in major U.S. markets and announced their first acquisition: One Financial Center in Boston.
The 46-story, five-star office building totaling 1.3 million square feet in the city‟s financial district near Boston‟s South Station. NBIM purchased its 47.5% share of the asset from seller Beacon Capital, while MetLife increased its current ownership stake by 2.5 percentage points to hold the remaining 52.5% stake.
Essex, BRE Finally Come to Terms On $4.3B Merger
By: Randyl Drummer
After a long courtship, Essex Property Trust Inc. and BRE Properties Inc. agreed to merge for $4.3 billion in cash and stock.
If consummated, the transaction between the two San Francisco Bay Area rivals would form the largest pure-play apartment REIT on the West Coast, with an expected total market capitalization of about $15.4 billion.
San Francisco-based BRE said earlier this month it has begun a review of strategic alternatives, including a possible sale or merger, acknowledging it has received a non-binding merger proposal from Essex, based in Palo Alto, CA.
If approved by shareholders, Essex would buy BRE for about $4.3 billion in cash and stock. Each BRE common share would be converted into 0.2971 newly issued shares of Essex common stock plus $12.33 in cash. The deal values BRE shares at $56.21 each, according to a joint release.
The company will retain the Essex name and will continue to trade under the ticker symbol ESS (NYSE).
In a rating note, Moody’s said the combination will create the dominant apartment landlord in the companies’ The combined company will own 56,000 multifamily units in 239 properties in three major regions of Southern California, Northern California and Seattle.
“For over a year, BRE’s board and management team have been evaluating alternatives to maximize shareholder value,” said Constance B. Moore, chief executive officer of BRE. “This transaction will create a must-own sharpshooter REIT focused on West Coast apartments, and we believe this is a great outcome for our company.”
THE WATCH LIST NEWSLETTER 5
“The combined company will be the largest and only publicly traded pure play apartment REIT on the West Coast, which we believe will provide a greater competitive advantage in our markets,” said Michael Schall, Essex’s president and CEO. “In addition, by combining the strengths of the two platforms, which have a significant geographic overlap, we expect to realize operating efficiencies and further enhance our growth profile.”
Cantor Fitzgerald REIT analyst David Toti said in a note that the proposed merger is ultimately a defensive move by Essex to eliminate a competitor rather than an accretive play driven by a compelling return proposition.
“Apartment mergers abound, but have not been catalysts for share prices,” Toti said. “That said, the revival of M&A within the sub-sector implies value arbitrage and possible pricing support, and could suggest a valuation floor.”
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I am a successful Commercial Investment Real Estate Broker in Arizona now for 20 years and I worked with banks and their commercial REO properties for 3 years. I am also a commercial landspecialist in Phoenix and a Landspecialist in Arizona.
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