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Hudson Pacific Properties and Macerich to Redevelop Westside Pavilion

Hudson Pacific Properties and Macerich have partnered to transform the Westside Pavilion mall on the Westside of Los Angeles into a campus featuring 500,000 square feet of creative office space, according to an official joint statement.

Approximately 100,000 square feet of the 600,000-square- foot property will be retained for existing entertainment and retail space. The 12-screen Landmark Theatres complex will remain in the reconfigured mall, as will Westside Tavern restaurant, both of which have performed well and will be “great amenities to tenants,” sources familiar with the deal told Commercial Observer.

The companies estimate total project costs in the range of $425 million to $475 million, with each partner contributing their pro-rata share, according to the official statement. (Those figures include the undisclosed estimated value of the existing mall.) Hudson Pacific will hold 75 percent of the joint venture and will be the property’s day-to-day operator and Macerich, the owner of the property, 25 percent.

The redevelopment, set for completion in 2021, is indicative of the rising demand for creative office space citywide, but particularly on the Westside, home to a large concentration of high-tech, media and start-up ventures. Sources familiar with the deal at HPP, which focuses on acquiring, repositioning, developing and operating high-end office and media and entertainment properties in select West Coast markets, said the venture began receiving inquiries from interested tenants since rumors began circulating about the joint venture and potential office conversion last year.

“Westside Pavilion is a perfect opportunity for us to reposition a marquee asset in a premier location. The project is poised to capture the strong demand from tenants for creative office space on the Westside of Los Angeles,” Victor Coleman, the chairman and CEO of Hudson Pacific, said in the official statement.

The partnership between developer Hudson Pacific Properties and Macerich, also reflects a wider national trend in which struggling shopping malls are being redeveloped in order to survive.

“Our joint venture with Hudson Pacific will enable us to maximize the value of this incredibly well-situated real estate with dynamic new uses,” Art Coppola, the chairman and CEO of Macerich, said in the joint statement.

The Pavilion, which opened in 1985, has struggled with weakening occupancy rates given the rise of online retail and nearby competition, including the Westfield Century City, which completed a $1 billion revamp in 2017. The redeveloped mall has siphoned off business and longstanding tenants from Westside Pavilion, with Nordstrom leaving for the Century City mall last year and Macy’s, which already opened a new store at Century City, closing its location at the Westside Pavilion later this month. The Westfield mall also became home to the first West Coast branch of Eataly, the high-end gourmet Italian food marketplace, which opened last November.

Source: commercial

The Plan: Santa Monica’s Historic Sears Gets New Life

Kacy Keys has fond memories of visiting the Sears in downtown Santa Monica, Calif., recalling childhood trips to the department store with her grandmother in the 1970s. At that point, the retailer could rightly claim, as per its advertising at the time to be “Where America Shops,” but, of course, that didn’t remain the case. Declining sales forced the iconic American retailer to shutter 200 stores just last year.

Keys, who has spent much of her career on adaptive reuse projects, is hardly caught up in the past. (She was most notably the senior real estate representative in L.A. Mayor Richard Riordan’s Office of Economic Development, where she spearheaded the Adaptive Reuse Ordinance and major development projects in downtown L.A. and surrounding areas, including the Staples Center, Walt Disney Concert Hall and the Old Bank District.)

As senior vice president and head of the Western division of Seritage Growth Properties, the publicly traded real estate investment trust established by Sears in 2015 that owns 253 Sears and Kmart stores, she is charged with finding new uses for struggling properties. The three-acre, centrally located Sears in Santa Monica is one of three premier projects being reworked this year. (The company broke ground last November on the Esplanade at Aventura, an all-retail project in South Florida, which will replace the Sears at the Aventura Mall and is redeveloping another Sears property at the Westfield University Town Center in San Diego.)

For the Santa Monica location, a verifiable landmark—designed by noted architect Rowland Crawford in Late Moderne style—Seritage is working on keeping historic details of the store while bringing it into the modern age with an estimated $50 million budget.

The mixed-use project is expected to break ground this month after clearing one final hurdle—a hearing and expected greenlight from the California Coastal Commission slated for March 8—will preserve the historic exterior of the big-box store, while literally lightening it up.

Following the temporary removal of the roof, Los Angeles-based House & Robertson Architects, will cut holes in the floor plates in the middle of the building to allow the atrium’s natural light to reach clear down to the basement level. The removal and replacement of the roof is also part of the seismic retrofitting needed for the 70-year-old building.

A fourth story will be added by capturing attic space between the third floor and the roof that was previously used for storage. The roof will be restored as a landscaped and furnished outdoor deck with ocean views and will be a key amenity for tenants of the approximate 53,000 square feet of office space for rent on the top two floors. Keys predicts that a single tenant will occupy the space, and, given its location in Silicon Beach, will likely be a tech-driven or media-oriented client, though, “it could be a hedge fund for all we know, right? Keys said with a chuckle. True. Creative office is a growing demand in all sectors.

The architect is behind the revamp of other local notable properties, including the Petersen Automotive Museum on Museum Row, and the expansion of the historic Farmers Market in the Fairfax District.

An office lobby, courtyard and Market Hall featuring a mix of 32 retail and food-and-beverage vendors will take up approximately 58,000 square feet of retail space at the ground and basement levels of the property scheduled to be open in the fall of 2019. AVRO/KO is the design architect behind the Market Hall portion. Nabih Youssef Associates is the structural engineer.

Keys said the building’s rebranding as “Mark 302″ was to not only reflect its address at 302 Colorado Avenue, but also the Market Hall concept and its place as a destination moving forward.

While the Sears logo is still visible in official renderings of the property, whether it remains is yet to be determined and will depend on the tenant’s preference.

Despite being situated at the back of Macerich’s high-end outdoor mall Santa Monica Place and the retail-ladened Third Street Promenade, Keys said they didn’t fear oversaturation, especially given the influx of an estimated 60,000 daily riders at the terminus of the city’s expanded Metro Expo line, which now connects downtown Santa Monica to the Eastside clear to downtown Los Angeles. (As of last June, the Metro reached its 2030 ridership goal in just about a year, with an estimated 64,164 weekday riders.)

“We think we are in a unique location,” Keys said. “We see it as the tie that connects Santa Monica Place, the [Santa Monica] Pier and the Civic Center. We’re sitting right in the middle of that cross[roads] between all of those things. The pedestrian traffic and the location between the train and the pier is ideal and really lends itself to a multi-use project here.”

Sears building redevelopment
Sears building redevelopment
Sears building redevelopment
Sears building redevelopment
Sears building redevelopment
Source: commercial

Industrious Raises $80M in Funding Co-Led by Fifth Wall, Riverwood

Rapidly growing Brooklyn-based flexible workspace provider Industrious, which has attracted members from Hyatt, Instacart, Chipotle, Fullscreen, Mashable and Pivotal, is about to get even bigger.

After tripling the number of its locations in the U.S. to 35 over the past three years, Industrious has completed its latest fundraising round and pulled in $80 million in Series C funding co-led by Los Angeles-based Fifth Wall Ventures and Riverwood Capital, according to an Industrious news release today.

The company has now raised a total of $142 million since its founding in 2013, according to a spokeswoman. It plans to further its expansion by adding about 30 more locations this year. Also Industrious is projecting its revenue growth will triple this year, according to Jamie Hodari, a co-founder and the CEO of Industrious. He also said that in 2018, the company plans to launch an app that will help connect tenants to events. He declined to go into further detail about the product.

“Our network is growing very quickly and that is a capital intensive proposition,” Hodari told Commercial Observer. “We have to be able to serve our customers where they are, wherever that is across the country.”

img 0036 Industrious Raises $80M in Funding Co Led by Fifth Wall, Riverwood
Industrious plans to open many new locations around the country this year. Photo: Industrious

Other investors in the funding round include Alrai Capital, Outlook Ventures, Rabina Properties, Schechter Private Capital and Wells Fargo Strategic Capital, the release indicates.  

Fifth Wall, a venture capital firm that invests in burgeoning real estate companies, is backed by major property owners such as Hines, mall-operator Macerich, Prologis and Rudin Management Company. (Industrious is not the first coworking provider that Fifth Wall has invested in, but it is the first that has been publicly announced.) It has already invested in VTS, Appear Here, WiredScore and Enertiv, as CO reported first in January.

The company chose to invest in Industrious because of its ability to attract Fortune 500 companies to its model.

Industrious does not create flashy spaces designed with startups in mind, but implements sophisticated designs with actual offices—and a handful of coworking desks—at its locations.

“It’s an elegant, simple, refined aesthetic that attracts large companies,” said Brendan Wallace, Fifth Wall’s co-founder and managing partner.

Wallace added that Fifth Wall also selected Industrious because he believes the office space provider partners more with landlords than do its competitors, based on the structure of the lease agreements it signs.

The Fifth Wall co-founder declined to elaborate, but said Industrious is different than say a WeWork, which signs a lease and then fills its spaces with members whose collective fees work out to much more than the price of the original lease. In WeWork’s case, the coworking giant receives more upside than the landlord does for the space. (A spokesman for WeWork declined to comment.)

“I think that landlords have grown increasingly cautious to coworking players, including WeWork,” Wallace said. “What [Fifth Wall’s investors] were looking for was a coworking partner to deploy across their national footprint.”

Source: commercial

Fifth Wall, Rudin Raise $4.3M in Seed Funding for PropTech Company

Fifth Wall Ventures led a $4.25 million seed funding round for Enertiv, a property tech company that creates hardware and software to track the performance and energy usage of building systems, Commercial Observer has learned.

Rudin Ventures, the Rudin family’s investing arm, also joined the funding round as well as New York Angels, Cerium Technology and MetaProp NYC. Enertiv, a seven-year-old company with 15 employees, is currently using its technology in 200 buildings across 30 states. The funding will help Enertiv expand its products and hire up to 10 more employees, such as product engineers and data scientists, within the year.

“We know we have a great team, we know we are solving a problem that often gets overlooked, we know we are really far ahead in the [industry], it’s nice that that was finally acknowledged by some key players like Rudin and Fifth Wall,” Connell McGill, a co-founder of Enertiv, told CO.

Enertiv builds meters, “Internet of things” sensors and software applications that allow it to capture data from building systems, such as energy usage from boilers, elevators, pumps, chillers and exhaust fans. This gives landlords knowledge about the intricate workings of their structures.

Furthermore, through Enertiv’s system one can digitally check on any specific equipment in their property, allowing building managers to quickly identify and repair problems, and even predict equipment failures ahead of time. Also if an equipment breakdowns the system will alert the building manager automatically. Ultimately, this technology can help owners reduce energy consumption and save money, McGill said. The company’s technology can also integrate with energy meters built by other companies.

Fifth Wall’s partners, which include major real estate owners and developers like Hines, Lennar, Macerich, and Rudin Management Company, invested in Enertiv because they are concerned about “energy consumption and energy savings,” said Adam Demuyakor, a senior associate at Fifth Wall.

“In older office buildings, there is no management system or brain there, so it’s a ‘dumber building,’” Demuyakor said. “Plugging Enertiv’s smart meter in, will turn them into ‘smart buildings.’ The potential for Enertiv is quite large.”

McGill declined to share the total amount of funding the company had to date.

Enertiv’s products have helped property owners reduce total operating expenses on average by about five percent, according to McGill. Another significant benefit for landlords is having buildings that operate smoothly.

“This is what helps differentiate one real estate company’s services and the experiences that they provide from others,” McGill said. “If they are able to preempt some of these issues—it’s too hot in this space, it’s too cold, there are odors, there is no hot water or the elevator is not working—if they are able to get ahead with our data that’s potentially 50 to 100 tenant complaints that aren’t coming in.”

Rudin was interested in Enertiv because it had been working on a similar concept. The landlord created tech company Prescriptive Data, which has a product called Nantum that collects building data like occupancy and electricity usage to help maintain optimal indoor temperatures and efficient energy use. Rudin executives hope there comes a time when they can find ways to partner Enertiv tech and Nantum.

“We were really impressed by [them] and think they have built and grown a really great company with a great product,” said Michael Rudin, a senior vice president of Rudin Management. “There are obviously a lot of buildings that are the right fit for what Enertiv is doing and that’s why we found it to be attractive. And maybe there is a way down the road that the technical teams [of Nantum and Enertiv] will collaborate.”

Source: commercial

VC Firm Fifth Wall’s Brendan Wallace Talks About What’s Next for Real Estate Tech

Brendan Wallace is the co-founder and managing partner of Fifth Wall Ventures, a venture capital fund dedicated to investing in start-up tech solutions for the real estate industry. The fund’s name alludes to the fifth “disruptive” wall the firm provides in addition to the four physical walls of a building. Founded just a year-and-a-half-ago in Los Angeles with Brad Greiwe, 35, the fund has raised $212 million to date, mostly from nine of the country’s largest real estate companies, including CBRE, Equity Residential, Macerich Co. and Lennar Corp.

Fifth Wall has injected money into real estate tech newcomers like short-term retail rental platform Appear Here, OpenDoor, which lets people instantly buy and sell homes, and States Title, which is seeking to revamp the title and underwriting process, as Commercial Observer previously reported. The fund led an investment group with Bessemer Venture Partners that acquired a majority share of WiredScore, a company that uses a rating system for tech capacity in commercial buildings and was founded by Arie Barendrecht and Jared Kushner in 2013. Kushner sold his stake in the company to the group in October. (Purchasers included Kushner’s brother, Joshua Kushner among other angel investors.) Fifth Wall declined to comment on the acquisition.

High-caliber partnership and buy-in from industry leaders is key to the fund’s success, Wallace told CO during an interview over lunch at Café Hill in Downtown L.A. in the middle of the month. Wallace, 36, was in the area to partake in “RETHINK: Emerging Macro Trends in Real Estate,” the eighth annual SoCal commercial real estate conference, trekking from his company locale on the West Side in Venice.

Commercial Obsever: How did your partnership with Brad and the founding of Fifth Wall come about?

Brendan Wallace: We got to know each other as we were doing a lot of individual angel investing and saw this opportunity.

Real estate is the largest industry in the United States, representing 14 percent of the gross national product and the largest asset class, the largest lending category, the largest store of consumer wealth. Yet it is clearly one of the least technologized. It’s slow to adopt technology. That’s true empirically; it spends a small percentage of industry revenue on [information technology]. Even impressionistically, when you walk into that building [South Park Center where “Rethink” was held] nothing about that experience has changed in the last 20 years. It’s a very outdated industry. We saw all that changing. [Real estate investment trusts, or] REITs, large REITs were, for the first time, hiring chief information officers, digital strategists. You’re starting to see real budget open up to adopt technology across the real estate world.

When did you see that start to happen?

We probably started seeing that as far back as five years ago, but in the last two years it’s rapidly accelerated. The reason it’s suddenly accelerated is the maturity of companies that can meet those needs.

Say something like [customer relationship management] software. Yardi was the only game in town for a while, but now there are three or four companies that also serve that need.

When you look at real estate tech and who is producing big outcomes, you think about two or three of the unicorns today like WeWork and Airbnb, Zillow and Priceline and Expedia. Hundreds and billions of dollars have been created in hospitality tech, yet we couldn’t find a dedicated venture fund, which we thought was odd because you have venture funds for transportation tech, cannabis tech, whatever it is, small categories when it comes to the total U.S. economy.

Why is that?

There are couple of reasons for that. One is there’s not a lot of people who come from the real estate industry who are in tech. There is just not a wide overlap of people who have those two skill sets.

The second reason is that real estate tech has a peculiar risk profile [compared to] other types of venture capital. It tends to have very low technical risk because the baseline of technology in the industry is so low, what constitutes real innovation is usually quite simple. It could be something simple like we take your vendor management logs and we put them in the cloud. We don’t typically face the big technical risks, like can you build it, does it work, is it better than the status quo? Most ideas in real estate tech are good ideas.

All the risk hinges around distribution. If you can’t sell your product to two or three players, you have no one else to sell to, right? The entire success or failure of the business hinges on a very small number of contracts. So, the way we try to solve that is raising venture capital that’s independent but that access to capital comes from the largest buyers in real estate technology. The kingmakers, the deciders of who wins and who loses—let’s raise capital from them.

So, we went to the biggest real estate groups and we systematically raised $15 million from CBRE, the largest commercial broker, Prologis, the largest industrial REIT and Lennar Corp., the largest home builder, Hines, the largest office developer, Host Hotels & Resorts, the largest luxury hotel owner, Macerich, the largest mall owner, and then Lowe’s home improvement, came in as well.

Did you invest your own funds?

Yes, all funds have a general partner commitment, which I can’t disclose—funny thing those [Securities and Exchange Commission] rules (laughs). [In the most recent SEC filings from May 2017 for the fund, they declined to share the issuer size, but the total offering amount and total sold was $210,000,000 with zero remaining to sold.]

After graduating with a bachelor’s in political science and economics from Princeton University in 2006 you came out west to get an MBA from Stanford University and you’ve been in California ever since?

Yes, I’ve been out in California since then. Born and raised in New York City and Brad is from Cincinnati. I moved to Los Angeles San Francisco three years ago.

Are you the largest VC in the industry?


What’s the next largest?

Navitas [Capital] at $60 million, which they announced just a couple of days ago, based in Beverly Hills.

We’re not a company that raises money for ourselves. We’re not buying hard assets; we’re investing in fast-growing technology companies. What is distinct about us is that we have a general capital fund and all the companies we invest in are real estate-related or have a real estate dimension to them.

We conceptualized investing in real-world technology…where technology is touching and impacting businesses that have to do with real estate. The approach we take is we really collaborate with these anchor [limited partnerships], we try to identify situations where they’re going to adopt the technology or somehow accelerate their growth and the edge that gives you is threefold.

One, you have an informational edge, right? You know about a partnership or you know about a big adoption decision or big distribution deal before it happens. Two, we take a very different approach to investing. We take a very top-down approach to investing. We’re looking for a technology solution that solves this particular pain point in the market and then we’ll invest in one.

And then the last component, we’re structuring partnerships alongside our deals. So, as you can imagine, for an early-stage company, being able to deliver revenue alongside equity capital is quite profound. That could be game-changing for them.

How many employees do you have?

We have 12 employees and we’re hiring three more as we speak, so 15. Primarily the team is investors, that’s obviously our core competency.

What’s the state of real estate tech today?

We’re early in the innovation cycle, but it depends on what dimension of real estate tech we’re talking about.

You just think about VTS for example. It’s grown incredibly fast. What they really do is leasing and asset management platform, so it’s a software layer that permits an owner of a portfolio to communicate with individual owners of an asset, and, in turn, interact with brokers that are representing tenants

It’s a platform layer that lets you see that in real time and then allows you to manipulate it and show the impact on the performance of an entire portfolio. Software for portfolios is less than 10 percent penetrated and the company is doing —we can’t say exactly what their revenue is —but it’s in the tens of millions of dollars right now. (According to Crunchbase, VTS has raised a total of $110,360,000 to date.)

It just goes to show how much runway there is in real estate tech.

What’s changed?

Real estate owners are seeing that there’s a market for operating businesses.

Real estate is an industry that has self-identified as great wheeler-dealers, right? You’re great a buyer or seller of a property. You make your money on the buy or the sell and I think what has certainly happened since the great recession is that you tend to end up owning an asset for a lot longer than you might be able to predict.

So, people that have traditionally thought of themselves as making money by buying or selling are thinking of making their money in operations. That is exactly where technology can add value, by driving incremental revenue through creative real estate concepts like co-working or cutting costs through imaging software, driving transparency for solutions like VTS.

What’s also happening is we are seeing institutionalization of the real estate asset class. So, the fewer the players and the larger your footprint, the more the incentive is to adopt technology across a large footprint.

Have you invested in VTS?

We have invested in VTS. [Wallace declined to specify how much he invested.]

Who else?

States Title, B8ta, which is an interesting retail concept, Appear Here, a platform for pop-up shops.

We don’t say what we put in any company, but we can say in aggregate we’ve invested in just over $70 million in all 14 portfolios.

What is the next big thing in real estate technology for 2018 and beyond?

It’s hard to say what the next big single thing is, but I’ll give you three themes.

One is greater depth and breadth in suite enterprise software solutions for the building. There have been a lot of point solutions—for instance, turning air-conditioners off when people are no longer in the building now. What you’re seeing is like what happened in corporate enterprise software. [Enterprise software refers to large-scale software geared toward supporting an entire organization. This large-scale software allows for several different user roles, and the roles define the actions a specific user can perform.]

Different platforms are becoming enmeshed with each other and integrated. You’re starting to see the ability to operate a building with what looks and feels like the ability to operate a company. What companies have in corporate enterprise software is happening in commercial real estate enterprise software. It’s a huge opportunity obviously.

The second big theme is you’re seeing a big growth in real estate concepts that are asset-like. So, like co-working or co-living, but they are platforms and really operating businesses that look and feel like a real estate business and are providing a service like providing an office or whatever it is without holding an asset. It’s this intermediary asset-like layer. WeWork is just part of a broader changing workplace of space on demand.

What you’re seeing is that the nature of being a real estate company is changing and the service of being a real estate owner and operator is becoming bifurcated from asset ownership. There is this increased level of tenant focus.

It’s far easier to do that when you also don’t have to deal with a building and say, keeping the lights on. It’s just an interesting dynamic that’s playing out in the industry.

You’re starting to see a lot of innovation in real estate fintech [or financial technology]. Real estate capital markets are larger than the U.S. stock market, so it’s just vast. The amount of mortgage debt outstanding in the United States is enormous and is bigger or at least the equivalent to the U.S. stock market. Yet, when you think about how easy it is to buy and sell a stock versus how painful it is to get a mortgage, it’s just unnecessarily archaic and inefficient. We’re starting to see a lot of point solutions emerge in real estate from title insurance, to home insurance, to getting documents notarized to getting your first mortgage, second mortgage.

There are all sorts of direct to the consumer solutions that don’t warrant going into the bank anymore. So again, it’s nothing groundbreaking, it’s just taking a mortgage property and distributing it online, for instance.

What about Blockchain?

We’re obviously in the very early days. At its essential level Blockchain is a derivative of the first land registries. The first property people owned was land. And one of the hardest things to track for land is who actually owns it.

The whole title insurance industry is based on the fact that we don’t have Blockchain. What Blockchain does very eloquently is it conveys ownership and ownership history, so you can trace its lineage—who owned it during a period of time, who traded it to whom and when. It’s verified by the network, who owns that property in the public.

In some aspects, we might have that in the land registry, but it’s semi-private because the counties control some of it and the states, and the title agencies, which are really the ones verifying it are for the most part private. So, it’s a weird disconnect when it would be so much more eloquent to convey ownership through blockchain.

The other thing is that it largely facilitates fractionalization of ownership of real estate. So today the only way to fractionalize ownership are private [limited liability companies], which only credited investors can buy, private REITs which tend to be kind of a dark underworld to the REIT industry where no one really trusts the price of a security because they’re somewhat liquid and then REITs, which are publicly traded, fractionalized ownership positions and real estate equities. And REITs are still only a small portion of the U.S. real estate market.

The promise of Blockchain is you could effectively fractionalize ownership of this building [at 632 S. Hill Street], create a series of points to securitize by a position in the equity of this building and start to free and trade them. And for real estate—it’s an industry that it’s so hard to get in and out of—really the fastest you could sell a place like this is three to six months if you’re lucky and it’s a painful process. But if you could quickly react to say, rising real estate prices, that’s one of the promising things about Blockchain.

Source: commercial

Brookfield Back to the Drawing Board After GGP Rejects Takeover Bid

The fate of Brookfield Property Partners’ bid to takeover mall landlord GGP appears uncertain after GGP reportedly rejected Brookfield’s initial $14.8 billion overture earlier this week, with analysts split on whether Brookfield will return to the table with an improved offer and the market for retail assets potentially altered by European giant Unibail-Rodamco’s massive $15.7 billion acquisition of Westfield Corporation.

The two sides are expected to continue discussions after GGP rejected the Nov. 11 bid, Reuters reported Sunday. Brookfield’s proposal consisted of a cash-plus-stock offer valued at $23 per share—a premium on GGP’s “unaffected” pre-offer share price, which hovered north of $19 per share in early November, but well under the real estate investment trust’s consensus net asset value (NAV) of around $28 per share.

The bid was deemed unsatisfactory by an independent board comprised of five of GGP’s nine directors, which excluded three Brookfield executives on the board and Sandeep Mathrani, GGP’s chief executive officer. Brookfield has played a sizable role in GGP’s governance since helping the Chicago-based company emerge out of bankruptcy in 2010; it already owns 34 percent of the company, and the $14.8 billion takeover offer would have seen Brookfield acquire the other 66 percent.

Real estate investment and development firm Brookfield—a subsidiary of Toronto-based investment giant Brookfield Asset Management—is expected to reevaluate its offer before potentially returning with another bid. Bruce Flatt, the CEO of Brookfield Asset Management, described the proposal as “a fair offer” in an interview with Bloomberg this week but added that such negotiations “are long, long processes,” and sources with knowledge of the discussions told Commercial Observer that the two sides are still engaged—noting that GGP has yet to formally reject Brookfield’s overture in a public manner.

Brookfield’s takeover effort has come in the midst of heightened buzz surrounding the governance of the nation’s major publicly traded retail landlords, which have faced mounting headwinds affecting the brick-and-mortar retail sector and have traded at significant discounts to underlying value of their assets.

Macerich and Taubman Centers—two of GGP’s fellow mall REITs specializing in the high-quality, Class A mall sector—have both seen activist investors increase their ownership positions in recent months, while the Brookfield bid prompted further speculation around potential mergers and acquisitions in the retail real estate sector that has fueled a recent run-up in mall REIT stocks.

That buzz was realized via Paris-based Unibail’s enormous deal for Sydney-based Westfield, which was announced Tuesday. The transaction sees Europe’s largest commercial landlord gain a foothold the U.S. and U.K. markets and creates a company with 104 retail assets and a gross market value eclipsing $72 billion.

The Unibail-Westfield deal may well have changed the calculus for a Brookfield acquisition of GGP, according to some analysts. In a research note this week, investment banking and brokerage firm Boenning & Scattergood said Unibail’s acquisition of Westfield “should boost the share price of all ‘A’ mall owners in the U.S.”—adding that the deal enhances the “irreplaceable” nature of Class A mall assets.

“No independent [GGP] board could sign off on a transaction valuing ‘A’ mall owners at a discount without significant pushback from shareholders,” Floris van Dijkum, a senior REIT analyst at Boenning, said in the note.

Alexander Goldfarb, a managing director and senior REIT analyst at investment banking firm Sandler O’Neill + Partners, told CO that the Unibail deal shows how, as far as consolidation in the retail sector, “there’s an appetite for malls [among investors] but also very few buyers” capable of lodging offers persuasive enough to get a deal done.

Goldfarb said that while it’s likely Brookfield returns with an improved takeover proposal for GGP, it’s also possible that the company backs away from negotiations and looks for GGP’s share price to return to its pre-offer levels before reevaluating the situation.

“You can see Brookfield saying, ‘No dice—we’re going to let the stock cool down for a bit,” he said. “What you’re seeing is there are very few natural buyers for malls, and you just saw one of them [Unibail] make a deal for another [Westfield].”

Brookfield’s $23-per-share offer was widely seen by analysts as merely an opening salvo similar to the firm’s initial offer for mall owner Rouse Properties. Brookfield eventually acquired Rouse for $18.25 per share last year after having previously offered $17 per share for the company.

“Brookfield is a value buyer and certainly not going to but their best offer forward [first],” according to Haendel St. Juste, a managing director and senior equity research analyst at Mizuho Securities USA. “If Brookfield doesn’t budge on $23 [per share], then the deal is dead. At $23, at least you know what GGP’s independent board thinks of the offer.”

St. Juste and other observers noted that GGP shareholders have largely been turned off by the cash-plus-stock composition of Brookfield’s initial offer, which sees half of the offer comprised of Brookfield Property Partners (BPY) stock. Unlike GGP, BPY is not traded as a REIT but as a limited partnership—lessening its appeal to REIT investors drawn to the sector’s tax and dividend structure—and as a publicly traded entity is relatively illiquid compared to GGP, with sizably lower trading volume and market capitalization

“REIT investors I talk to don’t want that [BPY stock],” St, Juste said, noting that “more cash, less stock and a slightly improved improved offer likely gets [the deal] done” for Brookfield. “The mindset of investors is, ‘We hope there will be a second offer, and hopefully that offer is more attractive,’ ” he added.

Sources said that while GGP has already expressed its desire for an “altered mix” in the compensation being offered by Brookfield, extending a bid that goes beyond the $7.4 billion in cash it already put forward could be an unappetizing proposition for the investment giant.

But that could be what it takes if Brookfield wants to realize its dream of creating one of the world’s largest property companies—one with more than $100 billion in global real estate assets and a net operating income of roughly $5 billion annually.

Source: commercial

Regional Malls Look to Reposition as Retail CMBS Space Sweats

The e-commerce contagion has pulled brick-and-mortar retailers, regional malls and shopping centers under the weather, resulting in tenant bankruptcies and mass store closures that have, in turn, put pressure on maturing retail commercial mortgage-backed securities loans predominantly those issued in 2006 and 2007, prior to the financial crisis—and created refinancing hurdles for borrowers.

“The concern is everywhere, and in some cases, it’s a surprising reality,” said Manus Clancy, a senior managing director at Trepp. “Because of the outlook for retail in general, a lot of borrowers are struggling to refinance. The problems are across the sector.”

From November 2016 to October 2017, roughly $29.3 billion in securitized mortgages backed by retail properties were paid off or liquidated, 12 percent of which was disposed with losses, according to data from Trepp. The disposed loans were written off at an average loss severity of just under 55 percent, up from around 47 percent in 2016, while overall CMBS loss severity for all loans disposed within the same time frame fell to just under 43 percent. This year, there have been 244 retail loans—totaling $3.4 billion—that have been resolved with losses at around $1.8 billion, according to data from Trepp and Morningstar Credit Ratings.

“If I had to guess, [retail loss severities] are in excess of 50 percent,” said Andrew Hundertmark, a managing director at CWCapital Asset Management. “In my opinion, a mall was never worth what it was when the loan was made. There were assumptions made to rent growth and tenant strength that didn’t turn out to be true, and 10 years ago then these loans were made, no one saw Macy’s as a troubled retailer. J.C. Penney showed some cracks but wasn’t a concern. People underwrote loans thinking everything was going to stay as it was.”

The rest is history. Retail giants such as J.C. Penney, Sears and Macy’s have closed hundreds of stores as they try to shift investment focus to e-commerce, technology and the use of delivery services. On Nov. 2, Sears announced that it plans to close more than 60 locations by late January 2018, marking 243 total closures since January 2017. The retailer will be left with around 680 stores operating in the U.S., down from 3,500 locations in 2010.

What impact have these closures had on maturing retail CMBS? These loans have been made vulnerable, in part, because they’re propped up by leases from major anchor retailers. When anchor boxes come under increased stress or shutter, it creates a vicious cycle for the mall owner or landlord that can negatively affect overall consumer traffic to small- and midsized in-line retailers such as Radio Shack or Bon-Ton Stores—both of which have recently closed stores—who fill out the mall and benefit from a strong anchor presence.

“The best we can do [as servicers] is try to stabilize tenancy and get them in longer-term leases,” Hundertmark said. “We want leasing arrangements with tenants who can take advantage of co-tenancy if anchors close. Just because you have a mall that’s troubled, it doesn’t mean there aren’t retailers ready to come in. They’re all about traffic counts, and they don’t care so much if Sears is open for business or not.”

Chattanooga, Tenn.-based REIT, CBL Properties’ Mall of Acadiana in Lafayette, La., may be a transitionable survivor. Its debt was originated by Bank of America in 2007, and the loan comprises 63 percent of the roughly $196 million BACM 2007-2 CMBS transaction. The enclosed mall at 5725 Johnston Street was previously anchored by the usual suspects: Sears, J.C. Penney, Dillard’s and Macy’s. According to Trepp watchlist commentary, Sears will shutter its location at the mall by the end of the year, and “there are significant co-tenancy implications tied to the two anchors closing, which may have a significant negative impact on cash flow and potentially collateral occupancy.” The mall is buoyed by its collection of noncollateral tenants such as a Carmike movie theater, which occupies 247,072 square feet—or roughly 81 percent —of usable space, an Old Navy, a Barnes & Noble, an Olive Garden and a Taco Bell. As of November, Trepp commentary indicated that the borrower is “self-managing and leasing the mall and continuing to make monthly payments” despite the mall’s status as nonperforming beyond maturity.

Some major high-end national mall landlords, such as Washington Prime Group or GGP, look to reposition retail space to include entertainment and lifestyle services and national restaurants. Washington Prime has even moved to use online competitor Amazon’s fulfillment lockers to help draw consumers.

“Often, the property will be sold at auction for a discounted price, and now, at lower basis, the new owner can invest and turn them around. It’s a mixed bag,” said Edward Dittmer, a senior vice president of CMBS at Morningstar Credit Ratings.

Smaller entities may not be so lucky or may not have the capital necessary to make a change, being that repositioning an anchor into an entertainment venue or fitness center can be a daunting task. It can sometimes be an even harder challenge as malls in metro areas and gateway cities are just simply outdated and face competition from newer facilities complete with more modern amenities.

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Interior view of West L.A.’s Westside Pavilion mall. Photo: Wikipedia Commons

Los Angeles’ Westside Pavilion is one recent victim of an oversaturated market. The future health of the three-story, 766,608-square-foot mall at 10800 West Pico Blvd. in the suburbs came into question in August after its debt service coverage ratio fell below 1.10x as it faced hurdles with lease terminations—major tenants have begun moving just a few miles away to the Westfield Century City mall.

“West L.A. has too many malls chasing the same customer and it was due for consolidation,” said Macerich Chief Executive Officer Art Coppola—Westside Pavilion’s owner—in the company’s third-quarter earnings call. In October, Macerich, announced its search for a buyer. The $142 million, post-crisis era loan was transferred to special servicer Rialto Capital Advisors for the first time in September due to imminent monetary default. The note comprises just under 13 percent of the remaining collateral in the roughly $700 million WFCM 2012-LC5, Wells Fargo-sponsored CMBS transaction.

“[Many borrowers] view retail as undervalued and come in at a good basis with a plan and some money and an opportunity to make some good return,” Hundertmark said. “In general, people are out there trying to sell the troubled stuff. Regional malls attract a much different buyer set. Strip malls or shopping centers tend to bring in more local buyers, those who know the market and may have owned the property next door and can bring some synergies there with repositioning. The buying universe really differs, and there are a couple names in almost all sales.”

CMBS retail issuance has climbed while delinquencies have fallen 16 basis points to 6.47 since August, Trepp data shows. Changes in the way retail space is being modeled and used have most certainly spurred new investment into the sector and enabled many operators to thrive despite widespread concerns over the performance of the physical retail environment.

“A lot of the new delinquencies we’ve seen have been maturity defaults in 2017 as a result of the 2007 issuance,” Dittmer said. “Some of those loans have not been liquidated yet and are going to take some time to work through. It may take a year or two to see what will be the ultimate resolution.”

Retail delinquencies recovered more quickly than other major property types after the most recent financial crisis, according to Trepp analysts. Special servicers acted more swiftly to foreclose on distressed retail collateral to cut losses, in contrast to the “extend and pretend” approach more commonly employed with other property types, analysts said.

“We’ve talked to a lot of landlords, and most of them are scratching their heads because every location is different,” Hundertmark said. “If we can get a gym in here and a couple of nice, national restaurants, the community is strong enough, so we can keep this moving. But, retail has moved away from us, so what can we do? We can partner with or sell to a multifamily developer to put up a new development. The old retail paradigm has been shattered. There is no one size fits all.”

GGP, a Chicago-based publicly traded owner and operator of high-end malls, has sought to survive retail market headwinds by renovating former department store boxes into restaurants, supermarkets and movie theaters. Meanwhile, GGP is considering a takeover bid by Brookfield Property Partners.

“[Landlords] have got more flexibility and more options than a servicer, and [they’re] definitely getting more creative and more aggressive, taking steps they’d never dreamed of 10 years ago,” Hundertmark said. “The model was you build the mall, and the anchors stores build around you.” That’s no longer the norm as landlords can no longer rely on anchors and must take matters into their own hands.

Some analysts argue that yield can be mined easily in the right market with the right strategy. “The bright side is pruning season is ending,” Clancy said. “Sears and Macy’s have been pruning and closing stores, but what’s left in their portfolio they’re confident in. Simon Property Group and GGP and others who provide experience can still make the business model work. The headlines have outpaced reality. People can still make a good buck with the right strategy, market and tenants. What’s disastrous is older malls, sagging demographics and newer competition.”

National mall landlords who can reposition these assets may be the future of regional malls as they’ve been able to exhibit the clout and capital needed to entice bondholders and take on such projects. And, these companies, like GGP, have seen its stock price climb in recent months.

There’s an interesting variety of players at auction for distressed regional malls, ranging from major national mall landlords to development firms looking to use the typically stellar locations where malls have been built to construct lifestyle centers full of national retail brands and restaurants, along with a residential building to help drive foot traffic and spark cash flow.

“First things we look for from a borrower is do they have the desire and the capital to reposition this mall, and three, do they have a plan?” Hundertmark said. “If they don’t know what they’re doing with the capital, they’re wasting everyone’s time. More and more we’re seeing them come in with a plan and turn it into a discount strip center or what have you.”

With approximately 25 percent of the CMBS arena being retail and roughly $3.1 billion in retail CMBS set to mature in the next 12 months, many borrowers may be done wiping their noses and ready to lick their chops.

Source: commercial

Brookfield’s Takeover Bid Is the Latest Chapter in Mall Giant GGP’s Turbulent History

When Brookfield Property Partners lodged a $14.8 billion takeover bid for GGP last month, it raised the possibility of one of the biggest real estate mergers and acquisitions seen in recent years—one that would create a massive company with nearly $100 billion in assets globally and annual net operating income of roughly $5 billion, Brookfield said in announcing the bid.

It also marked the latest chapter in the tumultuous history of the Chicago-based real estate investment trust formerly known as General Growth Properties. The past decade, in particular, saw GGP emerge from the wreckage of one of the biggest real estate bankruptcies in history in 2009—when it was unable to refinance more than $27 billion of debt in the wake of the financial crisis—to re-establish itself as one of the nation’s major players in the Class A mall space, with assets ranging from prestigious shopping centers in Honolulu and Southern California to high-street storefronts on Fifth Avenue.

GGP’s renaissance has come under the guidance of Sandeep Mathrani, who left his role as head of Vornado Realty Trust’s retail division to become the REIT’s chief executive officer in 2010, when the company was just getting back on its feet after the bankruptcy. With the help of investment from the likes of Brookfield and hedge fund investor Bill Ackman’s Pershing Square Capital Management, GGP shed dozens of properties, rid itself of burdensome holdings by spinning off Rouse Properties and the Howard Hughes Corporation into standalone companies and exiled to the past the legacy of the Bucksbaum family—which founded General Growth Properties in the 1950s but also oversaw its descent into financial ruin. Today, GGP has regained its status as one of the largest publicly traded owners and operators of retail properties in the U.S., with a portfolio of more than 120 properties spanning roughly 123 million square feet.

Yet, the Brookfield takeover proposal comes at a significant juncture for both the company and the market in which it specializes. The challenges facing the brick-and-mortar retail sector today have been well documented, with the Amazon-fueled rise of e-commerce having contributed to store closures at a rate unseen since the Great Recession.

Though GGP’s profile as an owner of high-quality, Class A malls has insulated it somewhat from headwinds that have most heavily impacted Class B and Class C malls and shopping centers throughout the country, the company has not been altogether immune from the great retail apocalypse of 2017. The struggles of department stores like Sears, Macy’s and J.C. Penney, which historically were counted on as mall anchor tenants capable of driving customer traffic, have prompted GGP to spend more than $2 billion to redevelop roughly 9 million square feet of space across its portfolio—mostly “anchor boxes” formerly occupied by such department stores that it has sought to reposition into restaurants, cinemas and other uses more relevant to the current retail market climate.

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Sandeep Mathrani. Photo: GGP

Like fellow Class A mall REITs Simon Property Group, Macerich and Taubman Centers, GGP has seen its stock price undertake a slow and steady slide over the last 12 months as investors have increasingly subscribed to the doom-and-gloom narrative surrounding the retail sector. Market conditions have meant that GGP (also like its peers) has found itself consistently trading at a discount to its actual net asset value (NAV); by Nov. 6, the day before news broke of the Brookfield takeover talks, GGP’s share price had fallen to $19.01, down from its 52-week high of $26.63 and well below the company’s consensus NAV of more than $28 per share (analysts who spoke to Commercial Observer for this story pegged GGP’s NAV at anywhere from $26 per share to $35 per share).

Brookfield’s initial bid for GGP, meanwhile, came in at $23 per share, or $14.8 billion in total, and took the form of a 50-50 cash-equity offer comprising $7.4 billion in cash and another $7.4 billion in Brookfield Property Partners (BPY) stock. BPY, a subsidiary of Toronto-based investment giant Brookfield Asset Management, has held a sizable stake in GGP since helping bring the company out of bankruptcy in 2010, and the deal would see it acquire the 66 percent of GGP that it does not already own. (In the third quarter of this year, Brookfield exercised stock warrants to increase its ownership interest in the REIT from 29 percent to 34 percent by purchasing 68 million GGP shares for $462 million.)

“Brookfield’s access to large-scale capital and deep operating expertise across multiple sectors, combined with GGP’s high-quality retail asset base, will allow us to maximize the value of these irreplaceable assets,” Brookfield Property Partners CEO Brian Kingston said in a statement announcing the bid.

Brookfield noted that its takeover offer constituted a 21 percent premium on GGP’s “unaffected closing share price” of $19.01 on Nov. 6, as news of the proposal immediately pushed GGP stock to north of $22 per share the next day and above $24 per share on Nov. 13, when Brookfield officially announced its offer. In the wake of the bid, GGP said it had formed a “special committee” of independent directors—excluding Mathrani and directors affiliated with Brookfield, such as Kingston, BPY Chairman Ric Clark and Brookfield Asset Management CEO Bruce Flatt—to review and consider Brookfield’s proposal and “pursue the course of action that it believes is in the best interests of the company.”

Representatives for both GGP and Brookfield declined to comment for this story.

With the offer coming in well below most analysts’ valuation of GGP, many are split on whether the deal provides good value for GGP shareholders at a challenging time for the retail sector at large, or if it undervalues one of the top publicly traded commercial landlords in the country and could prove a mere starting point in negotiations between the two sides.

“I’m sure everyone would like to get a deal done; the question is, What is the price Brookfield is willing to pay?” said Alexander Goldfarb, a managing director and senior REIT analyst at Sandler O’Neill + Partners, who noted that the initial Brookfield bid “undervalues” GGP below Brookfield’s own internal net asset valuation of the company of around $30 per share.

Goldfarb and other analysts also called into question whether GGP investors would be willing to accept BPY stock as part of any deal. In a note released last month, BTIG equity research analysts James Sullivan and Ami Probandt described BPY’s stock, which has been trading between $21 to $24 per share for most of this year, as “relatively illiquid with very low average trading volume.”

“Our assumption is they’ll have to improve their offer; no one ever throws in their best offer first,” Goldfarb said. “I think Brookfield sees the real story, which is the company being undervalued by the Street.”

Anita Ogbara, a director and credit analyst at Standard & Poor’s, described the Brookfield bid as “opportunistic” at a time when there is “a lot of pressure on valuations” in the mall REIT sector. “We don’t know what the ultimate outcome is going to be, but there’s a clear sign that [Brookfield is] trying to take advantage of the discount versus the true value of [GGP’s] assets.”

While Brookfield’s first crack at a GGP takeover may have been “an underwhelming offer” for many stakeholders, Haendel St. Juste, a managing director and senior equity research analyst at Mizuho Securities USA, said that challenging conditions in the retail space could end up having outsized sway over whether a deal gets done or not. He noted that, speaking to participants at the National Association of Real Estate Investment Trusts’ annual REITworld convention last month, there is a sense that an offer of around $25 per share “would maybe carry the day.”

“People are disappointed [in the $23-per-share offer], but then again I think there’s been a resignation among folks—that maybe it’s not great on its face, but given the current dynamic, maybe it’s as good as you could hope for or expect,” St. Juste said.

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Brookfield Place in Battery Park City, Manhattan. Photo: Getty Images

Should a deal go through and Brookfield acquire GGP, it is unclear what will become of the company’s leadership and whether the likes of Mathrani will remain in some position or capacity. What appears more certain, according to analysts as well as sources with knowledge of Brookfield’s operations, is that the combined company would look to leverage Brookfield’s exposure in nonretail sectors, such as office and residential, to potentially reposition underperforming properties in the GGP portfolio.

“We are excited about the opportunity to leverage our expertise to grow, transform or reposition GGP’s shopping centers, creating long-term value in a way that would not otherwise be possible,” Kingston said in his statement announcing the bid.

While GGP has already made steps toward pursuing such repositionings—having recently announced a partnership with residential REIT AvalonBay Communities to build apartments at one of GGP’s malls in Seattle—Brookfield would likely seek to further that approach, as it did with select Rouse Properties assets in New Jersey and Vermont in the wake of its $2.8 billion acquisition of the mall landlord last year.

Mizuho’s St. Juste said the integration of a more diverse array of uses at malls and shopping centers is warranted in an environment where “there’s too much retail in the United States” and landlords are seeking new ways to drive traffic.

Sources also said that while Brookfield would almost certainly look to hold long-term onto GGP’s premier retail assets—such as the Ala Moana Center in Honolulu, Glendale Galleria in Glendale, Calif., and Tysons Galleria in Washington, D.C., suburbs—it would probably seek to offload other lower-quality properties either through outright sales or joint-venture partnerships.

It would also remain to be seen what happens to GGP’s high-street retail portfolio, a market in which former Vornado executive Mathrani upped the REIT’s exposure via the acquisition of pricey storefronts along luxury retail strips like Manhattan’s upper Fifth Avenue corridor.

Sandler O’Neill’s Goldfarb noted that GGP’s foray into the luxury street retail space was one of the few areas where Mathrani “got pushback” from investors and observers, given that the REIT entered that market “right at the peak” of New York City property values—via deals like its nearly $1.8 billion acquisition of the Crown Building at 730 Fifth Avenue, which GGP acquired alongside retail magnate Jeff Sutton of Wharton Properties.

“[Mathrani] had done [street retail] at Vornado and he saw an opportunity at GGP,” Goldfarb said. “It was just that the prices he was paying were top of the market.” While GGP has found success with its street retail assets—most notably signing luxury fashion brand Bulgari to a pricey lease to maintain its presence at the Crown Building—depressed Manhattan street retail rents could contribute to a change in approach.

Whatever direction is in store for a new Brookfield-helmed GGP, it is almost certain that a successful takeover would shake up the market as far as publicly traded retail landlords are concerned—and very well signal a time of heightened consolidation as the industry takes on virtually unprecedented headwinds.

“It’s created an M&A tailwind and brought some investors back in the space,” St. Juste said, citing how the likes of Simon, Macerich and Taubman have also seen their share prices run up in the wake of the Brookfield bid. “Next year is going to be tough from an operational perspective; without this M&A buzz, the stocks would be down. They’re not trading on fundamentals right now.”

Source: commercial

Why More Real Estate Companies Are Getting Into the Tech Game

Over the weekend of Oct. 13 through Oct. 15, the Real Estate Board of New York hosted its inaugural hackathon, which brought teams from 40 different organizations together to compete for who could develop the best app to address real estate problems.

Prescriptive Data, a one-year-old software company, came away with two wins at the event’s sustainable maintenance and operations, and location intelligence categories.

It should be noted Prescriptive Data had a serious leg up. It was spun off from a division of institutional landlord and developer Rudin Management Company to sell its software Nantum, which gathers building data, such as occupancy, electricity usage and other factors, to help maintain optimal indoor temperatures and efficient energy use.

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A screen shot of the Nantum platform. Photo: Prescriptive Data

This is one of the open secrets of real estate and tech: Despite all the hand-wringing about how real estate is populated by dinosaurs who only understand brick and mortar, there are plenty of landlords worried about just how far behind the industry is and have been actively trying to fix the problem. Landlords are investing venture capital directly into new companies, creating venture capital arms or funding venture capital firms that invest in real estate tech, and making their own in-house technology.

The initial version of Nantum, Prescriptive Data’s first product, was created in 2013, and Rudin tested it with its buildings. 

“We wanted to improve our business, and once we developed Nantum and we saw how powerful the system was in our properties, we thought, ‘Wait a minute, we may be onto something here,’ ” Michael Rudin, a vice president at the company, told Commercial Observer.

Rudin started Prescriptive Data last summer and began selling Nantum on the market to landlords. At that time, it was using the product in 17 Rudin buildings encompassing 10 million square feet, according to a release. The company now has more than 12 million square feet of properties on its platform, according to a spokeswoman. (Rudin declined to say if Prescriptive Data was profitable yet.)

And through Rudin Ventures, Rudin has invested in a series of technology companies, including Hightower (since merged with VTS) in 2015, Radiator Labs in 2016, Honest Buildings and Latch in 2016 and Enertiv in 2017.  

But Rudin is hardly the only real estate company to invest in related technology; Blackstone, which has its own tech division with Blackstone Innovations, has invested capital in various startups, including property management platform VTS in January 2015 with $3.3 million.

Today, Blackstone executives, along with Rudin, Equity Office and other large real estate players that use VTS’ technology, make up the company’s customer advisory board. They meet as a group once a quarter to talk about things they like about the product and ways to improve it—on a voluntary basis.   

“They are seeing the value that they are getting for the product, and if they can get a stake in it, it is a pretty great thing for them,” VTS co-Founder and Chief Executive Officer Nick Romito said. “It’s better to be in the car than watch the car pass you.”

Brookfield Property Partners, Rudin and Milstein family’s Circle Ventures have invested in Honest Buildings, a project management platform that helps ensure developments are completed on time and on budget. And mall operator Simon Property Group, via Simon Ventures, has invested in Appear Here, a marketplace for short-term retail space (with terms from one day to as long as three years).

Appear Here recently raised funding from Fifth Wall, a venture capital firm that supports emerging real estate-related technology companies. Fifth Wall injected the undisclosed amount into the company to support its expansion in the United States, according to a release on the partnership. This is significant because Fifth Wall has investments from major real estate landlords such as Equity Residential, Hines, Macerich and real estate investment trust Prologis, and Appear Here needs landlords for its model to work.

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Appear Here’s software. Photo: Appear Here

“At our end, we are really trying to disrupt an old industry,” said Elizabeth Layne, Appear Here’s chief marketing officer and U.S. general manager. “But in order for that to be successful, we need landlords to put their space online. We need them to use our dashboard. And that’s a big change for an industry that is just used to using brokers and talking to a person instead of using the internet.”

Fifth Wall, meanwhile, has raised $232.3 million to date and has already invested in many successful tech companies that are seeking to enhance real estate-related services, including OpenDoor, which lets people instantly buy and sell homes, and States Title, which is seeking to revamp the title and underwriting process. Fifth Wall’s success via those startups has raised eyebrows among real estate executives looking to make their foray into the world of tech.

“We launched a corporate venture group in March 2016. The idea started when our CEO had conversations with Fifth Wall,” said Will O’Donell, a managing director at Prologis, during the inaugural MIPIM ProTech event in Times Square on Oct. 11. “The reality of why we started it is everyone at the company has a day job…but if you actually create a group that is 100 percent accountable for identifying where disruptive trends are occurring—where technology is coming out—and forcing the company to deal with it, it’s a very creative and helpful friction.”

The MIPIM event brought out more than 800 professionals—most of whom were new startup founders and marketers—but there was a sizable group of real estate executives from institutional developers and landlords, including Blackstone, AvalonBay, Vornado Realty Trust, Silverstein Properties, Equity Office and Japan’s Mitsui Fudosan. Ric Clark, a senior managing partner and chairman of Brookfield Property Partners, and Owen Thomas, the CEO of Boston Properties, were panelists at one of the forums.

The showing revealed just how hungry landlords are for tech. Many used the time to network with young entrepreneurs and discuss new technologies.

“We ran a very large [request for proposals] back in the spring looking for a technology vendor that we could essentially partner with to handle everything from lease management, lease pipeline, tenant tracking all the way through to the asset management and the accounting,” said Jonathan Pearce, a senior vice president at Ivanhoé Cambridge, during the panel discussion. “And we had very smart people around the table, and believe it or not, there isn’t just one solution that does all of that.”

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A panel at the MIPIM ProTech event about new ventures by real estate companies, which was moderated by VTS co-Founder Brandon Weber. Photo: Reed Midem

When the moderator Ryan Simonetti, a co-founder of online meeting-space provider Convene, suggested a company at the event might have a product that Ivanhoé was looking for, Pearce replied, “I’d love to talk to them.”

“What is happening is as companies have been successful in developing technology, large real estate companies are embracing them, and they see an ability to prosper both on the innovation side and the management side,” said Robert Courteau, CEO of Altus Group, an advisory services and software provider for real estate companies. “By investing in these [startups], it has immediate benefits on their own companies and perhaps make some money in the market. They are being opportunistic.”

Landlords are also ramping up the use of tech in their properties. Cove Property Group and partner Bentall Kennedy are wrapping up construction at 101 Greenwich Street, where they have partnered with Convene.

Convene, which Brookfield has invested in numerous times, will debut a mobile app for 101 Greenwich that will allow employee access through security turnstiles. The app will also allow tenants to give mobile building access to visitors, book Convene conference rooms and order the delivery of food to their space from Convene’s kitchen. In addition to this, Cove is adding facial recognition technology to the building to be used by employees to access their place of employment.

“We look for technology to increase the tenant experience in the building and things that are going to make us run the building more efficiently,” said Amit Patel, the chief operating officer of Cove. “If you are rushing into the building into the morning and you have something to do like a meeting, you want to be able to get into the building as quickly as possible. And it will alleviate pressure off the security staff.”

Last year, developer Savanna employed Cortex Index, which provides building engineers with an app that helps them operate complex HVAC systems more efficiently, at 110 William Street. This helped the developer reduce annual operating costs by $250,000, according to a Savanna release. Now the developer is looking for further tech opportunities.

“As we have done with Cortex and other technology platforms, we will continue to selectively implement technologies that fit within our portfolio and also help drive operational efficiencies and savings, ultimately creating value for our investors,” Nicholas Bienstock, a co-founder and co-managing partner of Savanna, said in a statement to CO. “I think we are now starting to see technologies that generate real payback on the initial investment required to implement them, in addition to providing certain operational efficiencies or data analytics.”

And then there’s the startup Outernets, which transforms vacant storefronts (or any window, for that matter) into interactive digital displays or advertisements. Omer Golan, who co-founded the company two years ago with his wife Tal, said that they have secured a few major landlord investors who are “very much involved,” but he would not reveal the names.

United American Land is working with Outernets, as is office-space provider and soon-to-be landlord WeWork (once considered a startup itself) at its headquarters in Chelsea. The company installs a special material on the glass and a projector system inside that creates the graphics onto the window. Outernets shares the ad revenue with landlords. And the technology also has sensors that pick up demographic data about the people passing by, which they also share with landlords.

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Outernets’ technology on a window at Dylan’s Candy Bar in Union Square. Photo: Kaitlyn Flannagan

These technologies are just the beginning as landlords increasingly see their value, Courteau said.

“You’ll see more capital going into [startups] as larger asset owners invest in technologies,” Courteau said. “There is still a lot more capital coming in.”

The next generation of real estate players may be a hybrid of landlord-tech developers.

Columbia University’s Graduate School of Architecture, Planning and Preservation began offering courses in real estate technology in June, called Hacking for Real Estate 1 and 2, to teach the next generation of developers about the importance of property technology applications.

There students learn how to use a variety of real estate applications and how to think critically about incorporating technology in their projects. The one-year master of science degree in real estate will be useful as technology begins to play a much bigger role in development, according to Patrice Derrington, the director of the program.

“We are teaching our students how to be digitally literate,” Derrington said. “That means capable of all apps, understanding the place for applications, being critical in terms of the usage of applications and having a more incisive look at daily real estate activities and considering potential digital solutions. They even do a little bit of coding to know just what it is like.”

To date, real estate companies have been targeting real estate-related ventures, hardly straying from things that would support their core business. But then there is amazing story of SilverTech Ventures, which works in collaboration with Silverstein Properties (as it was in part founded by Silverstein President Tal Kerret). SilverTech Ventures has been investing in both real estate and non-real estate startups for more than two years.

Kerret and other founders meet with about around 50 to 60 companies each month and choose one startup in which to invest every two months. To date, they have invested in 17 startups, including mobile wallet Cinch, identity protection startup Semperis and property management service Rentigo. Kerret said before the selection they like to spend a few months getting to know the executives.

“The graph is always up and the revenue will always come in the future,” Kerret said. “From the hundreds and hundreds of companies that we have seen it’s always [the same]. It’s like going on a date before you begin seeing someone.”

But for Kerret, investing in young companies provides them with something other than just the next business opportunity or way to enhance their own portfolios.

“I want to have fun with what I do in life, and I want to be around people I enjoy,” Kerret said. “I spend a lot of time with the CEOs, and I would rather spend time with people that I can have more fun with.”

Source: commercial

$142M CMBS Loan on LA Mall Sent to Special Servicing

A $142 million commercial mortgage-backed securities loan backed by Westside Pavilion, a sprawling West Los Angeles mall, has been sent to special servicing, according to an alert from Trepp.

The loan was transferred to special servicer Rialto Capital Advisors due to imminent monetary default.

The 10-year-term loan, which carries a rate of 4.47 percent, was originated by Wells Fargo in September 2012 and had a securitized balance of $150 million. The note comprises just under 13 percent of the roughly $700 million WFCM 2012-LC5, Wells Fargo-sponsored mortgage backed securities transaction. This marks the loans first trip to special servicing.

The future health of the three-story, 766,608-square-foot mall, located at 10800 West Pico Blvd., in a suburb of Los Angeles, came under question in August after its debt service coverage ratio fell below 1.10x as it faced hurdles with lease terminations as well as fulfilling financial obligations. Its tenant occupancy has fallen roughly 20 percent from nearly full occupancy since the loan was underwritten and originated, according to information from Trepp.  

In February 2017, one of the mall’s largest anchor tenants, Macy’s, sold its owned, anchor store to Los Angeles-based real estate investment firm GPI Cos. for $50 million. The sale occurred as the department store was advancing its plans to close around 100 retail locations nationwide, according to a report in the Los Angeles Business Journal. At the time, Macy’s was also planning to expand its operations at Los Angeles’ Westfield Century City mall, located just a few miles from Westside Pavilion, after the mall completed its planned $800 million in renovations, according to the report.

Westside Pavilion’s largest anchor, Nordstrom occupies 138,128 square feetor just over 25 percent of the building’s spaceon a lease that’s set to expire in 2035. The retailer is expected to relocate to Westfield Century City in October 2017, according to servicer commentary provided by Trepp.

“The property performance has been trending downward primarily due to the loss of income,” according to the commentary. “Lease terminations and amendments have combined with the loss of Macy’s to reduce revenues over the past year. Definitive plans for the Nordstrom and Macy’s space and the mall property, generally, are not yet known. Excluding Macy’s, Macy’s Home Store, Nordstrom’s and Landmark Theatres, the inline space is 77 percent occupied. It’s anticipated further deteriorating in income will occur throughout the remainder of 2017.”

Built in 1985, the mall features two community rooms for use by the locals and community organizations, free three-hour parking, a parking guidance system and a controlled parking program. The parking systems feature a red and green light system that pinpoints available parking spaces with a green light. The property also features an SMS text, ticketless valet parking system that allows visitors to simply text to request their vehicle.

Officials from the mall’s owner and operator Macerich did not immediately return a request for comment.

Source: commercial