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Category ArchiveMacy’s

NKF’s Regional Mall Guru Thomas Dobrowski Is Taking Retail Doom and Gloom in Stride

Thomas Dobrowski might be one of the reasons why malls are not actually dying. And it’s not just because he sells regional malls, but because he arguably has been to more malls than anyone else (60 in 2017 alone), and whenever he visits one, he shops (that’s 60 purchases last year).

No, he’s not buying anything big—“just a couple small items I can throw in the bag,” the executive managing director at Newmark Knight Frank, said—but he’s still shopping at malls. And just that fact alone, he said, “inherently speaks to—when you get people in the mall they’re going to spend money.”

Dobrowski, who handles regional mall investment sales nationally, sold 13 regional malls last year. (Whenever he gets an assignment, not only does he tour the property he’s selling; he check out the mall’s competition.)

While there’s no doubting that malls, and retail in general, face headwinds—only five malls have either opened or are under development since 2007, while about 200 have closed in that time Dobrowski said—the broker remains optimistic about the future of the industry. “The news does not help pricing. However, it does help bring attention and interest to mall properties for sale,” Dobrowski said, “because savvy investors recognize that this could be a once-in-a-lifetime opportunity to pick up malls at good prices.”

Dobrowski didn’t start his career in the mall business. After graduating with a bachelor’s degree in finance from Villanova University he worked in Morgan Stanley’s real estate investment banking group. He got into the mall business at the now-defunct Rockwood Real Estate Advisors, where he worked from 2002 through 2014, before NKF came calling. The brokerage was looking to “grow a capital markets platform and grow a national brokerage business,” Dobrowski said.

Since then, Dobrowski has been NKF’s lone regional mall investment sales broker. With the help of a support staff of three who handle underwriting, analytics, materials preparation and research, he sold 13 out of the 30 brokered mall deals last year, making the sellers’ representative’s market share nearly 50 percent.

Being in a business that is not territory based, Dobrowski can be based anywhere in the country, but prefers New York City, his home for the last 18 years or so. (He, his wife and their 3-and-a-half year old son live in the East Village.)

As people continue to speculate about the future of malls, CO sat down with the 39-year-old broker at NKF’s digs at 125 Park Avenue last week to make sense of it all.

Commercial Observer: What’s your take on the doom-and-gloom mall headlines?

Dobrowski: My opinion is, it’s very overblown—the “death of the mall” headline.

Do you only deal with noncore assets?

Look, all the REITs want to hold onto their good assets obviously, or assets that they feel they can add value to so our business today is really split 50-50—50 percent of our sales come from the REITs that are shedding their non-core assets and then the other 50, plus or minus, come from [commercial mortgage-backed securities] special servicers and lenders that have taken back a lot of these malls over the last decade that were overleveraged and now are in many cases distressed. I grew this business out of the distressed mall market [back] in 2011, 2012 when malls started to sell again. A lot of the mall REITS, when these loans came due, and even today, when they come due, if they can’t refinance out of them, they’ll just give the keys back to the lender and that obviously is the beauty of CMBS financing. One of the best sources of lending for regional malls is CMBS debt.

Why is that?

I think because that’s where there is the biggest appetite for that type of loan. A lot of the insurance companies and a lot of the balance-sheet lenders typically have shied away from regional malls, just given the complexities behind them. They’re relatively illiquid in markets. And CMBS historically was the go-to source of financing [for regional malls]. That’s started to change now because obviously the headlines about malls are pretty tough. So that’s really why you see, [with] a lot of the sales today, the valuations are much lower than people ever really anticipated, even though we’re obviously in a really great economic cycle and there’s growth and retailers are doing well in many cases. But buyers are just underwriting out all of the risk associated with most malls. The proof is in the pudding. The reality is a lot of these malls are suffering around the country.

Have the mall owners found financing materially more difficult?

Yes. In the last 24 months, in particular, I would say financing has become one of the major hot points or constraints with respect to really selling bigger malls that require real financing. Because the equity check gets bigger, the number of players gets smaller who can stroke a big check to take down a $50-plus-million-dollar mall, which is a big deal today. Ten, 15 years ago, we were selling malls at $100 [million] and $200 million valuations. If you look at 2017, most malls were, call it between $20 million and $60 million, plus or minus, that sold.

How would you characterize lenders’ level of caution?

Well, much like buyers—but even more. They’re much more cautious where they are really concentrated on two or three main aspects. One is who the sponsor is: Do they have a track record? Do they have an expertise in the space? Because there are a lot of new owners and new buyers starting to enter the mall field today. Next, it’s starting to get into the property: Who are the anchors? What’s my anchor risk? Do I have a Sears, Bon-Ton, JCPenney, a Macy’s, kind of a lot of the anchors that are worrisome today for a lot of folks, and what does that risk look like in relation to really the rest of the mall and what are the options of re-tenanting those spaces? The third one is really then, Who’s the competition for that mall in that given market?

What are the most essential differentiating factors between malls with a positive outlook and those with more cause for concern?

I always give the comparison: It’s like a custom suit. From 50 feet away, your navy blue suit that you buy off the rack at Macy’s could look the same as the one you buy at Brioni, right? So when you look at a mall from an aerial, it could have Macy’s, Dillard’s and JCPenney and Sears and have very similar tenants on the inside, and that mall could be 10 miles outside Manhattan, and it’s killing it. But then you could take that same mall and put it in the middle of Ohio with the same tenant makeup: Once you get closer into it, [it’s floundering]. So what do we look at? I would say the big driver…is what are the options for that consumer in that market and what’s going to continue to drive them to continue to go to that mall into the future. If that mall is in a market that has two or three other malls but the market really only needs one…it’s going to be hard to make a case that [all three] need to exist. They may keep going for a while. Malls don’t die of heart attacks. They don’t die overnight. It takes a very long time for a mall to go away. It could take five years, it could take 10, it could take 15. Once you’re comfortable knowing that that mall can survive in that market, it’s then, What can I do to improve upon the tenant mix that is there today?

There’s enough there you don’t need to sell open-air shopping centers?

Correct. I can comfortably say we’re the only team probably in the country that can say we focuws 100 percent of our time and efforts on covering the regional mall market, which is why we have, arguably, the biggest market share, because we’re just ingrained in this sector. 

What would you say is impacting malls besides e-commerce?

It’s changes in shoppers’ habits I would say and changes in the shopper demographic. I can give the example of, when I was growing up [in Holmdel, N.J.], it was always the mall where you bought everything, from soup to nuts. Right? Malls were woven into the social fabric. You hung out there. It was always where you sort of went shopping for back to school and holidays and everything in between. You first date at the movie theater was at the mall [and] you maybe ate at the food court.

screen shot 2018 01 09 at 12 10 56 pm NKF’s Regional Mall Guru Thomas Dobrowski Is Taking Retail Doom and Gloom in Stride
MALL FOR ONE: Dobrowski has had his hand in selling dozens of malls in his career, including Foothills Mall, at top, Mesa Mall, in the middle and College Square Mall, at the bottom.

What’s the biggest deal you’ve ever done?

The largest mall sale I ever worked on was a mall out in California called Stonestown Galleria, right outside San Francisco. We sold it for $312 million at the peak of the market [in August 2004]. It’s still a great asset. It’s still owned by [General Growth Properties].

What’s the last mall you sold?

Moreno Valley Mall in Moreno Valley, Calif. The all-in purchase price was $63 million. It was one of the bigger sales of 2017. It’s one of the best malls I’ve sold in the last five years.

Why?

It’s a complete contrarian story. This mall was foreclosed and taken over by CWCapital, a special servicer, in 2011. It’s one of the few malls, since they took ownership, it has only steadily improved year over year. And, it’s just a great case study in execution in terms of they brought in Round1 [entertainment company], they brought in Crunch Fitness, they brought in cool retailers that weren’t in that market before, and a lot of it has to do with Inland Empire California, which got hit really hard in the recession but has since emerged and exceeded expectations you can say in terms of population growth. And the mall stood to benefit from that. And we sold it to a private owner outside of Beverly Hills, [International Growth Properties]. This closed on Nov. 28, [2017].

How long does a mall typically take to sell?

Three to six months I would say is average. The time to sell them is not necessarily the part of selling malls that is most challenging.

What is?

It’s just the sheer complexity of the properties and the amount of time and effort that has to go into preparing offering materials and underwriting the asset that I think a lot of brokers would shy away from that, plus it’s a national product type and most brokers focus on regions, and that’s how most brokerage offices are set up. So we don’t sell anything in the immediate New York metro because there’s not really a mall market there.

Are you worried, with the death of mall stuff, about your future with this slice of the market?

I get that question a lot. A lot of people are like, Why do you put all of your chips in this basket, focus on this one product type? The answer is no. If you look at the peak of the market, there were 1,300 malls in the U.S., a well-established fact in 2007. Today, there are around 1,100. We’ve only lost 200 malls in 10 years’ time. If it took 10 years to get rid of 200 malls, is it another 10 or 20 of sales, trades, transactions to get these malls into the right hands of people that will really redevelop them, close them down and have them developed into something else? So, I think there’s a lot of runway left in terms of the number of sales that will happen over the next, call five to 10 years, and candidly, I think it’s only going to ramp up and increase. I think there’s going to be more transactions in 2018 than there were in 2017.


Source: commercial

Mall Developers Bet on the Basics—and a Trampoline or Two

The death of the American mall has been a topic discussed ad nauseam. Whether through overdevelopment, the rise of Amazon or the financial woes of traditional anchor tenants like Macy’s and Sears, brick-and-mortar retail—and the mall meccas that house them—have had their obituaries posted for the last year, or more.

Yet, in seeming defiance of the mournful headlines, private investors, with the funds and ability to reinvent struggling properties, are buying into the regional mall model that has defined the U.S. retail landscape since its creation in the mid-1950s by Victor Gruen.

Way back when, Gruen, the Austrian-born architect created the nation’s first grand shopping center, the 800,000-square-foot Southdale Center in Edina, Minn., in 1956 and still operates as the oldest, fully enclosed shopping mall in the United States. He was inspired by the town center of Vienna where he was born. He envisioned a communal gathering spot with a lively mix of commerce, art and entertainment. A socialist who hated cars, Gruen designed the development with long promenades and parking lots built far away to encourage walking. Gruen also envisioned a property with medical centers, schools and residences, not just an array of retail.

He wasn’t alone. Matthew Bucksbaum and his brothers, Maurice and Martin, the founders of what would become General Growth Properties, bought a struggling shopping center in Cedar Rapids, Iowa, around the same time and went on to expand to many small cities throughout the Midwest.

The model was widely embraced, and the rest is history. Today, there are an estimated 1,200 malls nationwide, primarily in suburban areas, inspired by Gruen’s conception—one he grew to despise. They didn’t bring about the vibrant urban centers Gruen envisioned; they led more to the rise of American car culture, suburban sprawl and the decline of walkable downtowns.

Is it any wonder then that the American mall—a concept dreamed up and later cursed by its own creator—would continue to stir debate and contradictory ideas about how to run, refashion or completely reinvent them?

Round1 Bowling
The Moreno Valley Mall is turning itself around by bringing in a bowling alley, gym and trampoline park. Photo: Dan Arnold Photos

Too Much of a Good Thing

“You know, the big question is, How many malls does the country need?”

This is the question asked by Thomas Dobrowski, the executive managing director at Newmark Knight Frank in New York, who handles regional mall investment sales nationally.

“Does it need 500? Does it need 800? There’s no question that the U.S. is over-retailed, and it’s really the regional malls that have been overbuilt. There are just too many, especially with people shopping more and more online and with people looking for more experiential experiences.”

Pete Bethea, an executive managing director at NKF, concurred.

Some of these centers that are in secondary and tertiary markets were just overbuilt with retail. So, instead of there being three viable centers, there might be one,” said Bethea, who is based in NKF’s San Diego office and focuses mainly on open-air suburban mall property sales. “What happens with those other two centers [depends on what] the market lends itself to, right? What is the next evolution of use of that space or that land?”

As mall real estate investment trusts (REITs) have been shedding their B- or C-level malls or noncore assets over the last five years, private equity investors have stepped up to purchase them.

“Contrary to all the news out there, there have been a lot of transactions happening in the enclosed mall space,” Dobrowski said. “Some of the malls we’re selling are almost exclusively to private equity or high-net-worth buyers who don’t have the same scrutiny that an institutional or typical mall REIT would have when it comes to repositioning or redeveloping these malls by bringing in alternative uses.”

Dobrowski said that a lot of the malls he sells are purchased to continue as malls with about one-third bought to be redeveloped.

He pointed to the Moreno Valley Mall in San Bernardino County outside of Los Angeles, which was previously owned by GGP before the company filed for bankruptcy in 2009 in one of the largest commercial real estate collapses in U.S. history, as a prime example of a mall turnaround.

NKF sold the property on behalf of CW Capital, which had bought it back from GGP, for $63 million in November 2017 to International Growth Properties, a small private equity firm in Beverly Hills.

IGP brought in a gym, Crunch Fitness—in a move most mall operators previously shunned, according to The Wall Street Journal—Round1 Bowling and Amusement, Action Time Bungee Jumping (a trampoline park) in addition to movie theaters and anchor tenants like Macy’s already on the premises.

“They really transitioned this mall from a kind of cookie-cutter enclosed mall with your traditional anchor tenants into a shining star of a lot of the malls that we sold this year,” Dobrowski said.

He and Bethea expect the trend to continue given market conditions.

“Pricing now is at a level where it makes sense to purchase a property and then go reinvest and reposition it,” Bethea said. “We’re in the early innings of that starting to happen. There are double-digit cap rates. Certainly, in the world of suburbia, we are starting to approach the 8 or 9 [percent cap rate] in submarkets.”

Dobrowski said the trend will likely accelerate in the next 12 to 24 months, depending on the state of major retailers.

“Last year was a big year in terms of stores closing and bankruptcies, and 2018 will probably be another big year,” he said. “But to redevelop a mall takes a long time. It’s a two- to five-year process, so we’re really just in the early phase of malls being purchased to eventually be redeveloped.” (For more from Dobrowski, see the Sit-Down on page 32.)

Adapt or Perish

IGP’s strategy of incorporating something like a trampoline park is exactly what the mall redevelopers are looking for to attract consumers to their properties, from families to millennials. Some are going even further. The long-stalled American Dream Mall in Northern New Jersey is back in business with construction resumed and developer Triple Five Group targeting a fall 2018 opening. The 6-million-square-foot property at the Meadowlands sports complex will feature the country’s first indoor ski slope, an aquarium, an indoor water park with a 1.5-acre pool capable of generating seven-foot waves and the largest indoor theme park in the Western Hemisphere with four roller coasters.

Triple Five, the Canadian company that already owns the two largest malls in the Western Hemisphere, the Mall of America in Minnesota and the West Edmonton Mall in Canada, is obviously betting big on the megaproject despite the pessimism surrounding traditional brick-and-mortar enterprises of which the shopping mall is emblematic. According to The New York Times, the developer has spent $700 million thus far on the project.

Ami Ziff, the director of national retail at Time Equities, is in the process of adding amenities to reinvigorate a few of its regional mall properties, including the Newgate Mall in Ogden, Utah, for $69.5 million in August 2016 from GGP, as CO previously reported and two malls in Tennessee purchased from Chattanooga, Tenn.-based CBL & Associates Properties for $53.5 million last May.

In addition to adding a Fly High Trampoline Park, which will occupy 41,000 square feet at the Newgate Mall, Time Equities is looking to add amenities that can meet the human’s need to socialize and appeal to social media and Instagram-addicted consumers.

There are plans for flash mobs as a special event, as well as immersive experiences, including a bubble and ball exhibit like the one the company has at its residential condominium at 50 West Street in Manhattan.

At Newgate, Time Equities will be renovating the food court area with the addition of a fireplace and common-area seating meant to evoke a ski lodge with seasonal and community programming—think caroling and hot chocolate around the fire during the winter holidays, s’mores and ghost stories come Halloween.

“There is such a difference in the kind of work that goes into owning a mall versus a strip center,” Ziff said. “You might have a lot of the same tenants, but the fact that you have this common space, there’s a significant burden on the landlord as well as the tenants to produce experiences. There needs to be a whole marketing agenda and program that we roll out at different malls based on different needs, timing and markets.”

Ski slope in Dubai
The long-stalled American Dream Mall will include an indoor ski slope like the one in Dubai . Photo: Getty Images

Alternative Uses

In addition to off-the-hook amenities, mall developers have turned to creating truly mixed-use properties, including creative office space, residential, grocery and, at some, alternative uses like medical facilities, thereby creating in effect the one-stop community center Gruen once envisioned.

“The same Baby Boom population that fueled regional malls and other retail property types in the 1950s, ’60s and ’70s continues to do so,” said Mark Hunter, the managing director of retail asset services for the Americas at CBRE based in Chicago. “We’re now seeing Baby Boomers [are] now requiring additional medical services and [how they’re being integrated]. A perfect example of that is the 100 Oaks Mall in Nashville, Tenn.”

In 2007 100 Oaks Plaza, which bought the property the previous year for $49.2 million, redeveloped one of its department stores into a medical center for The Vanderbilt University Medical Center, which leases over half of the 850,000-square-foot building. “I think you’re going to continue to see this trend where there’s a mix of medical, office, entertainment and residential as different markets adapt to the changing environment,” Hunter said.

Data centers could also fill in space left by struggling retailers, given the rise in cloud storage needs, pointing to how Rackspace, a web-hosting company based in San Antonio, moved its corporate headquarters into the local now-shuttered Windsor Park Mall in 2012.

Then there is a model that turns the whole American mall discussion on its head. Billed as a “solution to the retail conundrum,” Case Equity Partners introduced a patent-pending concept called the Shopping Fulfillment Center last month. The SFC, a hybrid of brick and click, combines a vast fulfillment center in the back of a retail center component. In the proposed model, retailers would share logistics costs and require much less in terms of traditional square footage. It would allow customers to peruse or test out their products, but instead of, say, having to stock several varieties of a high-touch item like a sweater, one would suffice with a vast array of options housed in a communal warehouse in back. (For more on the concept, see Chopp’s column on page 35.)

Omnichannel and Co-Existence

Arthur Coppolla, the chairman and CEO of Macerich, one of the country’s leading owners of high-end mall REITs, is bullish about the future of brick-and-mortar retail.

“If you read the social media and the news media, you would come to the conclusion that Amazon and e-commerce are killing all legacy retailers, but I see digital as being the best of friends with brick-and-mortar retail,” Coppolla said during a keynote talk at “Rethink: Emerging Macro Trends in Real Estate” in Los Angeles this past December. (Coppolla declined to be interviewed for this article.)

Coppolla said the common misperception among investors is that Amazon is synonymous with e-commerce “and that there’s nothing else, which is not true.”

Digitally made, vertically integrated brands—brands that have a niche and identified a broad market to disrupt and are not Amazon—are where it’s at in terms of the next great brands.

“Digitally native is a very chic place to be born,” he said. “Digital brands are growing at a far greater rate than e-commerce itself. If you look at the next [few] years between now and 2020, the digitally native brands are going to be generating as much business as Amazon direct.”

If you want a glimpse into the future of traditional retail, he said, just look to its past.

“The future of retail is its past,” Coppolla said. “If you look at legacy retailers, department stores were everything. They distinguished themselves in how they curated brands for their customers. But they cut sales people on their floors and lost touch with their customers. We have to be curators of brands like how department stores used to be.”

Successful malls need to take over where legacy retailers faltered and curate brands. E-commerce, he said, is the driver of brand creation today, and as such, he is actively seeking digitally native brands to his properties and the feeling among these brands is mutual.

“These digitally native brands, they all believe that brick and mortar is where they want to go because, when they open their store, that’s when they feel that they have arrived. It’s the last mile for them in terms of having a relationship with their customer,” Coppolla said.

Not only can e-commerce and brick and mortar co-exist, but according to Hunter at CBRE, the perception that online selling eclipsed traditional retail is much overblown.

“When you really delve into where most retail sales are happening today, as of last year, 9 percent of all retail sales were online, meaning 91 percent of all other retail sales were done in a physical space,” he said. “Our research shows that peaking in the next, call it, eight to 10 years in the high teens. Still, the bulk of retail sales will be done in physical space.”

The more important point, he said, is that, to thrive, retailers must be adept at omnichannel distribution.

“Whether you’re on your smartphone, or you’re in the store, it’s going to be a much more seamless transaction. You’re going to continue to see that happen, and the retailers that can adapt to the omnichannel distribution, they’re going to be very successful,” he said. “Those behind the times, that don’t adapt to that, will struggle more.”


Source: commercial

Macy’s Closing 11 Stores This Year, Clearance Sales Launch Today

Following a small uptick in sales during this past holiday season, Macy’s announced the closure of 11 stores in 2018—seven of which weren’t previously announced—hoping to save $300 million annually.

Macy’s reported its sales increased 1 percent in November and December 2017 combined compared with the same period in 2016, according to a recent company press release.

Clearance sales for the 11 stores are expected to begin today and will continue for approximately eight to 12 weeks. The closure of those stores this year represents 81 of the 100 locations it put on the chopping block in August 2016. (Macy’s has terminated 124 locations since 2015). Macy’s will reduce its workforce by 5,000 employees as a result of the closures and staff cuts made at remaining locations, as USA Today reported.

“Our primary focus in 2017 has been to continue the strong growth of digital and mobile, stabilize our brick-and-mortar business and set the foundation for future growth,” Macy’s CEO Jeff Gennette said in a statement. “We’ve made good progress on each, including encouraging trend improvements in our brick-and-mortar business.”

Among the 11 Macy’s closing this year, there are four in California including the one in Westside Pavilion mall in Los Angeles (news about its closure was announced last year, as the Los Angeles Business Journal reported in October 2017). There are two closing this year in Florida and one each in Idaho, Indiana, Michigan, Ohio and Vermont.

Macy’s—which has brands such as the flagship Macy’s, its off-price sibling Macy’s Backstage, high-end cousin Bloomingdale’s and beauty and spa retailer Bluemercury—has approximately 140,000 employees and operates more than 860 stores.

Macy’s stock has plummeted to just over $24 per share from approximately $30.46 a year ago. It is expected to report its fourth quarter earnings on Feb. 27.

Besides Macy’s, other retailers have struggled as the retail industry has changed. Sears announced on Jan. 4 that it was planning to close an additional 103 stores this year. JCPenney has plans to eliminate 138 stores. And Bon-Ton announced last year it was cutting 40 locations, as Commercial Observer previously reported.  


Source: commercial

Burlington Inks 55K-SF Deal at Kings Plaza for Third BK Store

Burlington has signed a 55,000-square-foot deal at Kings Plaza Shopping Center in the Mill Basin section of Brooklyn for its third location in the borough.

The discount clothier, formerly known as Burlington Coat Factory, will occupy 52,915 square feet on the fourth floor of the mall at 5100 Kings Plaza at the intersection of Avenue U and Flatbush Avenue, which is owned by Macerich, as The Real Deal first reported. Another 2,163 square feet is on other floors of the shopping center.

The asking rent in the 10-year deal was not immediately clear. The transaction includes three five-year options to extend the lease, according to TRD.

A spokeswoman for Macerich did not return a request for comment on the deal. CNS Real Estate’s Cliff Simon, who brokered the deal for Burlington, did not return multiple inquiries seeking comment on the transaction.

The existing Brooklyn Burlington locations are at 625 Atlantic Avenue in Boerum Hill and 410 Gateway Drive in the Gateway Center in East New York. A spokeswoman for the company did not immediately return a request seeking comment.

Macerich purchased the 1.2-million-square-foot Brooklyn mall from Alexander’s Inc. for $751 million in 2012, according to public records.

Existing tenants at the shopping center include Macy’s, Best Buy, Old Navy, H&M and Forever 21. Last year, Sears shuttered after two decades years at the mall, as was widely reported at the time.


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.

westside pavilion interior 2008 Regional Malls Look to Reposition as Retail CMBS Space Sweats
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.

gettyimages 171080470 Brookfields Takeover Bid Is the Latest Chapter in Mall Giant GGPs Turbulent History
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

Delivering Amazon: This Is What’s Right and Wrong With the City’s Pitches for HQ2

Earlier this week, The Associated Press reported that Amazon received 238 proposals from cities and regions that want to house its second North American headquarters.

Indeed, Amazon has a lot to offer: a promised 50,000 jobs and $5 billion to spend. Everyone—including Gotham—wants in on the action.

In its attempt to lure Jeff Bezos to our city, New York hasn’t shown this much leg since The Deuce era.

More than 70 elected officials—from Public Advocate Letitia James, to Manhattan Borough President Gale Brewer, to City Council Speaker Melissa Mark-Viverito—signed a statement touting New York City’s accessibility to both Boston and Washington, D.C.; its commitment to sustainability; Citi Bike and the largest subway system in the world (wisely, nobody mentioned MTA’s “summer of hell”) and “affordability”—as in, the fact that the administration has promised 200,000 affordable housing units over the next 10 years. (Friendly advice: The word “affordability” isn’t something that really works to New York’s advantage in real estate matters. But too late now.)

“Companies don’t just come to New York,” Mayor Bill de Blasio wrote in his seduction letter. “They become part of New York.”

In its official presentation, the New York City Economic Development Corporation proposed four different neighborhoods that could conceivably do the job: Lower Manhattan, the Far West Side, Long Island City and Downtown Brooklyn.

And while everybody weighs in (Moody’s pegged New York’s chance of landing Amazon as sixth in the country—after Austin, Texas; Atlanta; Philadelphia; Rochester, N.Y.; and Pittsburg—as per a New York Times story), it’s worth considering the four areas up for consideration, what they all have to offer and what the NYCEDC probably won’t mention.—Max Gross

Lower Manhattan

Over the 16 years since the Sept. 11, 2001, World Trade Center attacks, Lower Manhattan has been transformed from a financial district to a commercial and residential hub.

It is this very evolution—plus its transportation network—that makes the neighborhood ideal for Amazon’s second headquarters in North America, Lower Manhattan boosters say.

Amazon wants 500,000 square feet of office space in 2018 with another 7.5 million square feet over time. And Lower Manhattan has the potential for over 8.5 million square feet of space, according to the city’s recent proposal to Amazon.

Granted, Downtown Manhattan would not be the cheapest option nationwide. But, “cost of space should be least of their concerns,” Marty Burger, the chief executive officer of Silverstein Properties, said in a survey for Commercial Observer’s upcoming Owners Magazine. (The landlord owns the majority of the World Trade Center buildings.)

“Most important is access to new talent,” he continued. “You want a place that has A) the best transportation, B) a great pool of people to draw from. When we look at the lower tip of Manhattan, it has the best access to all this talent—Brooklyn, Queens, Staten Island, Jersey City, even Long Island. There are 10 million people to draw that talent from.”

Lower Manhattan has a high concentration of mass transit with 13 subway lines and the PATH train, and those transit hubs have been upgraded with abundant retail and dining options as well as climate-controlled concourses, said John Wheeler, a managing director who runs JLL’s Lower Manhattan office.

Downtown Manhattan boasts access to the waterfront, more than 83 acres of open space and enticing dining options, from food halls like Hudson Eats in Brookfield Place to restaurants helmed by star chefs, like Jean-Georges Vongerichten, Nobuyuki “Nobu” Matsuhisa and Danny Meyer, to fast-casual chains like Chop’t Creative Salad Company and Dig Inn.

Burger has already figured out how to make it work for what’s being called Amazon HQ2.

“We could put together a campus for them,” Burger said. “They could take the top of 3 World Trade Center. We could work with Durst [Organization] to get them the top of 1 World Trade Center. We have a potential to build 2 World Trade Center and 5 World Trade Center. We could put together 7 million square feet.”

But there are also other options for Amazon.

Wheeler noted that, while the World Trade Center would be “part of the solution,” other candidates include Brookfield Place, 28 Liberty Street and Guardian Life Insurance Company of America’s headquarters building at 7 Hanover Square.
Lauren Elkies Schram

Long Island City

Long Island City’s relatively recent transformation from an industrial outpost to Queens waterfront hotspot has been mostly fueled by residential development, with more than 14,000 new units built since 2006 and another 19,000-plus in the pipeline, according to data from the Long Island City Partnership.

As far as commercial development is concerned, however, the neighborhood by most accounts has some way to go. Most of Long Island City’s new office stock has come in the form of repositioning existing warehouse buildings into loft-like spaces mostly of a scale smaller than what Amazon would demand.

But the city is floating LIC as a legitimate option for Amazon, citing the neighborhood’s “creative” appeal as “home to over 150 restaurants, bars and cafés” and more than 40 “arts and cultural institutions” including galleries, museums and theaters, according to the NYCEDC’s proposal.

While the proposal cites “over 13 million square feet of first-class real estate” available in the neighborhood, how much of that qualifies as office space that would suit Amazon’s needs is murkier. Per the LIC Partnership, the area has roughly 7.5 million square feet of existing, nonretail commercial space—which would already fall short of the 8 million that Amazon will eventually require—and another 4.5 million square feet on the way by 2020.

But projects like The Jacx—Tishman Speyer’s two-towered development that promises to bring 1.2 million square feet of Class A office and retail space to Jackson Avenue—hope to further enhance the neighborhood’s office chops. And perhaps the biggest advantage LIC has is its relative affordability compared to the other areas under consideration with the city citing “price points that compare favorably with commercial centers across the five boroughs.”

For developers like TF Cornerstone, which was an early believer in Long Island City and has helped facilitate its transformation via multiple large-scale residential projects, Amazon’s arrival would be a massive boon to the neighborhood’s economy—one that would fuel demand for the thousands of new residential units due to come online, attract needed retail to the area and heighten its profile as an office destination. In turn, LIC’s relatively central location within the five boroughs and robust public transit offerings would give Amazon what it needs for a viable HQ2.

“The north Long Island City waterfront offers the best location for a large user like Amazon,” Jake Elghanayan, a senior vice president at TF Cornerstone, told Commercial Observer in a forthcoming interview for Commercial Observer’s Owners Magazine. Elghanayan cited the neighborhood’s large “contiguous development area” and robust public transit offerings, as well as its proximity to the new Cornell Tech campus on Roosevelt Island.—Rey Mashayekhi

West Side of Manhattan

Those associated with the Hudson Yards megaproject like to say that “a new city” is being built on Manhattan’s Far West Side, and it’s hard to argue with the assessment. With tens of millions of square feet of new commercial space due to come online in the area over the coming years, Hudson Yards would most likely serve as the centerpiece of the city’s effort to get Amazon to commit HQ2 to Manhattan’s West Side.

Besides the sprawling 28-acre development being undertaken by Related Companies and Oxford Properties, there is also Brookfield Property Partners’ Manhattan West project nearby, where Amazon already has a sizable footprint. Last month, the tech giant committed to taking 360,000 square feet of office space at 5 Manhattan West, where it will house 2,000 employees and serve as the primary location for Amazon’s advertising division. (CO first reported that Amazon was in talks for the space in April.)

The city’s proposal for HQ2 also cites the nearby Penn Plaza district, where Vornado Realty Trust—the largest commercial landlord in the area surrounding Penn Station—has in recent years talked up a large-scale repositioning of its assets in a bid to capitalize on the West Side’s newfound appeal as an office destination.

In total, the city says the West Side offers Amazon more than 26 million feet of available office space to build its campus—more than triple the 8 million Amazon will need long term—as well as ample transit options for the company’s sizable workforce: 15 subway lines, plus access to the PATH, the Long Island Rail Road, the Metro-North Railroad and Amtrak, not to mention the Port Authority Bus Terminal and the Hudson River ferry service.

But the West Side could prove cost prohibitive; it is the most expensive of the four New York City submarkets being floated as options for Amazon. With the cost of living and doing business in New York already the biggest drawback in the city’s bid for HQ2, the likes of Related and Brookfield may have to look elsewhere to fill up all that office space.

Such cost concerns aren’t discouraging neighborhood stakeholders, however. “Manhattan’s always been expensive, but it gives you other things,” said Robert Benfatto, the president of the Hudson Yards/Hell’s Kitchen Alliance Business Improvement District. “It has its upsides and downsides, but it tends to be attractive to businesses.”—R.M.

Downtown Brooklyn

Out of the four neighborhoods New York City proposed for Amazon’s second headquarters, the “Brooklyn Tech Triangle” of Dumbo, Downtown Brooklyn and the Navy Yard might hold the most promise. Although the area doesn’t have much office space right now, several large projects are either under construction or in the pipeline. At the Navy Yard, Rudin Management and Boston Properties’ Dock 72 will bring 675,000 square feet of offices—anchored with a 222,000-square-foot WeWork—to a former dry dock on the East River.

Besides Dock 72, landlord Brooklyn Navy Yard Economic Development Corporation is leasing up a newly renovated 1-million-square-foot industrial and office building called Building 77, and there’s available space at Steiner Studios, the film and television production complex on the eastern edge of the yard. The closest subway stations are about a mile away in Dumbo (certainly its biggest drawback), but the yard has begun running shuttle buses that take commuters into Dumbo and Downtown Brooklyn for easy transit access. It’s also about to open a new ferry stop next to Dock 72.

TerraCRG Founder Ofer Cohen dispelled concerns about the Navy Yard’s lack of transit, pointing out that it hasn’t prevented hip companies from setting up shop there. New Lab, an innovative science and tech coworking space, recently opened in Building 128. And Building 77 hosts tenants like startup incubator 1776, a commissary kitchen for small food manufacturers called Tiny Drumsticks and fashion company Lafayette 148. He noted that Dock 72 would probably be the only project large enough to accommodate Amazon’s requirement of 500,000 square feet of office space in 2019.

“Downtown Brooklyn and the Brooklyn Tech Triangle are poised for significant growth,” said Downtown Brooklyn Partnership President Regina Myer. “There’s a huge demand for Class A space in Downtown Brooklyn. We have 1,400 innovative companies in the broader tech triangle. And we have an amazing pipeline of new talent for companies relocating to the tech triangle because we have 10 different colleges.”

Myer pointed to several sites in Downtown Brooklyn that could host Amazon. Rabsky Group could build an office building as large as 770,000 square feet on its vacant parcel at 625 Fulton Street, and RedSky Capital could develop a huge commercial and residential project on its assemblage bounded by Dekalb Avenue, Flatbush Avenue and Fulton Street. And Tishman Speyer is developing the Wheeler, a 10-story office building, on top of the Art Deco Macy’s department store at 422 Fulton Street.

CPEX Real Estate’s Timothy King, the brokerage’s managing partner, pointed out that Amazon would have convenient access to plenty of retail and amenities in Downtown Brooklyn, including hospitals, hotels, shopping, restaurants and bars. And when you consider Atlantic Terminal, the broader tech triangle offers 13 subway lines. “Short of going out in the desert somewhere and building some kind of utopian village,” he said, “I’d be hard pressed to find some place better for Amazon than beautiful Downtown Brooklyn.”—Rebecca Baird-Remba


Source: commercial

Under Construction: How Tishman Speyer Is Building an Office Tower Over Macy’s in BK

Tishman Speyer and partner HNA Group are trying to blur the lines between Art Deco architecture and contemporary glass with their new office project in Downtown Brooklyn called The Wheeler.

The project involves adding a new 10-story, office building above the existing four-story French Mansard building at 422 Fulton Street, constructed by Brooklyn developer by Andrew Wheeler in 1870 (where it gets its name). The new structure will be tied to the two adjacent 10-story Art Deco buildings. Macy’s—which owned the three buildings in their entirety—will continue to occupy the first four floors of the project; the upper floors will be a mixture of old and new and comprise 620,000 square feet. (The building will also have an entrance at 181 Livingston Street).

“We have been trying to create [a seamless] footprint so you won’t know that you are on an amalgamation of different floors,” Chris Shehadeh, a Tishman Speyer senior managing director who oversees New York, told Commercial Observer. “We are putting in a new core that will thread the three different buildings, and then we will go back and take out the old cores. What we will be left with is a new core and wide-open floor plates where you don’t have a reminisce of each of the individual buildings.”

To preserve the historical pedigree, JRM Construction has removed cast iron from the facade, which will be repaired and replaced. Moreover, construction workers will also renovate the masonry to the main Macy’s brick buildings.

A gut renovation is currently underway with demolition teams clearing the interiors of the existing buildings. Workers will then join those properties to the new building.

The first four office floors will have 90,000-square-foot floor plates with loft-like 16-foot high ceilings. The remaining six floors will range in size from 34,000 square feet to 60,000 square feet. The project is expected to be completed in mid-2019.

Tishman Speyer declined to disclose the construction costs to CO, but the developer took a $194 million construction loan from Bank of the Ozarks in January. And it paid $170 million to Macy’s for the top six floors of its properties. Macy’s still owns the bottom four floors. (Tishman Speyer also will give Macy’s another $100 million to renovate the retail space.)

The developer is also hoping to blend East Coast and West Coast vibes.

The developer brought in Los Angeles-based architect Joey Shimoda of the namesake Shimoda Design Group, which Tishman Speyer worked with for an office complex at Playa Vista in Los Angeles. This will be Shimoda’s first project in New York City. (Perkins Eastman is the architect of record.)

Shimoda’s design puts an emphasis on modern, open-plan spaces with loads of glass so light can flood the floors. And each floor will be open plan, which will attract a mix of companies to the office tower. He also crafted 11 terraces via setbacks and a roof with a lawn and seating. In total, the property will feature an acre of outdoor space.

The rooftop space will be open to all tenants for events as well as common space to relax and enjoy the views 276 feet off the ground, such as the Statue of Liberty, the Manhattan skyline and the Brooklyn Bridge.

“We are trying to stay first and foremost true to the Brooklyn neighborhood feel and vibe while introducing modern and contemporary office amenities and design,” Shehadeh said. “I think the goal is to marry those two, and Joey is the perfect architect to do that.”


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

With Stores Closing, How Come Property Values—and Tax Assessments—Are Still Sky High?

In January 2007, Apple leased the 16,000-square-foot three-floor store at 21-25 West 34th Street between Fifth Avenue and Avenue of the Americas at a rent of $6 million a year. Then-Apple Chief Executive Officer Steve Jobs famously visited the site and deemed the block unworthy of an Apple store.

“The company decided not to open in the location and sublet it for 50 percent of the rent they were paying,” said Joel Marcus, a partner at Marcus & Pollack, a law firm that handles real estate tax review and litigation.

Esprit opened in the space in 2010 via a sublease, paying $3.6 million a year, the attorney said.

In early 2012, the German-headquartered clothing chain announced it was closing all of its stores in North America. The West 34th Street digs sat vacant from April 2012 until May 2016, when Commercial Observer reported that clothing company Superdry signed a deal to take over the space for its New York flagship. Superdry’s annual rent was $1.5 million.

Marcus said the New York City Department of Finance used the 2007 rent rather than the 2016 rent in calculating the property’s value.

“They didn’t reduce the tax assessment, so we are on appeal,” Marcus said. “We get this attitude from the assessment people that, well, the original lease was written for a higher amount. Our argument is real estate taxes are based on market value today. It was signed in a boom period, but we are not in a boom period. It doesn’t represent market value.”

As landlords of prime retail space face greater challenges in leasing their spaces due to overinflated rents, excess supply and the Amazon effect, they are hoping the DOF will take these factors into account when assessing their properties. Since the city relies on old data—when perhaps the market was rosier—to calculate tax bills, commercial property owners are doubling down to prove that their properties were incorrectly assessed at inflated prices. They do this by seeking a review by the city’s Tax Commission, the forum for independent administrative review of real property tax assessments set by the DOF.

Property owners have long been contesting the city’s annual property valuation, but “now these are realistic economic issues,” said William H. Jennings, the partner in charge of the real estate group at accounting firm Marks Paneth. The tax assessment reductions “will have a greater impact because of the vacancies,” he added.

These property assessments (which include a vacancy and loss factor) are nothing to take lightly. Of the 25,239 appeals filed last year, 10,200 were granted reductions totaling $3.5 billion, or about 9.4 percent of the total assessed value of the properties, according to a city spokeswoman.

There are already more appeals filed this year—25,616—for all commercial properties than in all of last year, when there were 25,239. To put that in perspective, there are 97,977 parcels of commercial property (not just retail, and excluding residential properties with a commercial space as well as condominiums) on the 2017-2018 assessment roll.

As for why there is an uptick so far this year, “It would be highly speculative to try to attribute the increase to any one factor,” the spokeswoman said in an email. “The numbers have increased every year for several years. Assessments have increased (8.59 percent for [this property] class since last year), and I expect that property owners are more aware of the availability of the appeal process. Tax rates on [this] class also have increased.”

All told, the annual tax revenue generated by New York City’s real estate industry has been on the rise the last few years. In 2016, revenue-generating properties (excluding one- to three-family homes, cooperatives and condominiums) produced $20.4 billion in tax revenue, according to an analysis by the Real Estate Board of New York.

Income-producing property owners have to file their real property and expense statement with the DOF by June 1, explained Joseph Giminaro, a partner at Stroock & Stroock & Lavan who manages the Tax Certiorari Group. That data reflects the dealings from the prior year. The city’s assessors use that data to determine their assessed value of the property. That figure is published in January for the fiscal year beginning the following July 1.

For example, “2016 data governs the 2018 assessment,” Giminaro said. “It’s a little bit ass-backwards.”

Under state and local law, property owners have the right to an administrative review of the assessed value of their property by the Tax Commission. They must file an application for correction between Jan. 15 and March 1, which includes the current year’s income and expense data audited by an outside accounting firm. The city makes its final determination on the tax bill using that up-to-date information.

One success story over the last number of years has been J.C. Penney, which owns its store in the Queens Center mall at 90-15 Queens Boulevard in Elmhurst, Queens. Marcus & Pollack has been able to reduce the department store’s tax burden due to declining sales. (J.C. Penney declined to comment.)

For the current year, the tax assessment was reduced from $11.7 million to $10.5 million, Marcus said. The city valued the property at $12.8 million and later reduced it to $11 million for the 2016-2017 fiscal year. For 2015-2016, the assessment went from $18.4 million to $11 million. For 2014-2015, the $19.6 million assessment was reduced to $11 million.

And at 422 Fulton Street in Downtown Brooklyn, Macy’s has seen reductions in its assessments over the last recent years, “based upon rapidly declining sales,” according to Marcus, who has direct knowledge of the situation. For the 2016-2017 year, the property was assessed at $25.4 million, which was reduced to $16.5 million. And, the previous year, 2015-2016, it went from $22.7 million to $16.5 million. This year’s assessment appeal includes the additional challenges the site has faced from construction. (Macy’s didn’t respond to a request for comment.)

Having slow sales, less rent or no tenants does not guarantee a new valuation. That is in part because the Tax Commission will look at the estimated rent and expenses for the space as if it had been rented.

“Just because you have a vacant storefront you should not assume the assessment will go down,” Giminaro said. “The assessor will assume the value of it whether it’s occupied or not. If you bought a $500,000 house and you don’t live in it and don’t rent it, it’s still worth $500,000. It’s the same thing with [a commercial property].”

Giminaro said his firm has been relying on rent issues and vacancy upticks to appeal tax assessments, but it’s still too early to know if those factors will impact assessments in a serious way.

Marcus also noted that it’s too soon to tell.

“So far we haven’t seen a big change in the way they are valuing property,” Marcus said. “But that doesn’t mean that the story is over because basically assessments trail the facts.”

Meyer Mintz, the tax partner at accounting firm Berdon, said, “I think we will see more successful cases on the attorney side because the buildings will show less revenues. As the building is vacant, there’s less income, which would mean the building is worth less to the city because the city looks at the net income to help determine the value.”

Nicholas Loguercio, the audit partner at Berdon, added that in preparing profit and loss statements for landlords, we’ve seen either more vacancies or reduced rent on some. It could impact the number of protests.”

Marcus & Pollack has 10 major property appeals in the works. While Marcus said the firm would likely be representing the landlords in those cases anyway—as property owners commonly appeal assessments in any climate—“the dire circumstances put a sense of urgency here.”

Marcus said he and his colleagues are “optimistic that we are going to get some significant relief,” in those cases, but “ultimately, we may have to take them to court.”


Source: commercial