Global Viewpoints

Majority Interest in 515 Madison Avenue Sells

Edited: Jennifer Brenner
Source: Studley

Represented by the Capital Transactions Group of international commercial real estate services firm Studley, the Malloy and Sheffer families have sold a majority interest of their fee and senior leasehold positions in 515 Madison Avenue, a 340,000-square-foot, 42-story, prewar office building on the northeast corner of 53rd Street and Madison Avenue in the Plaza District.

The purchaser, a joint venture led by the Gural and Hemmerdinger families, was the controlling party of the previously existing subordinate leaseholds. The transaction values the building at $150 million, or approximately $440 per square foot, and was financed with a loan from Wells Fargo.

“Consolidating the ownership interests made sense to do now,” explained Woody Heller, executive managing director of Studley’s Capital Transaction Group. “The building had been primarily occupied by two tenants, Fragomen and Brennan, Beer, Gorman, which together leased over 100,000 square feet and typically leased whatever space became available. As a result, the building maintained a low profile in the leasing community. Within the last two years, both tenants outgrew the building, which resulted in the property having sufficient vacancy to warrant upgrading and repositioning. However, the renovation could not be justified given the short duration that remained on the existing leasehold. Therefore, it made sense to consider consolidating the ownership interests, which eventually led to the deal just completed.”

“Now under fee-simple ownership,” added Heller, “515 Madison Avenue is positioned in a manner commensurate with its famous address, prestigious location and distinguished provenance.”

Jeffrey Gural, senior partner of the new venture that owns and operates the building added, “In anticipation of the closing, we recently renovated the entryway and lobby, as well as created above-standard pre-builts in the available spaces, which has resulted in strong tenant demand. We have leased almost 100,000 feet over the last 12 months and are now 96% occupied. We extended the lobby 40 feet and renovated the decorative ceiling to match the original design from when it was built in 1932; we even found marble from the original quarry. It was the first building my father ever operated, and it will also be the first of our buildings to receive LEED certification. Now that we control the building subject to fee simple ownership, we will continue renovating and improving it to make 515 one of the jewels of our nine million-square-foot portfolio.”

Timon Malloy, president of Fred F. French, commented, “We are delighted to have completed this transaction and to have achieved our objectives—to monetize the majority of our investment, and with the balance, to become partners with the Hemmerdingers and Gurals, who are excellent owners and operators.”

Steve Horowitz Esq. of Cleary Gottlieb Steen & Hamilton LLP represented the Malloy and Sheffer families, while Andy Albstein Esq. of Goldberg Weprin Finkel Goldstein LLP represented the Gural family. Christine A. McGuinness Esq. of Schiff Hardin LLP represented the Hemmerdinger family.

Avison Young releases 2010 national real estate forecast for U.S., Canada

Edited: Jennifer Brenner
Source: Avison Young

Recessionary headwinds took their toll on real estate markets on both sides of the border in 2009, with the U.S. continuing to shoulder the worst of the storm. Now several quarters into it, the Canadian real estate sector has not been entirely immune, but appears to be weathering the downturn thanks to relatively sound, though shaken, market fundamentals.

These are some of the key trends noted in the recently released Avison Young's 2010 National Forecast. The annual report covers the Office, Industrial, Retail and Investment markets in 13 regions: Chicago, Washington, DC, Vancouver, Calgary, Edmonton, Regina, Winnipeg, Toronto, GTA West/Mississauga, Ottawa, Montreal, Quebec City and Halifax.

"If anyone needs to be reminded, commercial real estate is a cyclical industry," comments Mark E. Rose, Avison Young's chair and CEO. "In our 2009 Forecast last January, we predicted one overriding theme - decision-making would grind to a halt until key metrics stabilized and new trends appeared. The dislocation in real estate lending and investing was so severe in March and April that the markets looked to be on the verge of collapse. Canada weathered the storm better than the U.S. and activity was down, but transactions were executed."

Rose continues: "Due to government intervention, the concept of distressed selling and buying did not materialize anywhere in North America. The U.S. government put money into the major banks, which in turn extended every loan they could to avoid realizing losses. The Securities and Exchange Commission watched from the sidelines and allowed the impacted lenders to postpone the inevitable."

"2010 is shaping up to be more of the same, but with a slightly positive bias," he says. "Fundamentals have firmed, decision makers are getting their sea legs back and the second half of 2010 should produce favorable comparisons to 2009. This, in turn, will drive the confidence we have been sorely missing and allow for activity to return to more normal levels. With that said, before recovery can occur in 2010, private markets must solve their own problems, even if that means capitulation; the bid and ask spreads need to narrow; and we must see job growth in North America."

U.S.

According to the report, mounting job losses in the corporate arena and the corresponding fall in the demand for office space have led to higher vacancy rates in markets across the U.S. Avison Young's coverage of its two U.S. markets of Chicago and Washington, DC revealed vacancy rates of 15.3% and 13.5%, respectively, up from 13.2% and 11.3% in 2008. These rates are indicative of the double-digit vacancy rates in other major US markets. For the year ahead, vacancy is expected to stabilize, trending slightly higher for Chicago (+50 basis points (bps)) while falling marginally in Washington, DC (-50 bps). A sharp decline in retail sales, the result of conservative spending from consumers, has driven up nationwide vacancy rates for retail space.

Occupancy of industrial space is also down, with some markets harder hit than others. While Washington, DC will see its vacancy rate retreat to 10% this year, Chicago's is anticipated to rise slightly above 12%. In all, demand for industrial space is variable by location even within a given market, and demand for certain types of well-located industrial property remains robust.

In the investment market, asset values continue to drop, particularly when compared to peak values experienced in 2007, and financing remains difficult to secure. It appears 2009 may very well mark the trough for real estate investment volume in the U.S.

The prognosis for the coming year is not overly optimistic. Many indicators appear to have hit cyclical lows; however, the recovery process remains slow and drawn out, and significant progress is not projected for 2010.

"The U.S. market continues to be in a falling-value state where asset values have dropped from their peaks in 2007 by between 35% and 50%, depending on the type of property and the market," explains Earl Webb, President, U.S. Operations, Avison Young. "Sales transaction volume has continued to decline, down approximately 70% from 2008 which, in itself, was down almost 80% from 2007. Financing continues to be scarce for office, industrial, retail and hotel properties, especially when seeking loans in excess of $50 million. Multi-family assets continue to attract significant industry attention due to the available financing through U.S. government-sponsored enterprises (GSEs) (i.e. FNMA and FHMC, also known as Fannie Mae and Freddie Mac)."

"We expect 2010 to be another difficult year for real estate fundamentals, although the dramatic drop in transaction volume has undoubtedly reached a cyclical low-point. Rents, while remaining well below their peaks in 2006-2007, appear to have settled out at cyclical lows in most markets and asset classes," he says. "The good news is that the construction of new supply was relatively contained in the prior up-cycle and there will not be a significant overhang of new deliveries in the next several years as (it is hoped) absorption picks up."

Webb adds: "Employment statistics are the leading indicator of real estate recovery, and the U.S. has yet to see any uptick in employment. Should the economy continue to lose jobs during 2010, real estate fundamentals will continue to feel pressure. Even with moderate employment gains, there will be sufficient shadow vacancy in most markets to absorb any additional employees without the need for additional space, at least through 2010."

CANADA

The national vacancy rate for office space in Canada is up 270 bps to 9.0% since the close of 2008 and is poised to climb to the 10% range by year-end 2010. Markets nationwide have experienced increases in vacancy as a result of less than stellar leasing velocity, which muted overall demand levels. The two strongest markets in Canada recently, Calgary (vacancy rate +410 bps to 10.1%) and Toronto (vacancy rate +340 bps to 10.5%), turned in the poorest performances, largely impacted by the delivery of new supply. In contrast, two of the smallest markets, Regina and Winnipeg, witnessed nominal increases in vacancy, rising to 1.5% and 5.4%, respectively, from 1.2% and 4.8%.

The leasing market for industrial space was also hit hard, experiencing escalating vacancy rates on average across Canada. With nearly 1.9 billion square feet (sf) of space distributed across Canada's 11 largest cities, the national industrial market saw its vacancy rate climb 110 bps from year-end 2008 to close 2009 at 6.3%. With the exception of Montreal (vacancy +200 bps to 8.0%) in the east, the most notable change in vacancy occurred in the western markets of Edmonton (+300 bps to 4.2%), Vancouver (+200 bps to 4.4%) and Calgary (+140 bps to 5.2%). This was tempered by the relative performance of the Ontario markets (Toronto, Mississauga and Ottawa), which witnessed marginal increases in vacancy of between 20 and 70 bps. As the industrial market continues to recalibrate, the national vacancy rate is expected to push beyond 7.0% over the next year.

Investment sales transaction volume was down 55% to $5.4 billion through the first nine months of 2009 as investor caution, a scarcity of willing lenders, and owners' increased reluctance to sell devalued assets in the current climate proved to be barriers to the flow of transactions. Interest from foreign investors, especially the Germans, remained a key factor in the investment sales market, demonstrating Canada's relatively strong real estate fundamentals and enduring appeal to overseas capital. This international interest, along with a surge in capital raisings and a number of notable acquisitions in the closing months of 2009 by the domestic REIT community, is perhaps a good omen of things to come. On the retail front, consumer spending was more resilient in Canada than south of the border through 2009. While some national chains fell victim to the recession, extensive discounting by retailers attempting to lure customers was common, especially in the months leading up to the all-important holiday shopping season. Though the final tally has yet to be determined on the overall performance in 2009, the outlook for the retail market is for stability or modest growth this year.

"Opinion remains divided on the question of whether Canada's economy will see the beginning of a sustainable recovery in 2010, or whether a further correction is to come before things start to look up," notes Bill Argeropoulos, Avison Young's VP and director of Research (Canada). "Notwithstanding this, Canada remains in better shape than its neighbor to the south and many other real estate markets around the world, and is poised for a more rapid recovery. Ultimately, markets are expected to rebound as the economic cycle starts its next upswing."

Valuation Firms Align: Colliers Meredith & Grew Joins Forces with FirstService PGP Valuation

Edited: Jennifer Brenner
Source: Colliers Meredith & Grew

Colliers Meredith & Grew, a full-service commercial real estate firm in New England, has entered into a joint operating agreement with appraisal services provider, FirstService PGP Valuation (f/k/a PGP Valuation), headquartered in Carlsbad, CA. The aligned offering will provide clients with enhanced valuation and advisory services throughout the New England region. The agreement comes as FirstService Corporation, majority owner of Colliers International, Colliers Meredith and Grew (CMG) and FirstService PGP Valuation (FSPGP), integrates and grows its real estate operations.

With over 200 employees across 21 offices, FirstService PGP Valuation (FSPGP) provides a full spectrum of valuation services to a wide range of private, institutional, financial, corporate and government clients with real estate and investment properties and portfolios. The firm is strategically expanding its U.S. footprint and has received recent recognition for innovative services, including its quality control and appraisal and portfolio services programs provided to such clients as the Federal Deposit Insurance Corporation (FDIC) in accordance with FDIC’s workout of distressed financial institutions.

“We are excited by the prospect of jointly growing our valuation business with FSPGP,” said Tom Hynes, chairman of CMG. “The venture will combine FSPGP’s national strength and technology platform with CMG’s local resources and expertise to greatly enhance our valuation offering to our clients.”

“CMG offers renowned real estate services with superior regional coverage,” said Ken Harrison, president and CEO of FSPGP. “In collaboration with CMG’s appraisal veteran Bob LaPorte and his team, we stand ready to expand coverage in this critically important real estate market.”

In addition, Karen Friel, MAI joins the FSPGP team as managing director for Boston/New England to focus primarily on delivery of client services to this growing office and region. A twenty-year industry veteran, Friel has extensive institutional appraisal experience, most recently with Bank of America where she served as the bank’s senior vice president of appraisal services for New England, the Mid-Atlantic region and the Midwest.

“This is truly an exciting opportunity,” said Friel. “I have long admired the expertise and outstanding reputations associated with FSPGP and CMG both nationally and regionally. The synergies that will emerge from this new partnership will produce highly reliable, market-based valuation and appraisal products from a highly efficient, technology based platform. Together, we will deliver on our mission: generating genuine value for our clients through innovative appraisal solutions that push beyond the industry standard.”

Clark Street Capital’s Bank Asset Network to Sell $200 Million Chicago Mortgage Loan Portfolio

Edited: Jennifer Brenner
Source: Clark Street Capital

Clark Street Capital, a full-service Chicago-based provider of asset management and advisory services, recently announced the exclusive marketing of a $200 million loan portfolio secured by high-quality multi-family, mixed-use, residential, commercial and land assets in the Chicago area. With approximately 90% of the assets located in the Chicago metropolitan area, this is the largest loan sale offering in the current economic cycle.

This $200 million portfolio is offered in eight diverse pools, arranged by property type and asset quality:

1. Multi-family properties (2-4);
   
2. Multi-family properties (5+);
   
3. Mixed-use properties of various performance types;
   
4. Performing single-family residences (SFRs) and residential condos;
   
5. Sub-and-non performing SFRs and condos;
   
6. Performing retail and office assets;
   
7. Sub-performing and non-performing retail and office assets; and
   
8. Residential and commercial development land.

“These eight pools offer potential investors an exclusive opportunity to make either a broad or a more granular play in the Chicago market,” said Jon Winick, president of Clark Street Capital. “The underlying properties are in some of the Chicago area’s most desirable neighborhoods and are among some of the most sought-after types of assets in today’s market.”

Full due diligence information is available now electronically, with indicative bids due by January 26, 2010. Final bidders will be selected on January 27, 2010 with final bids due on February 4, 2010 and a closing date scheduled for February 10, 2010.

A key point of differentiation in this offering - in addition to its size - is the transparency and completeness of due diligence materials. Buyers will have access to succinct asset summary reports prepared by Clark Street Capital and Loan Workout Advisers, LLC, recent site inspections, and appraisals for the vast majority of the assets. This level of remotely available information will enable serious investors to fully vet their interest in the portfolio without leaving the office. Clark Street Capital offers complete confidentiality to sellers and total transparency to buyers, thus enabling a bridging of the bid/ask spread.

Clark Street Capital is a full-service advisory and asset management firm specializing in U.S. real estate assets.

Morgan Stanley Appoints Real Estate Veteran John R. Klopp as Head of Americas Real Estate Investing and Global Real Estate Debt Investing

Edited: Jennifer Brenner
Source: Morgan Stanley

Morgan Stanley has appointed John R. Klopp as Head of Americas Real Estate Investing and Global Real Estate Debt Investing. Klopp will start his new role effective February 1.

Klopp, 55, has over 30 years of real estate experience and most recently served as CEO of Capital Trust Inc., a publicly traded investment management and real estate finance company. Prior to co-founding Capital Trust with Sam Zell in 1997, Klopp was a founder and managing partner of Victor Capital Group, L.P., a private merchant banking boutique that specialized in workouts and distressed debt investing. Previously, Klopp started Chemical Realty Corporation, Chemical Bank’s real estate investment banking unit, where he served as managing director and co-head. In his role at Morgan Stanley, Klopp will report to Jay Mantz, chief investment officer of Morgan Stanley Real Estate Investing.

“We are thrilled to have someone with John’s depth of experience and accomplishments join our leadership team,” said Owen Thomas, Chairman and CEO of Morgan Stanley Real Estate Investing. “His proven management and investment skills, combined with his long-standing client relationships and strong track record in the real estate industry, make him ideally suited to help drive Morgan Stanley Real Estate Investing forward.”

“Morgan Stanley is a clear leader in real estate investment management, with unparalleled global resources, multiple products and a highly experienced team in place. I look forward to partnering with this team to build on the Firm's achievements and capitalize on what we believe are significant opportunities ahead,” said Klopp.

Morgan Stanley Real Estate Investing is one of the largest real estate investment managers globally. Since 1991, it has acquired $173.7 billion of real estate assets worldwide and currently manages $59.5 billion in real estate assets on behalf of its clients.