“Debt” is going to be the name of the game for the European real estate markets in 2012, according to Emerging Trends in Real Estate Europe 2012, the industry forecast published by PwC and the Urban Land Institute. With daily reminders that interest-rate cuts on Greek bonds are still in limbo and debt-rating decreases for Euro-zone nations are on the rise, a turnaround looks to be tied directly to banks’ willingness to make commercial loans and whether the financial industry could face another collapse. The survey took responses from more than 600 commercial-property professionals across Europe to determine the overall course of the industry.

“The profound instability is affecting the providers of equity and debt,” Joe Montgomery, chief executive of ULI Europe, said. “We are operating in an environment that is very difficult to model. The uncertainty over the level of banks’ exposure to sovereign-debt default, coupled with uncertainty over the regulatory changes introduced as a result, has caused significant elements of the capital markets to be reduced to a state of near paralysis.”

In general, lenders are facing a level of pessimism over debt at levels not seen in years, according to John Forbes, the report’s author. Only 6 percent of lenders think that debt will be as available this year as it was in 2011, and a full 52 percent feel it will be substantially less available.

But not all news is gloomy, however. “The good news is that the view of respondents regarding the availability of equity is much more positive,” Forbes wrote. “Most promising is the response from institutional investors: 65 percent believe that equity will be moderately more available, with a further 10 percent believing that equity would be substantially more available.” And those lenders will play a significant role in the economy’s health, as all the players are interconnected. Mezzanine lenders need senior lenders to push debt into the marketplace, and insurance companies need time to build the right infrastructure to deploy capital.

With such uncertainty, it was difficult for the survey’s respondents to make sweeping generalizations about market sectors, but geography will certainly play a role in how investments will roll out from city to city. Istanbul, the report noted, has been the top market for commercial real estate investment for the past two years, “but that ranking is more a reflection of its long-term economic future than a sign that investors are about to rush to place their capital in the market.” And, while debt concerns continue to plague Spain and Italy, opportunistic investors may still see possibilities as banks begin to release assets later this year.

Overall, 2012 could be a turning point, the year that investors have been waiting for – or it may turn out to be a bust. Pressures from all directions could make finding funding solutions for banks an imperative, but whether investors get the bargains they would like is still very much an unknown. In general, the report’s bearish mood reflects the larger overall picture, and the coming months will certainly tell a clearer story.

While it’s not quite hitting the level of last year’s $9.4 billion purchase by The Blackstone Group for 588 retail properties owned by Centro Properties Group,  it’s still the biggest news in retail for the nascent year.  BRE DDR Retail Holdings L.L.C., a joint venture between Blackstone Real Estate Partners VII L.P. and DDR Corp., has just spent $1.4 billion on a 47-property retail portfolio formerly owned by EPN Group.

The transaction, which is expected to close in June of this year, includes a $934 million assumption of debt. Blackstone will own 95 percent of the joint venture, and DDR will own 5 percent and invest $150 million in preferred stock with a fixed dividend rate of 10 percent. To finance its investment in the joint venture, Beachwood, Ohio-based DDR began a public offering of 15 million shares and expects to give underwriters an option to buy up to 2.25 million more shares.

“This transaction enables the retention of significant fee income and enhances our current ownership and future access to prime assets,” Daniel Hurwitz, DDR’s president & CEO, said.

The properties, totaling 10.6 million square feet and located across 20 states, are 90 percent leased. The largest tenants by base rent are TJ Maxx, Kohl’s and PetSmart.

Blackstone has been aggressively pursuing retail assets in the last few quarters, as evidenced by its $473 million purchase of 36 properties from Equity One Inc. in December as well as the $9.4 billion Centro purchase.

Israel-based Elbit Imaging Ltd., the affiliate company of EPN, saw its shares jump 19 percent on the news. According to Bloomberg, Plaza Centers N.V., the Elbit unit that owns the malls that are being sold in the U.S., climbed as much as 21 percent in London trading, the biggest gain in two years.

Goldman, Sachs & Co. advised DDR and JP Morgan advised EPN on the deal. Citigroup Global Markets Inc. and Eastdil Secured advised Blackstone.

A 2011 year-end report by services firm Jones Lang LaSalle noted that the retail sector “continues to edge tentatively toward recovery,” but will likely “remain in a holding pattern for at least the next three quarters.”

$66M for D.C.’s Highland Park Multi-Family

D.C.'s Highland Park

The building, which sits above the Columbia Heights Metro station at 14th and Irving Streets NW, was previously recapitalized by Cassidy for $122 million in December 2010 for Phase I, which was followed by a $26.1 million construction loan for Phase II in September of 2011.

First-Mortgage Refi of $70M for Michigan’s Aldingbrooke Apartments

In a $70 million deal arranged by NorthMarq Capital’s Charlotte and Chicago offices, Allerion Associates L.L.C. has found a refinancing for its first mortgage on the Aldingbrooke Apartments development in West Bloomfield, Mich. Financing was based on a 10-year term with a 30-year amortization schedule. NorthMarq created the arrangement through its seller-servicer relationship with Freddie Mac.

Vestar, Rockwood Capital Secure $50M Loan for Vegas Retail

Vestar, in a joint venture with Rockwood Capital L.L.C., has originated a $50 million loan to finance The District at Green Valley Ranch a 384,000-square-foot retail property just outside of Las Vegas. The financing, supplied by Wells Fargo, sits at a fixed 4.4 percent rate. The two companies paid $79 million for the District asset this past October.

Behringer Harvard Multifamily REIT I Inc. has just entered into a new co-investment partnership with one of the world’s largest pension funds, advised by Heitman L.L.C., a multinational real estate investment management firm with more than $23 billion of assets.

As a result of the partnership, the Heitman-managed entity has acquired minority interests in 15 multi-family communities across eight states. The total portfolio, which has 4,100 apartment units, is slightly more than one-third of the REIT’s entire portfolio under management and is valued at more than $1 billion.

The Behringer REIT has been busy in the second half of 2011, purchasing the 132-unit luxury multi-family Renaissance in Concord, Calif., in September and selling the 390-unit Waterford Place apartment community in Dublin, Calif., in May.

“This additional infusion of institutional co-investment capital provides further market validation of the institutional quality of the asset portfolio our REIT has assembled thus far, as well as its perceived value,” Mark Alfieri, COO of the REIT, said. “As our REIT continues to expand its asset portfolio, we will constantly evaluate both strategic acquisition opportunities and disposition opportunities.”

The partnership with Heitman represents the REIT’s second co-investment partnership with an international institutional investor. In 2007, the REIT entered into a co-investment partnership with PGGM Private Real Estate Fund. PGGM initially committed $100 million for co-investments with the REIT, and then subsequently increased its commitment to $300 million.

To complete the Heitman transaction, interests in 12 multifamily communities were sold by PGGM. A co-investment presence in the REIT’s portfolio has been retained by PGGM through ownership interests in 15 other multifamily communities.

In addition to the interests sold by PGGM, the REIT sold to the Heitman-managed entity minority interests in six multifamily communities. In three instances, both the REIT and PGGM sold interests they held in the same multifamily communities to the Heitman-managed entity.

Ahead of the major euro-zone pow-wow on Friday, word is that the latest idea to fend off Europe’s woes is the sooner creation of the European Stability Mechanism, or the ESM, which would be a permanent successor to the European Financial Stability Facility, or the EFSF, the temporary fund that has been bailing out various nations lately. The ESM is scheduled to be operational by mid-2013, but in these panicky times no one wants to wait that long, and euro-zone leaders are calling for a 2012 start-date.

The ESM-creating treaty has been signed, but not ratified in the cumbersome way that the euro-zone has for ratifying treaties, so it isn’t clear if a sooner start-date is possible. But even before ratification, change is in the wind for the permanent rescue fund. As originally envisioned, the limit for bailouts from ESM and the EFSF combined would be 500 billion euros ($775 billion). The EFSF has already used about 190 billion euros to tamp down fires in Greece, Ireland and Portugal. So the thinking of euro-panjandrums is that the 500-billion euro limit needs to be revised upward, or dispensed with all together.

Investors seemed optimistic about the direction the euro-zone was taking on Tuesday, with European and Asia stocks rising, and the currency itself up a little. And, if nothing else is consistent about this crisis, investors are bound to stay optimistic until something else comes along and sets off a mini-panic.

ISM Semi-Annual Report Shows Some Optimism About 2012

The nation’s purchasing and supply managers are optimistic themselves, or at least somewhat optimistic, in the latest Semiannual Economic Forecast by the Institute for Supply Management, which was released on Tuesday. While the forecast projects optimism overall about the U.S. economy for 2012, some sectors are naturally more cheerful than others. Still, 69 percent of survey respondents expected their own revenues to be greater in 2012 than in 2011.

The manufacturing sector is the most positive about prospects in 2012. Respondents in 17 industries said they’re expecting to do better next year than this. The non-manufacturing sector, on the other hand, appears slightly less positive about the year ahead, with only 15 industries expecting higher revenues.

Yet problems lie ahead. Survey respondents in manufacturing reported that the most difficult problems facing their businesses as they plan for 2012 are poor sales (43.9 percent); government regulations (22 percent); inflation (17.4 percent); cost of labor (4.5 percent); quality of labor (4.5 percent); taxes (4.5 percent); and interest rates and finance (3 percent).

California, Nevada Pool Resources in Robo-Signing Investigation

The attorneys general of California and Nevada said on Tuesday that the two states are joining forces to investigate foreclosure fraud and other mortgage shenanigans. That means sharing litigation strategies and evidence in both criminal and civil cases.

The states’ move is yet another indication that a settlement of the legal Gordian knot inspired by robo-signing and other dubious lender practices will not be a quick cutting of the knot by the federal government — the states want a say in how the issue is resolved. The move came not long after Massachusetts said it was planning lawsuits against the nation’s five largest mortgage servicers, and California AG Kamala Harris is already investigating Bank of America (and with it, Countrywide Financial), along with Citibank.

Wall Street gyrated on Tuesday, ultimately turning in a mixed performance. The Dow Jones Industrial Average gained 52.3 points, or 0.43 percent, while the S&P 500 gained 0.11 percent. The Nasdaq lost 0.23 percent.

Evidence of banks’ strong attraction to the apartment market, even construction projects, continues to grow and TF Cornerstone is among the latest real estate companies to benefit from the growing interest. TF Cornerstone has secured $265 million in financing from a consortium of four banks for the development of 4545 Center Blvd, an 850-unit luxury apartment high-rise that will sprout up in Long Island City, Queens.

The Singer and Bassuk Organization served as TF Cornerstone’s advisor on the loan transaction, with Wells Fargo, M&T Bank, Bank of America and Capital One providing the loan for the 40-story tower.

In addition to high-end residences, the nearly 800,000-square-foot, LEED-certified building will feature 12,300 square feet of retail space, 55,000 square feet of outdoor space and a 1,000-space parking facility. The project is part of TF Cornerstone’s 20-acre East Coast mixed-use residential development that will ultimately encompass 2.9 million square feet of multi-family units, as well as extensive retail and parking accommodations. Investors have been lured to the projects like metal to a magnet. In 2010, when financing was even harder to come by, the company had obtained the necessary funds to commence construction of 4615 Center Blvd. and 4540 Center Blvd, which will add 700 luxury rentals to the local market come spring 2012.

Lenders have come off the sidelines and banks are no exception; they are becoming progressively eager to provide financing in the increasingly attractive apartment market. “While agency originations increased over past year, the re-emergence of life companies and banks caused their market share to drop from 62 percent in 2010 to 44 percent in the first half,” William E. Hughes, a senior vice president with Marcus & Millichap Capital Corp., noted in a third-quarter report. “Lenders view apartments as preferred assets.”

The long-term stability of the market as a result of strong and growing demand is the draw, and fundamentals in Queens are particularly desirable. In the past year, the vacancy rate in the borough has dropped to an enviably low 1.9 percent, as per the report.

TF Cornerstone expects to wrap up construction of 4545 Center Blvd. in 2013.

December 5, 2011
By Nicholas Ziegler, News Editor

In a huge move for the Sam Zell-helmed Equity Residential, the firm has entered into a contract for a 26.5 percent ownership stake in Archstone, a privately held owner, operator and developer of multi-family apartment properties. Equity paid $1.33 billion in cash.

While the contract is not yet finalized, the ownership interests at stake include one half of the collective interests of currently owned by Bank of America and Barclays Bank P.L.C. Were the deal to close, Equity would hold only a minority interest, without the ability to affect decisions on behalf of Archstone.

“The Archstone and Equity Residential portfolios are highly complementary with concentrations in the same markets and assets of similar quality,” David Neithercut, Equity’s president & CEO, said. “In addition, since we believe that none of the current owners of Archstone is likely to be a long term owner, acquiring this position allows us a role in determining, and perhaps even expediting, the ultimate outcome regarding Archstone.”

Morgan Stanley & Co. L.L.C. served as Equity’s financial advisor and Hogan Lovells as its legal advisor on this transaction. BofA Merrill Lynch and Barclays Capital served as sell-side financial advisors on this transaction. Kaye Scholer served as legal advisor to Bank of America and Simpson Thacher & Bartlett served as legal advisor to Barclays Bank PLC.

Image courtesy Flickr Creative Commons user borman818

Saying “we can’t wait for Congress to act,” President Obama on Friday announced that over the next two years, nearly $4 billion in combined federal and private-sector money will be surging into energy upgrades to buildings. “Upgrading the energy efficiency of America’s buildings,” Obama said, “is one of the fastest, easiest, and cheapest ways to save money, cut down on harmful pollution, and create good jobs right now.”

This new commitment to the Better Buildings Challenge is the largest so far. The public-sector portion comes by way of a Presidential Memorandum that commits the federal government to $2 billion of energy upgrades to federal buildings, using long-term energy savings to pay for upfront costs, reportedly at no cost to taxpayers.

The private side is represented by 60 organizations, a diverse group of commercial real estate and hospitality companies, manufacturers (such as 3M, GE and Nissan), colleges and universities (including Michigan State), retailers (Kohl’s Department Stores, Supervalu and Walgreens), healthcare systems, municipalities (including Denver, Sacramento and the District of Columbia) and other entities, including the AFL-CIO and TIAA-CREF.

The private-sector partners have committed to invest nearly $2 billion of private capital into energy-efficiency projects and to upgrade energy performance by a minimum of 20 percent by 2020 in 1.6 billion square feet of office, industrial, municipal, hospitality, healthcare and education-related space. The White House’s announcement noted that commercial buildings consume roughly 20 percent of all the energy used by the U.S. economy.

CRE/hospitality players include CBRE, Forest City Enterprises, HEI Hotels & Resorts, InterContinental Hotels Group, Jones Lang LaSalle, Prologis, RREEF Real Estate, Shorenstein Properties LLC and Wyndham Worldwide.

Joining Obama in making the announcement was former President Clinton, whose Clinton Global Initiative in June had signed up 14 entities to the initial phase of the BBC. Those participants include Lend Lease, Transwestern and USAA Real Estate.

The BBC is part of the Better Buildings Initiative. Launched in February by President Obama, and spearheaded by former President Clinton and the President’s Council on Jobs and Competitiveness, the larger effort aims to “support job creation by catalyzing private sector investment in commercial and industrial building energy upgrades to make America’s buildings 20 percent more efficient over the next decade, reducing energy costs for American businesses by nearly $40 billion,” according to the announcement.

Jones Lang LaSalle vice president of public relations Craig Bloomfield told Commercial Property Executive that JLL has committed to reduce energy usage by 20 percent by 2020 in 98 million square feet of multitenant space it manages. He noted that JLL was the project manager for the recent energy-efficiency upgrade of the Empire State Building, in partnership with Johnson Controls and the Rocky Mountain Institute.

Despite this newest stride, Bloomfield said, more owners want to retrofit than can afford to do so. “Energy retrofits right now are very problematic” in multitenant buildings, in part because although the owner pays for the upgrade, it’s the tenant who benefits. A better system is needed for financing energy retrofits, he concluded.

Interestingly, Friday also saw the release of a new report from the U.S. Government Accountability Office, titled “Green Building: Federal Initiatives for the Nonfederal Sector Could Benefit from More Interagency Collaboration.” Designated GAO-12-79, Nov. 2, 2011, the report is available at www.gao.gov/products/GAO-12-79, with a one-page summary at www.gao.gov/highlights/d1279high.pdf.

The report noted that 94 federal initiatives, implemented by 11 agencies, “foster green building in the nonfederal sector,” which includes the private sector as well as state and local goverrnments. The most common green building issue, implemented in 83 initiatives, is energy conservation/efficiency.

“Agencies with green building initiatives for the nonfederal sector,” GAO commented, “may be missing opportunities to, among other things, reach agreement on governmentwide goals and measures for assessing the overall progress of their green building efforts.”

GAO recommends that the Departments of Energy and Housing and Urban Development and the Environmental Protection Agency “lead an effort to collaborate with other agencies on assessing the results of federal green building initiatives for the nonfederal sector.”

Capitalizing on the growing demand for residential rentals in metropolitan Washington, D.C., Washington Real Estate Investment Trust has entered into a joint venture with Trammell Crow Co. to build an apartment high-rise in Alexandria, Va. The 270-unit project carries a development price tag of $95 million.

The partners will erect the 15-story tower on a one-acre site approximately seven miles outside of Washington, D.C., which will be easily accessible by a nearby Metro station. WRIT will provide 95 percent of the funds necessary for making the project a reality, and partner and sponsor developer Trammell Crow will throw in the remaining 5 percent.

It’s a timely endeavor. The cry for more multifamily product in Northern Virginia and throughout the greater Washington, D.C., is loud and growing louder. The source: jobs. “Local employers are no longer cutting jobs as they did during the recession and many have resumed hiring in sufficient numbers to ignite greater household creation,” a fourth-quarter report by Marcus & Millichap Real Estate Investment Services stated. “These new households have filled more than 16,000 rentals in the district, Maryland and Virginia since vacancy peaked two years ago, reducing the rate to less than 5 percent.” The vacancy rate in the Alexandria submarket has dropped to just 3.5 percent.

With a limited number of projects having come online recently, WRIT and Trammell Crow are primed to capitalize on an increasingly tight market. By the close of 2011, apartment production in Northern Virginia will total roughly 900 units for the year, one of the lowest totals on record, according to the report.

Even beyond the Alexandria project, WRIT is doing its part to help fill the gap between supply and demand in the area. In June, the REIT formed a joint venture with Crimson partners for the development of a 150-unit apartment building in neighboring Arlington, Va., at a cost of $43.5 million.

Construction in Alexandria is scheduled to get underway during the fourth quarter of 2012. WRIT anticipates completion in late 2014 and stabilization by the first quarter of 2016.

The project dovetails with WRIT’s decision to exit the industrial real estate sector and focus on premier apartment and office properties in areas with solid and growing demographics, within the Beltway. In November, the REIT wrapped up the final phase of the $350 million disposition of its 3.1 million-square-foot, metropolitan Washington, D.C., industrial portfolio to a joint venture between AREA Property Partners and the Adler Group.

WRIT’s recent efforts in repositioning its portfolio include the $73.5 million acquisition of the 223,000-square-foot John Marshall II office building in Tysons Corner, Va., and the $101 million purchase of the 345,000-square-foot Braddock Place office campus in Alexandria.

“While real-estate fundamentals in Washington remain choppy, we will continue to build a portfolio that will remain more stable in this environment with better prospects for future growth as the economic climate improves,” George F. “Skip” McKenzie, WRIT president and CEO, said during the company’s third quarter earnings conference call at the end of October.

When the owners of the 470 Vanderbilt Ave. project in Brooklyn, N.Y., were attempting to complete a pre-lease with the New York City Human Resources Administration for 400,000 square feet of office space recently, Lance Capital L.L.C. helped pave the way with its participation in the creation of a multi-faceted financing package. The firm ventured onto new ground in its effort, employing a new form of tenant improvement financing that may well have marked a watershed moment in the real estate leasing process.

“What’s creative and different is the financing of a portion of the rent,” Richard L. Podos, CEO of Lance Capital, told Commercial Property Executive.

The story starts with HRA agreeing to a 20-year lease at 470 Vanderbilt, a 650,000-square-foot redevelopment project owned by a partnership consisting of GFI Development, Starwood Capital and The Carlyle Group. The partners planned to transform the former manufacturing building, originally developed roughly 80 years ago, into an office destination while keeping its new semi-pledged anchor tenant’s preferences in mind.

“The proposed facility at 470 Vanderbilt Avenue is of sufficient size and would be appropriately renovated for cost-effective HRA operations,” the City Planning Commission noted in a report. “The space is currently vacant and in good condition and would require an office build-out to make it suitable for HRA’s needs.”

Customarily, the closing of the deal would move forward, however, HRA was not prepared to fully commit to the traditional lease agreement. “The City of New York, very intelligently, said, ‘We will negotiate a lease with you but then we’re going to put the lease into escrow,’” Podos explained.

HRA insisted on refraining from executing the transaction until a firm financing package for the redevelopment of 470 Vanderbilt and build out of the agency’s space was firmly in place. HRA’s decision created a financing puzzle, of sorts, that needed all the pieces to fit together perfectly before the deal could move forward.

Lance Capital took steps to orchestrate the TI segment of the necessary funds. The firm secured $44 million in sub-5 percent rate credit-backed funding through CGA Capital Corp. “It’s actually a really fascinating sort of sequence of events that all had to happen at once,” he said. “What we did was we inserted an eight-page clause into the lease relating to the TI contribution from the landlord and we financed that. There’s a specific portion of rent associated with the tenant improvement and that’s really what we financed.”

Financing a portion of the rent. Not the building’s cost, not the cost of capital, not the security collateral value of tenant improvements, but a portion of the rent.

“With net lease deals, for example, the financing is focused on the credit of the tenant and the stream of cash flow that comes out of rent. We figured out, basically, how to take elements of the net lease world and insert it into a regular multi-tenant lease to finance the TI.” With early lease agreements in place, other names that will be on the tenant roster are The League Education and Treatment Center and Carl Fenichel Community Services Inc., which have signed on for an aggregate 77,100 square feet under 25-year contracts.

“It was credit-backed financing of tenant improvements in a multi-tenant building with a gross lease for the tenant — so it wasn’t a net lease for the tenant, it was just a regular office building lease — and we inserted this credit-based TI financing into that,” Podos noted of the HRA arrangement. “We don’t think that’s ever been done before, credit-based TI financing inside of a gross lease in a multi-tenant building. It’s actually really simple when you come down to it but nobody put these pieces together in something like a Rubik’s cube. But now that we’ve done it, we can bang these out literally in a matter of weeks. ”

Lance Capital’s innovative facilitation of TI financing for 470 Vanderbilt was just one piece of the puzzle. Money for the actual redevelopment endeavor came in the form of a $130 million loan from CIBC along with Eurohpyo and M&T Bank, and $24 million in equity from Starwood. Essentially, it took a total of roughly $200 million in total project financing to seal the deal with HRA. But it was the TI financing that served as the jumping off point for the remaining facets of the transaction — completion of the remaining segments of the project’s financing package and ultimately, the closing of the lease deal.

The new method of TI financing utilized for the HRA lease marked the beginning of a new trend at Lance Capital. The firm has roughly 15 other prospective TI financing transactions based on the new model in the works right now, involving various types of property owners–including institutional owners and REITs–and tenants ranging from corporations to healthcare entities. “We can apply this kind of TI financing to any property, any property type, anywhere,” he said. “It can even be done internationally.”

In fact, Lance Capital recently made the trek to London to confer with businesses on the tenant side. “We’re meeting with a variety of corporate healthcare and governmental entities that are looking for more efficient ways to fund capital expenditures related to tenant improvements, even with renewals. In a renewal, to the extent the tenant has already invested a lot of their own capital in interior improvements during the previous term of the lease, we can actually monetize the existing tenant improvements in addition to funding new tenant improvements.”

The novel technique is on its way to becoming commonplace for Lance Capital, and the firm believes a greater trend could be afoot. “It can be and should be a game-changer for the entire industry,” Podos asserted. “This is a better way to fund tenant improvements, starting with larger transactions but over time moving towards even small deals like million-dollar or $2 million deals. This is a better way to do it.”