Blackstone is no stranger to huge deals, and its latest transaction makes it the owner of 3.5 million square feet of industrial property in the United Kingdom. Prologis Inc. sold the 13-property portfolio for an aggregate $335 million.

“We were pleased with the amount of interest this portfolio garnered as the combination of quality assets and lease term appealed to multiple investors,” Philip Dunne, president of Prologis Europe, said. “We have sold this portfolio as it no longer fit within our investment strategy, and offered us the ability to redeploy our capital.”

The portfolio comprises 13 properties located in England’s Midlands and Yorkshire. The properties are 100 percent leased with an average unexpired lease term that exceeds nine years.

Blackstone has been picking up large parcels of property in multiple sectors of late. In early January, the firm — in a partnership with DDR Corp. — spent $1.4 billion on a 47-property retail portfolio across 20 states. In December, Blackstone purchased 36 shopping centers from Equity One Inc. for $473 million, including the assumption of $177.4 million in debt. In October of last year, the firm purchased $1.1 billion of office assets from Duke Realty Corp., netting it 10.1 million square feet of property across 82 buildings.

The U.K. industrial market is similar to its Stateside counterpart, ending the year on a mixed note as events in Europe threaten to erode the confidence that rose toward the end of 2011. According to a fourth-quarter report by services firm Cushman & Wakefield Inc., manufacturing surveys at year’s end pointed to improved performance in December, but the strong showing didn’t erase the weaker outturns for October and November – when many producers reported their worst quarters since the middle of 2009.

Image courtesy Wikipedia user Wyn Van Devanter

The U.S. General Services Administration has selected the Trump Organization as its preferred team to handle a $200 million redevelopment of the Old Post Office building and annex in Washington’s Federal Triangle neighborhood, the GSA announced Tuesday. Under the Trump Organization’s proposal, the Old Post Office will, perhaps unsurprisingly, be converted into a luxury hotel with more than 250 rooms, upscale restaurants, a spa and conference facilities, while still preserving the building’s Romanesque Revival architecture.

Under the RFP, GSA and the Trump Organization will spend the next year negotiating a detailed redevelopment agreement that will specify usage, historic-preservation requirements and the federal government’s revenue stream. In the meantime, GSA will relocate the building’s current federal tenants, which include the Advisory Council on Historic Preservation, National Endowment for the Arts and National Endowment for the Humanities.

If negotiations proceed as expected, redevelopment is expected to start in 2014, with occupancy in 2016. At the end of the lease, control of the building will revert to the federal government.

Built between 1892 and 1899, the Old Post Office was already considered old-fashioned when it opened. The D.C. Mail Depot was moved to a larger building in 1914, and in the 1920s the Old Post Office faced demolition.

A lack of money during the Great Depression kept the building open, but in 1964 a federal commission recommended taking the building down. Though demolition permits were issued, historic preservationists fought for the building. In 1973 it was added to the National Register of Historic Places, and an extensive renovation began in 1976.

A generation later, the building had outlived its usefulness as federal office space, and Congress directed GSA in 2008 to enter into a long-term lease under Section 111 of the National Historic Preservation Act, thereby guaranteeing the restoration and retention of all of the building’s historic features, while allowing the private sector to determine how to develop it to its fullest potential.

Although redeveloping historic properties is often perceived as a niche activity, GSA is currently involved in several such projects.

One is in Grand Junction, Colo., where in February 2011 the agency announced plans to turn the 92-year-old Wayne Aspinall Federal Building and Courthouse into the nation’s first net-zero energy usage building on the National Register of Historic Places.

If the redevelopment meets its goals, the building will in the course of a year produce as much energy as it consumes. The project is also aiming for LEED Platinum certification. GSA will install a geothermal heating/cooling system that uses the warmth or cold of the ground to help control temperature. A solar panel array is projected to generate enough energy to balance out the building’s electrical demand.

After the project is completed in January 2013, nine federal agencies will take space in the Aspinall Building.

A vastly bigger GSA historic-redevelopment project is getting under way in D.C.’s southeast quadrant, where a former mental hospital overlooks the Potomac and Anacostia rivers.

The creation of the Department of Homeland Security was the largest restructuring of the federal government since the creation of the Defense Department. Similarly, the $3.4 billion St. Elizabeths project, which will be DHS’ new home, is the largest federal construction project in metro Washington since the Pentagon was built during World War II. St. Elizabeths was established by Congress in 1855 as a government hospital. Currently, the 118-acre east campus is owned by the D.C. government, and the 182-acre west campus is owned by the federal government.

Ground was broken in September 2009 on the new 1.2 million-square-foot headquarters of the U.S. Coast Guard, which is scheduled for completion in 2013. The $450 million building is being funded under the American Recovery and Reinvestment Act of 2009.

Most of the St. Elizabeths project, however, will involve adaptive reuse. GSA will preserve 51 of the 62 buildings on the west campus, while incorporating many sustainable elements. For example, about 80 percent of the roof area on the new buildings will be green. GSA’s goal is to achieve LEED Gold certification.

BioMed Realty Trust Inc.’s presence in the Boston/Cambridge life sciences market will soon surpass 3 million square feet, now that the life sciences real estate REIT has entered into an agreement to purchase the 287,000-square-foot Cambridge Place in Cambridge, Mass. The property comes with a price tag of $119 million.

“The Cambridge life science market is what we think is the preeminent market in the world really,” Rick Howe, director of corporate communications with BioMed, told Commercial Property Executive. “There are a large number of life science companies and organizations that are looking for space — some office, some lab — and we want to be able to handle both types of users’ requirements in the market.”

Cambridge Place consists of three structures and is presently 80 percent occupied. Heading up the tenant roster are Idenix Pharmaceuticals Inc. and engineering and construction firm CDM Smith Inc., which has called the property home since the complex’s first building, One Cambridge Place, opened its doors in 1998.

The life sciences market in the Boston/Cambridge area is booming, so prospects for leasing up the remaining space at Cambridge Place and other industry-related office and laboratory properties are positive.

“The demand is strong,” Angus G. McQuilken, vice president for communications with the Massachusetts Life Sciences Center, told CPE. “Massachusetts continued to lead the nation in biotech-related construction in 2011 and that’s a trend we expect to accelerate in 2012.”

The U.S. is home to some of the world’s leading life-sciences clusters. New York/New Jersey, the San Francisco Bay Area and San Diego are among them, but Boston leads the pack, as per statistics from commercial real estate services firm Jones Lang LaSalle. And industry experts believe the Boston/Cambridge area will continue to lure life sciences businesses for the foreseeable future.

There are a few big reasons why the area is such a draw for life sciences companies ranging from large global corporations down to small entities and startups. “Companies are locating here and expanding here because they want proximity to our world-class academic institutions, our R&D, and they want proximity to partners in the industry and you’ll find all of the major global players in life sciences here in the Massachusetts cluster,” McQuilken said. “Also, they’re looking for talent. The talented workforce is the number one reason why companies choose to locate here. Then there’s the government role. Massachusetts’ 10-year, $1 billion life sciences initiative continues to be a magnet for private investment.”

Alas, the call for life sciences office and laboratory space accommodations is only going to grow louder. The average occupancy level at these properties is in the 13 percent range, according to a recent report by Richards Barry Joyce & Partners, but numbers can be deceiving. “One of the top biotech real estate concerns going into 2012 is the lack of tenant choice in the market and resulting constrained growth,” Brendan Carroll, senior vice president of research for Richards Barry Joyce & Partners, noted in a statement on the report. “It’s the downside of having such a strong biotech cluster in the region.”

A few sizable recent deals involving federal, state and county government agencies as office tenants has been trending of late, and Commercial Property Executive wanted to know more. With the severe budget cuts, and in many cases outright downsizing, hitting all levels of government, are government tenants as desirable to office building managers and owners as they were pre–Great Recession?

Conversations with brokers who specialize in such tenants indicate that although government agencies are not loved less these days, office landlords will continue to see less of them to love. Reductions in the sizes of government agencies, compounded by a push to use less space per worker, mean that, although these agencies remain credit tenants, their space requirements will in many cases shrink significantly.

Ripples into Waterfalls

“I’ve never seen the federal government under so much pressure from so many angles,” says Chris Roth, managing director and national project manager for Jones Lang LaSalle’s National Broker Contract, where he works primarily with the General Services Administration and other federal agencies. This pressure is coming both from Congress and from within individual agencies, he says.

“There is this move toward rationalization of costs” at various levels of government, and real estate is part of that, agrees Vineet Sahgal, executive vice president of Tenant Advisory Services for Transwestern.

For example, he says, pressure is being exerted on government to get its office use metrics in line with private-sector standards. One upshot is what Sahgal describes as “a more fluid situation” for governmental office tenants than in past years.

The prolonged recession isn’t causing a ripple effect, “it is a waterfall effect” on governments, says Kurt Little, a managing director at Jones Lang LaSalle, Chicago, who works exclusively with state, county and local governments nationwide.

Saving money is more of a priority now than ever for public entities, he says, and states are looking to cut costs by reviewing their entire real estate portfolios and downsizing as advisable. By and large, states “took longer to make tough decisions” about real estate than the private sector did, Little says, and are now trying to catch up.

Roth adds that the states often lag the federal government in having the data to identify all the space in their portfolios, but that once that has been pulled together, the effects will be seen in lease negotiations and transactions.

Substantial Cuts

So that’s the “why,” now for a look at the “how” and “how much.”

Little says that a 10 percent saving in space from restacking is “nearly a slam-dunk,” with up to a 30 percent reduction possible in some cases. These space savings come from such changes as decreasing the numbers of private offices, conference rooms, and copiers and printers a government tenant has.

“It’s a methodical process,” Little says, and typically takes 12 to 36 months.

Because government agencies are looking at tactics like new layouts, more efficient furniture and hoteling, says Roth, landlords these days are concerned that a government tenant will come back with proposal for 10 percent to 30 percent less space.

“If anything makes them less desirable” as tenants, Roth says, “it’s that.”

He adds, however, that in some cases, if their headcount projections are uncertain, agencies are looking for the flexibility to grow during the lease term. For this and other reasons, Roth says he wouldn’t be surprised to see shorter lease terms for governmental tenants, with fewer 15s and more fives, sevens and 10s.

On an even more strategic level, Little says, governments are carrying out occupancy assessments, evaluating issues such as leasing versus owning. He notes that although governments can be tempted to focus on selling surplus real estate, there’s usually greater long-term value from optimizing day-to-day operating costs like utilities and janitorial services.

Many county and state agencies, Little says, are spending twice as much per square foot on office space as a typical private-sector tenant.

Still Looking Good, Regardless

Because of regulatory changes and/or shifts in government’s role, Sahgal says, government demand for space fluctuates in ways that aren’t necessarily in synch with the rest of the economy. He cites as an example the establishment and growth of the Department of Homeland Security.

Some investors, he says, therefore see government-leased space as a business cycle–neutral play, although this can depend on the specific agency. The IRS, for one example, Sahgal guesses, is unlikely to be shrinking.

And if governments these days are more interested in sale-leasebacks, he says, there’s “a whole swath of investors” looking for such fully leased buildings. Even if a government entity were to vacate such a building, Sahgal says, a CBD location would still be a viable investment.

(Sahgal does mention one unique aspect to government office tenants. Some private-sector tenants dislike co-locating with certain governmental offices, such as the IRS, state or federal law enforcement agencies, or state unemployment agencies, because of the potential for business disruption from the occasional bomb threat to the building. It happens.)

Federal agencies are still credit or better-than-credit tenants, concludes Roth, and they still have plenty of negotiating leverage just because of their sheer size.

And that’s also true at the state level. One state client of Little’s will be vacating about 30 percent of a building they currently lease all of, and he’s confident that their new lease will nonetheless be for a lower rate.

“The federal government negotiates very aggressively,” says Roth. “They benchmark commercial rates,” which creates “marks on the wall” for companies like JLL.

“They’re pretty cutting-edge on that stuff,” he adds. “As a taxpayer, that’s good to hear.”

Mesa West Capital looked at the Hyatt Regency San Francisco’s impressive performance, its increasingly strong market and its solid ownership and decided to put its money where its mouth is. The portfolio lender has provided a partnership involving affiliates of Dune Real Estate Partners L.P. and DiNapoli Capital Partners L.L.C. with a $130 million first-mortgage loan for the refinancing of the 802-room hotel in downtown San Francisco.

“In the context of the hotel world, definitely lenders are warming up to the San Francisco hotel market because it’s arguably, outside of New York, the strongest hotel market in the United States,” Thomas E. Callahan, co-president & CEO-West, with PKF Consulting USA, told Commercial Property Executive.

Dune and DiNapoli snapped up the Hyatt Regency San Francisco from a subsidiary of Strategic Hotel Capital L.L.C. in 2007, after which point the team initiated a major renovation program at the 19-story property. Built in 1973 along the waterfront at 5 Embarcadero Center, the lodging destination sits in the bustling Financial District and features 67,000 square feet of function space, as well as a fitness center, restaurant and lounge.

As Ronnie Gul, principal with Mesa West, noted in a press release on the refinancing deal, the Hyatt Regency San Francisco is “outperforming the market in both rate and occupancy.” It’s an impressive achievement given the enviable strength of the city’s hotel market. The lending community may not be as keen on the hospitality sector as it is on multi-family, however, there are always exceptions and San Francisco’s hotel market is one of them.

“Room rates and RevPAR are extremely high,” Callahan said. “Most hotels’ occupancies are in excess of 80 percent, room rates of most hotels increased 14 to 15 percent in 2011 over 2010, and most people are forecasting room rates to increase at 8 to 10 percent this year.”

Furthermore, he added, there is no new construction on the horizon in San Francisco, as opposed to New York, where a fair number of new rooms are scheduled to come online.

The San Francisco hotel market’s positive fundamentals and strength are the keys to opening the door to financing in the current environment. “The truth is, of course, most lenders aren’t really excited about hotels per se, but if you are a lender looking to lend money on hotels, San Francisco is perceived as one of the best markets you can be in.”

Continuing the trend of a high transaction volume in the Texas markets, Core Real Estate and BayNorth Capital Inc. have sold The Plaza at Enclave to an affiliate of Azrieli Group, a real estate development and investment company located in Tel Aviv. Holliday Fenoglio Fowler L.P. marketed the property on behalf of the sellers and arranged financing for the buyer through Cornerstone Real Estate Advisers, an investment subsidiary of MassMutual.

Dan Miller, a senior managing director with HFF, called The Plaza “one of the finest office buildings, if not the finest, in West Houston,” after the transaction closed. The building was completed in 2008 and is currently 100 percent leased to Dow Chemical Corp. as its regional headquarters as well as to Ridgewood Energy, Petrofac and HRT America. The six-story, 344,295-square-foot Class A property is situated on eight acres of property and has LEED Gold certification.

Houston, which weathered the economic downturn better than most other metro areas in the United States, has been in the news quite a bit recently. Just yesterday, the city saw the signing of a 4.2 million-square-foot leasing-and-management contract signed by CBRE Group Inc. for the five buildings in the Houston Center complex. Last week, Cassidy Turley picked up a 2.5 million-square-foot management contract in Houston and Dallas. And, after signing a 358,100-square-foot lease at 1 Houston Center in late January, plastics and chemical manufacturer LyondellBasell saw the building renamed for the firm.

According to a fourth-quarter 2011 report by services firm Cushman & Wakefield Inc., Houston turned a corner last year by regaining all jobs lost in the recession. The office market, specifically, mirrored the overall economic climate in the city, with falling vacancy rates citywide and an increase in rent levels. “The outlook for Houston’s office market will closely follow the path of job creation in the city,” the report noted. “With a strong forecast of around 3 percent job growth in 2012, absorption is likely to be again be positive in 2012.”

A rendering of the renovations at 680 Folsom St.

Riverbed Technology, an IT firm in San Francisco, has just found itself a new home. Courtesy a transaction handled by TMG Partners and financial partner Rockwood Capital L.L.C., the firm just signed a 167,788-square-foot lease at 680 Folsom St. in the city’s SoMa district. Riverbed, which currently sits at 199 Fremont St., will move into the second through sixth floors of the soon-to-be 522,000-square-foot, Class A space with a 10-year lease term. Jones Lang LaSalle Inc. represented the tenant in the transaction.

The move was precipitated by both Riverbed’s increase in space needs – the firm pulled in more than $550 million in 2010 revenue despite being founded as recently as 2002 – but also due to 680 Folsom’s current $87 million renovation project. The modernization, which also extends to the adjacent three-story building at 50 Hawthorne St., is set to complete in 2013 and includes an increase of more than 100,000 square feet of space.

San Francisco’s mayor, Ed Lee, called the move a “successful real estate transaction that will create jobs and drive innovation in our city.” And, according to a fourth-quarter 2011 report by JLL, the tech sector is leading the way in that regard. Leasing activity exceeded 9.5 million square feet last year, and technology firms represented 35 percent of that total – with high-demand areas such as Mission Bay / China Basin and SoMa districts garnering the largest Class A asking rents in the city, at $56.69 and $54.00 per square foot, respectively.

“We’re making this investment to support our long-term growth and cement our commitment to the city of San Francisco, Jerry Kennelly, Riverbed’s co-founder & CEO, said. “We think the city is the right location to attract the best talent and provide a thriving environment for our current employees.”

“High-tech industry growth during 2011 drove the best market performance in more than a decade,” the JLL report noted. “Some are raising concerns about the market trajectory and depth of high-tech based demand. Data indicate more growth ahead and another strong year in 2012, but posting numbers achieved in 2011 may prove challenging considering the lack of expansion from other industries and the amount of new supply expected to enter the market.”

Industrial Contractors Skanska, the resulting entity of Skanska’s acquisition of Industrial Contractors Inc. just one month ago, has entered into its first contract. The company, a unit of Skanska’s civil division, Skanska USA Civil, will provide construction services for a project in Indiana under the $120 million deal.

Work has already gotten underway on the development, for which Industrial Contractors Skanska will furnish construction services for maintenance and capital projects for the endeavor. The company is on track to complete the assignment in December 2014.

In its announcement of the $120 million contract, Industrial Contractors Skanska did not offer further details about the undertaking. However, a real estate services firm that worked closely with the company when it operated as Industrial Contractors Inc., speculates that given the current state of the industrial market in Indiana, the project is most likely linked to the energy sector.

“Something of that size, I would say, may be related to the energy division, one of the power plants,” Ken Newcomb Jr., president and co-manager of Evansville, Ind.-headquartered F.C. Tucker Commercial, told Commercial Property Executive. “We’ve got a lot of power plants in this area that are switching over and going to the new scrubbers and the new cleaners and updated technology to be able to use Midwestern coal. So I think that may be a possibility.”

Taking into consideration the presently positive conditions in certain areas of Indiana’s industrial sector, more and more sizeable civil contracts could be on the horizon for Industrial Contractors Skanska, Newcomb believes. “They’re very qualified to do that type of work, and there are a lot of industrial plants within the Midwest that need those services.”

Skanska’s acquisition of Industrial Contractors and the subsequent formation of Industrial Contractors Skanska enabled the national construction company to enter the industrial sector in the Midwest overnight. However, Skanska’s activities so far this year extend well beyond the Heartland. In late January, acting through its Skanska USA Commercial Development division, the company acquired a 43,000-square-foot parcel in Seattle’s burgeoning South Lake Union neighborhood. And at the beginning of the year, Skanska entered into a design-build agreement with the Santa Clara Valley Transportation Authority to build a 10-mile extension of the Bart system in Northern California.

J.P. Morgan Asset Management has turned over to CBRE Group Inc. the property management and leasing of five buildings totaling 4.2 MSF in the Houston Center complex on the east side of downtown Houston, CBRE announced yesterday. J.P. Morgan acted on behalf of institutional investors it advises. The five buildings are Class A office buildings 1 Houston Center, 2 Houston Center, Fulbright Tower and 4 Houston Center, as well as retail-based The Shops at Houston Center.

Built between 1974 and 1984, Houston Center helped revitalize the east side downtown area, eventually encouraging the development of other large-scale buildings such as Minute Maid Park, Toyota Center, Discovery Park, Hilton Americas Hotel and Hess Tower.

CBRE provided Commercial Property Executive with additional particulars on the individual buildings. One Houston Center/LyondellBasell Tower, located at 1221 McKinney St., spans 1.1 million square feet across 46 stories. It was built in 1978 and is 93.9 percent leased. The building was renamed LyondellBasell Tower late last month after a lease extension by the Dutch-headquartered multinational chemical company.

Two Houston Center, located at 909 Fannin St., spans just more than 1 million square feet across 40 stories. It was built in 1974 and is 91.7 percent leased. Fulbright Tower — formerly Three Houston Center — is located at 1301 McKinney St. and spans 1.25 million square feet across 51 stories. It was built in 1982 and is 86.8 percent leased. The named tenant is Fulbright & Jaworski L.L.P., one of the 50 largest law firms in the country. The final office building, Four Houston Center, is located at 1221 Lamar Ave. and spans 674,000 square feet across 16 stories. It was built in 1983 and is 91.5 percent leased.

The retail component, The Shops at Houston Center — formerly known as Park Shops — is located at 1200 McKinney St. It spans 200,000 square feet. The Shops was built in 1982 and heavily renovated in 2003; it now stands at 80.4 percent leased. As is typical of downtown, service-center retail, it has no large anchors, instead mostly convenience and lunch-oriented tenants.

According to just-released figures from the Greater Houston Partnership, the city led Texas in job growth last year, accounting for one of every three jobs created in the state. The 10-county Houston area added 75,800 jobs, a 3.0 percent increase in metro-area employment over the previous year.

Construction lenders raised concerns about the possibility of future overbuilding in key multi-family markets, at the Mortgage Bankers Association’s Commercial Real Estate Finance / Multi-Family Housing Convention 2012, which opened yesterday in Atlanta. The financiers were speaking on the panel titled “Lending for Bank Portfolios—Easy Does it or Rocky Road?”

Ken Broussard, regional executive of the income property group of KeyBank, said the bank has had conversations questioning whether there is “too much development or structures that can cause a bit of a bubble” in multi-family. “No one is saying ‘yes, probably,’ but at least there is a discussion,” he said, “because across the country all of our regions are seeing a lot of requests on new construction in multi-family.” Broussard said 60 to 62 percent of the group’s new originations in 2011 were in the multi-family sector, primarily in permanent debt.

In particular, Washington, D.C. was singled out by the panelists as a market to be cautious about. Broussard said that the multi-family markets in Washington, D.C. and Baltimore are still holding up pretty well, but that there is much discussion about possibility of overbuilding in those markets. “We are seeing a ton of construction in Washington, D.C. and New York. The gateway cities are huge right now,” agreed Pete Matthews Jr., senior vice president of M&T Bank.

Marc McAndrew, executive vice president of PNC Real Estate, said there could be too much supply in both D.C. and Seattle if all the projects that are discussed are brought to fruition. While he noted that all markets are submarket specific, McAndrew added that a close eye should be kept on Texas, where it is easy to buy land to develop real estate. The supply and demand balance of multi-family housing is currently “pretty good” in Texas, but could disappear pretty quickly, he said.

While the lenders expressed concerns, they also said they intended to maintain, if not increase, their level of lending activity this year, whether of permanent or construction debt. “A lot of 2011 for many of us was continuing to cope with the residual of the financial crisis and the recession, but we are looking forward to getting some new loan growth,” said moderator Diana Reid, executive vice president of PNC Real Estate.

Matthews said M&T Bank will be focused on serving its customers and their liquidity needs this year. “We are taking advantage relative to 2011 of getting some new opportunities with different partners,” he said. He said the bank will provide construction capital and bridge financing, in “the right structures with the right players.”

In terms of lending to the different real estate sectors, Matthews said M&T bank is making some retail construction as well as refinance loans. Development in the retail sector, he said, is so difficult that there is no great oversupply. The office market is “lukewarm,” but the bank would lend in the right situation, while industrial properties are generally steady. M&T has also started providing capital for condominiums in New York City again, he noted.

McAndrew said PNC Real Estate is targeting $8 billion to $9 billion in new product this year, spread across construction, REIT and permanent financing.

As to favorite markets, the panelists unanimously agreed that New York City was the most desirable market in which to provide debt capital. It is difficult to overbuild in New York City, said McAndrew. In addition to Pittsburg, McAndrew said he also favors to certain multi-family submarkets in Washington, D.C.