Tuesday, May 27, 2008

Boston Properties Buy Confirms '08 Predictions

News of Boston Properties' $4B purchase of the GM building and other Manhattan assets from the Macklowe family shows that a lot of the predictions for 2008 are coming true. For example:

  • It has been apparent for a while that many buyers were over-leveraged and it was only a matter of time before it caught up to them. This may be the biggest example yet of a sale forced by the tightening capital markets, but it probably won't be the last.
  • Coming into 2008 everyone said low-leverage buyers, such as REIT's, would be the most active in 2008 - Boston Properties doesn't disappoint here. Although assumed debt represents 63% of this transaction, that's far below the almost 99% leverage Macklowe used last February to buy the EOP portfolio that now has him in trouble as the loans come due.
  • Many market observers predicted that the major players would consolidate in major markets as riskier secondary and tertiary markets bear the brunt of the downturn. Trophy office properties in Manhattan certainly qualify as major and this looks like a low-risk buy even at a record-setting price.
Thoughts on any other '08 predictions that are coming true?

Llenrock Group

Friday, May 23, 2008

Government Assistance Can Make Weak Markets Attractive

As the capital markets continue to make it harder to get all but the best deals done it's important for developers to be creative in how they can make their projects attractive to investors and lenders, especially in markets that have been hit hard by the economic downturn and housing slump.

One way to make projects in tough markets pencil out is to get local or state governments to pony up for a portion of a project's costs, something more and more municipalities are willing to do in order to have more say in the way development shapes their communities. In Michigan, one of the hardest hit areas in the recent downturn, the city of Troy is working with developers to redevelop a brownfield site into a town center in hopes of creating the walkable downtown that Troy has never had (Article).

Another great example of government assistance making otherwise impossible developments pencil out comes from Camden, NJ. There the Victor Apartments, completed in 2004, would have never penciled out, even during the times of easy capital, without the state selling the building for $1 to offset environmental remediation costs and investing $900MM in a light rail line linking Camden to the state capital in Trenton as well as other infrastructure improvements. The success of this building and continued government investment has subsequently spurred office and now hotel development along the Camden waterfront.

If you're looking to develop in a weak market in today's tough environment getting government assistance with development costs should be a top priority.

Llenrock Group

Friday, May 16, 2008

Perfect Storm for Brownfield Redevelopment

One of the ironies of the current real estate market is that while lenders, investors, and developers have become more risk averse due to the shaky economy one formerly high-risk type of development, brownfield redevelopment in urban areas, has become a sort of industry darling and may be one of the easier types of development to get done in today's environment. In my opinion a perfect storm of macro-economic and social trends are making brownfield redevelopment highly attractive right now. These trends include:

  • Higher gasoline costs - dense infill redevelopment looks better and better as gas passes $4.00 per gallon
  • The green movement - more individuals, companies, and municipalities are focused on creating green and sustainable environments in which to live and work.
  • A re-urbanizing workforce - today's workforce is showing an increasing preference for urban living and many employers and retailers are re-urbanizing as well to be close to their employees or patrons.
  • Relatively inexpensive infill land - government incentives, reusable existing structures, in-place infrastructure, and a limited number of qualified buyers make brownfield sites price-competitive with greenfield land.
  • Increasing comfort with environmental risks - developers, lenders, and investors have all become more comfortable with the ins-and-outs of environmental risks and rehabilitation.
The Hudson Yards redevelopment saga, currently ongoing in NYC, is a great case study in the current ups-and-downs of urban redevelopment, watching how it unfolds will be a great indicator of what can and can't be done with urban brownfield sites. One deal falls through, another pops up...

Llenrock Group

Thursday, May 15, 2008

Conference & Meeting Space in a Down Market

The hospitality industry is considered especially vulnerable to market ups and downs, partly because of the short term nature of it’s “leases” – most tenants only stay a few nights. The next step up in terms of lease length would have to be conference and meeting space, which is often contained within and correlated to the performance of hotel properties. However it is not as clear cut how demand for this space reacts to a down market as most events are planned far in advance, and many, such as the annual ICSC convention, are considered an indispensible part of doing business.

When investing in hotels that include meeting space it’s important to consider how it will interplay with the core hotel business, and how market and macroeconomic trends will affect demand for this space differently than for the hotel property as a whole.

For example will the recent trend of including more leasable conference space in new office buildings (see article here) hurt hotels’ business, or will it allow them to focus more capital and square footage on revenue-generating hotel rooms? Thoughts and anecdotes are welcome on this one.

Llenrock Group

Wednesday, May 14, 2008

Hotel Operators Perceived as More Stable than Owners...by Lenders too

The recent Wall Street Journal article on the disparity in financial performance between hotel operators and hotel owners (read it here) shows a slightly different angle on one of the biggest issues that we’re seeing when trying to finance hotel development, acquisition, or repositioning deals. Lenders are refusing to consider deals that don’t involve proven brands and experienced hotel management teams.

It isn’t uncommon these days for lenders to list only three or four hotel flags that they’re willing to lend on, and even with the right flag they expect to see highly experienced hotel development and management teams in place before moving forward on a project. This is true even for developers with deep pockets and plenty of experience in non-hospitality real estate.

After reading the WSJ article it becomes apparent why lenders are so concerned about the branding and management side of hotel properties: that’s where the money is being made right now as the real estate side of the business takes its lumps.

If you’re considering a hotel development project but don’t have experience in the industry or a relationship with a top-notch operator don’t give up, but do consider partnering with a more experienced player early on in the process. Having a major hotel developer and operator on board with your project from the start can increase the odds of success, especially in today’s ultra-conservative lending environment.

The Llenrock Group

Monday, May 12, 2008

Adding Value – Llenrock’s Overarching Goal

For the inaugural Llenrock blog entry it only seems fitting to spell out how this blog will add value for our clients, as adding value throughout the real estate development, financing, management, and disposition processes is what Llenrock is all about. It is our hope that this blog will allow us to provide current analysis and commentary on the trends and developments we’re seeing in the real estate marketplace, and that our readers will add this blog to their list of trusted information sources.

By combining intelligent discussion of current events, our experience in the marketplace, and in depth analysis of broad industry trends we will add to our readers’ understanding of what’s going on in the world of real estate and help them maximize value within that world. We will also offer unique perspectives from guest bloggers from the realms of academia, government, and the non-real estate business world.

We hope that this blog will provide a launching pad for further discussion, questions, and interaction across the broad spectrum of people who make up the commercial real estate community. So, please bookmark this site and check back often for updates on what’s going on in the world of real estate. Feel free to leave comments, ask questions, or suggest topics for future entries.


The Llenrock Group