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What to Expect at ICSC Atlanta

ATLANTA—Thinking about going to ICSC Atlanta Oct. 26-28? What should you expect?

We asked Justin Berryman, director of real estate services for Franklin Street, for his take. He told us he’s expecting developers to have an increasingly larger presence than previous years. That’s because of the increased demand for space from new tenants coming into the market or expanding.

“The retail market in Atlanta is extremely active, specifically with the aggressive expansion of fast-casual restaurants throughout the region,” Berryman says. “Almost every day I get a call from a broker working with a different fast-casual concept that is interested in opening locations in the market.”

Berryman says retail brands are all competing for the same limited space. That, in turn, is increasing rental rates and is spurring new development activity to satisfy the current demand. What’s more, he says, established tenants in the market are looking to expand, along with new-to-market tenants coming in from the West Coast, Midwest and Northeast looking to take advantage of the positive momentum in the Southeast.

“We expect the show to also include some developers who have been sitting on the sidelines because they couldn’t get the financing or didn’t have enough space pre-leased to make a new development work that are now returning to the arena,” Berryman says. “The increase in construction and land pricing has made it challenging to get the preferred returns on retail development as before, but the aggressive expansion of some tenants create competition to help drive rental rates to make the rewards worth the risk that is inherent in development.”

Finally, Berryman says, specialty grocer-anchored centers and smaller two-to-four tenant strip buildings should encompass the majority of new product coming online and he anticipates this trend continuing for at least the next two-three years. He looks forward to an ICSC event filled with energy, enthusiasm, and individuals looking to take advantage and make deals happen while the current state of the retail market in the southeast remains positive.

 

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Emerging Leaders: Kevin Kelleher

Kevin Kelleher, 35
Senior Director
Franklin Street
Tampa, FL

Kevin Kelleher began his career in one of the worst economic downturns in history. His motivation and strong determination propelled his career forward despite the lackluster commercial real estate market. In his early career, he recognized the importance of creating, building and maintaining relationships in an advisory role, and he focused his time on earning a reputation as a trustworthy and hardworking individual. This served him well in his first position at Marcus & Millichap,  where he oversaw the underwriting and marketing of more than $500 million of multifamily properties. Kelleher joined Franklin Street in 2008, where he is sought by owners and real estate professionals throughout the industry for his market expertise and advisory services. He embraces the collaborative platform at Franklin Street, which casts the widest net possible when selling investment-grade real estate.

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All the Reasons We’re Not About to the Repeat the Crash

Is this South Florida real estate boom like the one in the 2000s? Fortunately not, according to our speakers at Bisnow’s 3rd annual South Florida State of the Market on Tuesday.

The key differences this time around are South Florida’s new-found stature as an international hub and the influence of Millennials, the speakers noted. But, it’s more than simply Latin American buyers coming here to buy properties with cash, though that’s been important. South Florida’s been a solid market since the end of the recession because buyers from around the world and the country have stepped into the market at various times (“different buckets of money,” as one speaker put it). More than 500 attendees packed Soho Studios to hear our speakers.

Also supporting the residential for-sale market, and to some extent the rental market: the growing popularity of this part of the country with Millennials. Between international buyers and Millennials, demand has managed to keep up with supply, our speakers explained, and they don’t expect that dynamic to run out of gas any time soon. Snapped: Related Development CEO Steve Patterson and Tate Capital CEO Jimmy Tate.

Residential developers are facing some difficulties, however, the speakers added. As the market fully recovered after the recession, construction costs, especially labor, ballooned—and so did land costs. Residential development deals are still being done, but it’s harder to pencil them out. Affordable housing is also a major concern. Renters in South Florida are facing the prospect of paying more for smaller units (though the amenities are a lot better now). Fortune International Group CEO Edgardo Defortuna, Adler Development president David Adler, and Gables Residential EVP Cris Sullivan, who moderated the Residential panel.

None of our speakers were surprised that the Fed kicked the interest rate can down the road a little further last week, but everyone’s expecting rates to rise before long. Will that affect commercial real estate in South Florida when it finally happens? Not so much, especially for deals involving highly desirable Class-A assets. Class-B and C deals, on the other hand, might suffer a bit more. Newgard Development Group CEO Harvey Hernandez, Franklin Street regional managing partner Greg Matus and Hunt Mortgage Group director Marc Suarez.

 

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California Firm Gives Rundown Properties New Life

Apartment buildings are a red-hot asset for small investors. But apartment buildings that house feuding gang members?

One property manager, Long Beach, Calif.-based Beach Front Properties LCC, is finding success in turning around such downtrodden dwellings.

Despite its upmarket name, many of Beach Front’s properties are located in some of Southern California’s toughest inner-city communities, including sections of Anaheim, Van Nuys and Long Beach. The company specializes in acquiring “class C” properties that are often rife with crime and graffiti, then turning the buildings into quieter and cleaner family housing.

A few weeks ago, Beach Front closed its 23rd micro fund since it was founded in 1997, Beach Front Vintage 2014 Fund, raising $11 million in a transaction that was 10% oversubscribed, according to the company. Beach Front buys and redevelops properties and also manages properties it doesn’t own. Overall, the company has about $1 billion under management.

Class C properties typically are home to working-class families while class B, the largest category, is home to the nation’s middle class. Class A buildings are mainly luxury properties.

Investor interest in small funds that invest in class C buildings has been growing in the past few years as operating income for the sector has improved. In many cases, returns on lower-income buildings are outstripping returns on higher-income properties.

“Occupancy rates are improving, rental rates are increasing and tenant retention is strong,” especially in markets with good job growth, said Jake Reid, a commercial real-estate broker with Franklin Street Real Estate Services in Atlanta. He said the operations are improving for class C due in large part to supply and demand: The supply of affordable housing has contracted in the past decade even as demand for the units has surged. The imbalance has allowed landlords to pass through hefty rent increases.

Kyle Kazan, Beach Front’s chief executive and co-founder, said the return on the company’s funds has averaged about 19% annually.

“If you buy a building in one class and try to move to the next class, like from C to B, you’re going to get an increased premium” on your return, said Paul Rajewski, a managing director at Pinnacle Investments in Los Angeles, which invested in Beach Front’s latest fund.

John Bishop, a wealth manager based in San Francisco who has invested in Beach Front funds for several years, says he has observed that funds’ annual returns typically start out at about 6% and then climb to about 14% within three to four years as the buildings in the fund are upgraded. He said the internal rate of return on the life of the investment is usually 19% to 21%. “It’s classic value investing,” said Mr. Bishop.

The strategy can be risky. Catering to a population that is financially fragile increases the possibility of lost rent collections and high turnover during times of economic weakness, said Mr. Reid. And managing such properties isn’t for the faint of heart.

“Some investors are initially worried about investing in [these neighborhoods], but they love seeing before and after photos,” said Mr. Kazan. “And they love seeing how cleaning up those properties has a big impact on the broader community.”

Mr. Kazan, a former police officer, says his law-enforcement training prepared him for the dangers of dealing with drug dealers and gang members who often inhabit the buildings when he first acquires them.

“I can read graffiti so I can see what’s going on and if there’s a turf war. If that were the case and we’re going to buy the building, I would sit down with the gang families and talk to them and show them the benefits of moving out instead of bringing in law enforcement. If there are gangs on site, there is drug dealing and you can’t get good rent. If you evict the drug dealers, you can improve the building and raise the rent.”

Sometimes Mr. Kazan has to pay “cash for keys” to get tenants to leave, he said. Other times, he has to negotiate peace agreements.

Several years ago, for example, he paid $1.2 million for a property in Anaheim that had been the scene of a recent police shooting. The dead victim was a young man whose friends and family set up a shrine to his memory on the property, which included photographs, candles and drug paraphernalia. Mr. Kazan worried that if he removed the shrine—the first step toward cleaning up the property—the gang members would retaliate.

To find a resolution, he said, he met with the victim’s mother and the two agreed that Mr. Kazan would replace the shrine with a permanent memorial plaque to be placed on the property.

“We removed all the photos and candles and beer bottles and bongs. Then we evicted people who were not paying rent,” said Mr. Kazan. The complex “is not fancy, but we made it clean and safe.”

New communities will be built in the outlying areas. Palmdale, Bakersfield, Riverside. People in the LA basin will be given free housing. Title to a home. Instant wealth.

The LA Basin will be bulldozed and dug up. A complete new master plan will be implemented that creates new large housing, townhouses, condos, roads, subways, monorails, bike paths, if you like Green your gonna love this. In the greatest weather zone on the planet. It’s a trillion dollar plan. It’s a 100 year vision.

I drive the ghetto all the time. Small over populated housing. 100 year old everything. You can never replace the water mains, the sewer system, never upgrade to Green whatever. You have to tear it down in large swaths. Rebuild a master plan. Create million dollar homes. High speed trains to outlanders.

 

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Downtown St. Pete apartment complex Beacon 430 sells for $84.5M

ST. PETERSBURG — In yet another sign of Tampa Bay’s apartment boom, the 326-unit Beacon 430 complex in downtown St. Petersburg has sold for the high-end price of $84.5 million.

An Alabama-based company, B&M Management, bought the apartments at 430 Third Ave. S from the NRP Group of Cleveland.

“There was interest in the investor community for that asset, and we felt it was the right time to sell,” Kurt Kehoe, NRP’s vice president of development, said Thursday. “I believe there was no more than 45 days of formal marketing but that’s not out of the ordinary for a brand-new product in a very sought-after market.”

Beacon sold quickly, he added, “because it’s new and has done so well financially.”

Opened this year, the Beacon’s studio and 1-, 2- and 3-bedroom apartments are 97 percent leased at a maximum rental of about $2,500, he said.

NRP built the Beacon on a parking lot that it bought for $6 million from Times Publishing Co., parent of the Tampa Bay Times. In April, NRP also bought the Times lot across the street for $3.9 million but is not yet certain what it will do with that site.

“Most likely it will be more floors, a higher building,” Kehoe said. “Possibly condos, but more likely an ultra-luxury residential rental project.”

No construction date has been set. (The Times will have 200 parking spaces in whatever is built.)

The Beacon’s sale price, which works out to $259,000 per apartment, “is among the highest we’ve seen on a per unit basis,” said Darron Kattan of Tampa’s Franklin Street commercial brokerage. “It falls in line with what new, Class 1 apartment communities seem to be worth these days.”

Among the Beacon’s amenities are a pool, two courtyards, a fitness center, a business center, a bayview lounge and free Internet, cable and “valet” trash pickup.

Kattan said it is not unusual for a developer to sell a project and build another nearby.
“The economies of scale in doing that are tremendous,” he said. “You don’t have to get to know a new area, they know what works.”

Downtown St. Petersburg has seen an explosion of apartment construction that began in 2011 with the 325-unit Fusion 1560 on Central Avenue. In May, that sold for $57.5 million or $177,000 per unit.

Several other apartment complexes with hundreds of units have opened or are under construction.

NRP Group, which has an office near Tampa International Airport, is exploring sites for development throughout the area, Kehoe said.

“We have a lot optimism in Tampa Bay and specifically about downtown St. Petersburg,” he said. “We really feel that there’s a lot more demand than what the current units can handle.”

Although his own office is in Orlando, Kehoe said NRP doesn’t consider that city “nearly as attractive” as downtown St. Petersburg with “its walkability, the urban lifestyle, the proximity to cultural events, the restaurants and shopping and nightlife.”

Kattan of Franklin Street predicted that the bay area apartment market will remain strong.

“The only two prominent potential hiccups are significant interest rate rising or significant overbuilding,” he said. “I personally don’t think we’re seeing that yet but if everything that’s in the pipeline comes through there’s definitely a risk.”

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Will Tampa See New Office Construction Soon?

ORLANDO—Tampa’s office market is rising in every direction. The latest noteworthy deal is a 20,800-square-foot office lease with Ideal Image Development Corp., a national aesthetic services company.

Ideal is relocating its regional headquarters to Tampa Commons, a class A office tower located at 1 North Dale Mabry Highway in the Westshore submarket. The firm was previously located at One Urban Center in Tampa. Westshore certainly is a hot market.

JLL vice president Sharon Bragg represented the landlord in the transaction. John Esposito and Andrew Bell of Newmark Grubb Knight Frank represented the tenant.
Ideal will occupy the entire 12th floor of the 13-story property. With centers in the US and Canada, Ideal is headquartered in Tampa and considered a leading provider of aesthetic services.

“As Tampa’s market continues to tighten, Tampa Commons continues to attract high calibre tenants,” says Bragg. “The building’s amenities and central location at competitive leasing rates makes Tampa Commons a smart option for tenants seeking a class A office space in Tampa’s Westshore submarket.”

The 254,808-square-foot office tower is experiencing a strong occupancy at 99% leased. The office building is located within walking distance to several restaurants. Neighboring tenants include Travelers Indemnity Company, Time Customer Service and Wilkes & McHugh, P.A.

With more buildings gaining occupancy, will new development follow? According to Marcus & Millichap’s latest numbers, growing space demand and restrained development will support a 140-basis-point drop in vacancy in 2015 to 13.4 percent. A decline of 160 basis points was posted last year.

Developers will complete 550,000 square feet in the market this year, encompassing competitive space and more than 270,000 square feet of medical offices. In 2014, 158,000 square feet was finished.

“Although demand probably dictates new product, the rates the market is giving now just aren’t at the level or price range that warrant new construction,” Clay Wommack, director for Franklin Street’s Office and Industrial Division, tells GlobeSt.com. “The price of land and construction continue to rise as well, in turn making new construction more challenging.”

 

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Moving Up: Eric Smith

Eric Smith
Franklin Street

Eric Smith has joined Franklin Street as director of risk management and claims for the firm’s insurance division. Based out of Franklin Street’s Tampa office, Smith will represent clients through the insurance claims process. Prior to Franklin Street, he worked for the Jacksonville-based broker Harden for nine years and with Liberty Mutual Insurance for 12 years.

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That Sinking Feeling

Many coastal U.S. cities are sinking, while sea levels are rising. Commercial property owners may be more exposed to flood risk than they realize.

Whether you buy into prevailing theories on climate change and mankind’s influence on the environment or not, few deny that human action is exacerbating a worrying trend of land subsidence.

Groundwater extraction diminishes subterranean water levels and is thought to be playing a major role in the sinking of land in locations around the globe, including the U.S.

In its most extreme form, subsidence can lead to building collapse or the formation of sinkholes, which can result in total property losses and casualties. But a much bigger, quieter concern is the gradual sinking of coastal cities, which in combination with accelerating sea level rise (SLR) is putting billions of dollars of property at risk.

Storm surges are becoming more violent, and urban development is robbing rain and floodwater of natural drainage routes while insured values continue to rise. Some experts warn that more commercial properties than we think may be exposed to flooding and structural damage in the event of storm surge.

“These risks are significant and carry the potential for large claims,” said Mark Way, head of sustainability, Americas, for Swiss Re, whose “2015 SONAR Report” highlighted soil subsidence as an “underestimated risk” not adequately factored into many CAT models and property insurance portfolios.

“It’s not potential sinkholes that keep risk managers awake at night — it’s the potential for 10 or 15 feet of flood water,” said Lou Gritzo, vice president at research-based insurer FM Global.

But it’s not just property at risk. The hidden danger lies in the potential impact on supply chains, he said.

“Risk managers should think about where their products are coming from and have a contingency plan in place in case a storm affects one of their supplier’s locations or a port their supplies are coming through.”

With U.S. businesses increasingly globally connected, this is a pertinent point.

Way noted that in some parts of the world, cities are sinking 10 times faster than sea levels are rising — Thailand has sunk over three feet since the 1970s; Jakarta may be the fastest sinking megacity, having sunk more than 12 feet in 35 years; while in France, subsidence-related losses have increased by more than 50 percent in the two decades prior to 2011, he said.

Yet, American risk managers are, on the whole, relatively ill-informed on the creeping effects of land subsidence and SLR, which can vary significantly depending on location. Hotspots in the U.S. include areas with significant coastal infrastructure such as New Orleans, New York, New Jersey, D.C.-Virginia, and parts of Florida and Texas.

“There is still a relative lack of awareness of the scale of the problem among businesses – even those operating in areas where there could be substantial risk,” said Ray Monteith, senior vice president of HUB International’s risk services division.

“SLR and land subsidence are relatively slow onset events, measured in incremental changes. There is a tendency for this kind of risk to creep up on people, and there is a failure to act.”

Florida-based Andrew Kiernan, senior director of captive services at Franklin Street, noted that his home state has a high concentration of wealth built not on rock, but sand.

“People continue to build right up to the water’s edge,” he said. “Miami Beach has extremely tall condos containing levels of multimillion dollar units on a sandbar that may not have existed 300 years ago. Palm Beach exists on a sandbar measured not in miles, but yards.”

“It is hard to quantify future risk because we can’t predict the level of future development and subsequently changes in exposed values. Similarly there is some uncertainty in the rate of change to the hazard.” — Andy Castaldi, head of catastrophe perils, Americas, Swiss Re,

Andy Castaldi, head of catastrophe perils, Americas, for Swiss Re, agreed that short term thinking is blinding people to the potential long term consequences.

“It is hard to quantify future risk because we can’t predict the level of future development and subsequently changes in exposed values. Similarly there is some uncertainty in the rate of change to the hazard,” he said.

“Nevertheless, we are aware of it and are trying to educate civil planners to think about the risk 10, 20 or 50 years down the road. You can’t build for today without thinking about tomorrow.”

Recent storm and flood catastrophes have at least prompted many businesses in areas with heightened flood risk to take defensive measures such as moving data and other valuable assets above ground level. The floodwall business is also booming in Florida in particular, Kiernan said.

Invisible Threat

While brokers and insurers may help companies identify potential risks and mitigation measures, SLR and subsidence are largely ignored as far as property insurance coverage is concerned.

“As of yet, the washing away of foundations is hardly factored into underwriting pricing — people worry more about glass windows and roofs,” said Kiernan.

Monteith said there may be “significant challenges” in obtaining flood coverage for damages related to the slow onset of SLR and subsidence as there would be no clear flood “event” to account for the loss.

“This is something any business owner should be aware of and speak to their insurance representatives about,” he said.

Kiernan explained, however, that the inclusion of “earth movement” rather than “earthquake” in policy wordings is a key differentiator. Earth movement covers a broad range of perils, including sinkholes and land subsidence, whereas earthquake covers only losses from tectonic shifts — a small but vital consideration if a property is to be covered against the potential effects of SLR and subsidence.

“It is important to make sure your policy is clear on what it does and doesn’t cover — for example, earth movement or earthquake cover. Are you clear on what the differences are? You better be,” said Duncan Ellis, Marsh’s U.S. property practice leader.

Gritzo urged risk managers to “double and triple check” the scope of their property coverage.

“Sit down with your insurer and throw out some scenarios — ‘What happens if a storm comes through and washes 10 feet of water into my building? What is covered and what isn’t?’ Those are great questions.”

Ultimately, the best defense is for property owners to take ownership of their risk management — from ensuring the right due diligence is conducted prior to developing land or purchasing a property (flood risk information should be obtainable from either local, regional or national government agencies, for example), through to bolstering physical flood defenses.

“We urge business owners to take control of their own destiny,” said Gritzo. “There are more certified physical loss prevention products out there to keep water out of your building than ever before, and we can thank Superstorm Sandy for that — it motivated manufacturers to come up with new innovative solutions.

“We recommend putting defenses up to the 500-year flood level — there is a 0.2 percent probability of this occurring each year. At the minimum, you should have a response plan. It doesn’t take long to put one together and every company should have one.”

In 50 years, cities like Miami and New Orleans could look very different than they do today.

Lawmakers and developers would be foolish to ignore SLR and subsidence when building coastal centers, and there is no time like the present for risk managers to begin taking steps to minimize their exposure.

Antony Ireland is a London-based financial journalist. He can be reached atriskletters@lrp.com.

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Atlanta’s Turnaround Bigger Than We Thought

ATLANTA–Talk about a turnaround. Atlanta had a long road back from the Great Recession but today developers are betting big on the Southern state.

Just how much development is underway in Atlanta? On the multifamily front, developers will add 9,750 units in 2015, according to Marcus & Millichap. New rentals will focus on high-rent areas in the Downtown, Midtown and Buckhead submarkets, where average rents per unit can top $1,400. Meanwhile, retail developers will bring about 1.6 million square feet of space to the market, mostly of pre-leased single-tenant offerings.

There’s a little less action in the office market. Developers will finish 626,000 square feet in 2015, down from the 1.4 million square feet completed last year. Looking at industrial, developers will deliver two million square feet of space, expanding inventory 0.3% by the end of the year. Finally, hospitality developers will add another 800 rooms to metro Atlanta’s hotel market by year’s end.

“It’s interesting how multifamily continues to lead us out of the doldrums,” says Thad Ellis, SVP and Atlanta market leader for Cousins Properties. “The past 24-plus months have been very good months to lease office in Atlanta, but multifamily developers are controlling of a lot of what were formerly very good office sites.”

Ella Shaw Neyland, president of Steadfast Apartment REIT, which has been acquiring multifamily assets in Atlanta, has some concerns about development there. For starters, although 400,000 new units nationwide is about 33% higher than the historic annual need for new supply, it does not catch up for the many years post recession where very few new apartment homes were constructed.

“A recent report from Freddie Mac says that we may be in a situation where we are about 1.5 million apartment homes short of demand today,” she says. “And that supply will not catch up with demand for the next nine years.”

Atlanta’s industrial vacancy represents a 13-year low, ranking it among the most active in the nation. A steady stream of organic growth combined with new entrants to the market is spurring the growth. “Atlanta’s market dynamics have led to historically low vacancy, increasing rental rates and significant investment sales activity,” says Todd Barton, a CBRE first VP of industrial. “The amount of spec development underway, while significant, is appropriate for the market given the limited deliveries in the past five years.”

In terms of retail, Monetha Cobb, managing director of Franklin Street of Atlanta, points out several recent large scale, notable retail-driven projects: Avalon, which opened in October 2014; Buckhead Atlanta, which had tiered openings over the past six months; and Ponce City Market, scheduled to open this fall.“If there is a small to mid-size development taking place, it is most likely being driven by one of the many grocers expanding in the metro Atlanta market,” she says. “This is great for many smaller restaurant or service-oriented tenants who benefit greatly from the ‘daily needs’ component the grocery store brings.”

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News in Brief: Nautical Ventures

Franklin Street managed the $2.5 million sale of a two-story, 26,258-square-foot retail building at 139 Shore Court in North Palm Beach, which will become Nautical Ventures superstore. FranklinSt.com