BLOCK REAL ESTATE SERVICES, LLC BLOG

Money In Multi-Family: The Final Investment Series Post

2012-02-21T11:23:00.001-08:00

As the final blog post in our three-part series focused on CRE investments in Kansas City, we look to the multi-family market sector and also sum up the overall 2012 outlook.

Mulit-Family
The darling of the commercial real estate investment world continued to be multi-family. With long-term debt at sub-4% interest rates provided by Fannie Mae and Freddie Mac, buyer activity remained “white \ hot.” Multi-family investment sales activity in 2011 outpaced the number and quality of transactions completed in 2010. The 340-unit Barrewoods Apartments sold at a 5.72% cap rate for $100,735 per unit ($34.25 million). The 324-unit Cordillera Ranch was sold by Sentinel Real Estate Corporation to A.G. Spanos Companies for nearly $32.6 million and at a 6.34% cap rate. Sentinel Real Estate Corporation also purchased the Fairways at Corbin Park, a 276-unit complex in Overland Park, Kansas, for $30.5 million at a 6.0% cap rate.

The Fairways At Corbin Park

Other significant transactions included the sale of the 250-unit Bella Palazzo in Overland Park, Kansas, and the 322-unit Timber Lakes at Red Bridge in Kansas City, Missouri. At the end of 2011, the Briarcliff City Apartments, developed in 2009/2010 in a joint venture between Briarcliff Realty and Kansas City Life, was under contract to Crow Holdings at a reported sub-5.75% cap rate, with an expected closing during the first quarter of 2012. Moving forward in 2012, we expect cap rates for Class A multi-family properties to remain in the 5.5 to 6% range, as they did for the 2011 sales. Class B multi-family cap rates should remain steady in the 7 to 8% range.

Investment Summary & Outlook
Commercial real estate fundamentals are improving across all sectors, albeit at varied paces. This recovery has been more muted than many expected as a result of continued softness in the general economy. Yet, commercial real estate has been an unintended beneficiary of the soft economy. The dearth of new construction and resultant delivery of new properties has aided in the slow improvement of underlying fundamentals, especially in the multi-family sector, as demand continues to outweigh supply. The lag in the improvement of market fundamentals within the office, industrial and retail sectors, as compared to multi-family, is an indicator of adjusted expectations and of course, slow job growth. While the drastic drop in development activity and contracted demand levels may have reduced overall real estate activity in the short term, activity is expected to grow quickly if and when new job growth is evident.

Expect 2012 to again see an increase in investment transaction volume. There is definitely sufficient capital for investment transactions, but the limiting factor will continue to be the “supply of marketable properties” to fuel transaction growth. The deleveraging process will continue and take time to sort through as properties get right sized, as it relates to debt levels. Moving forward into 2012, debt availability should grow further than 2011. Lenders will continue to hold on to strict underwriting standards, and in most cases, will be more concerned about the sponsorship of a particular deal first and the underling real estate second. Low interest rates will continue to be attractive to borrowers, and with historically low treasury rates, institutions will look to place money in core real estate deals to achieve 4 to 5% versus sitting in treasuries at 2%.

Best Bets 2012
With the exception of multi-family, none of the property sectors offer sure-fire opportunities for big gains in 2012. As addressed in this report, owners can feel secure in Gateway cities and buyers will continue to focus on the few markets generating jobs. Look for commercial developers and construction lenders to remain on the sidelines unless a single tenant credit build-to-suit becomes available, which will ensure a feeding frenzy by developers chasing the deal. The sectors that will garner the most attention from equity investors in 2012 will be Class A multi-family, Class A enclosed malls, infill neighborhood centers, gateway industrial and on-campus medical office buildings. Look for investors to continue to capitalize on low interest rates by refinancing properties through 2012. Lenders will not be likely to allow owners to pull cash out unless a deal is underwritten to strict standards, but good properties with high occupancy should find plenty of options for replacement debt, albeit at lower LTVs (loan-to-value). However, don’t be surprised to see some investors still sitting on the sidelines in cash until the economy shows some real signs of significant recovery.

Kansas City has and will continue to be a sought after market on the investment front. Multi-family will continue to lead the way in investment transactions in 2012 followed by industrial, office and retail. However, due to Kansas City’s industrial market being tightly held by local developers and historically difficult for institutional investors to break into the deal flow, activity may continue to be limited in this sector in 2012.

Contributor: Grant Reves,Investment Sales, LinkedIn

Block Real Estate Services, LLC

The Block Funds Syndications Breakdown

2012-02-14T19:17:00.000-08:00

As an active, growing firm, we are constantly presented with property investments. Investor capital is what allows us to readily act on these opportunities. Thus, Block Funds manages our Syndications with a strategic outlook on maximizing investor outcomes.

Objectives

Preserve, protect and return investors’ capital
Maximize cash distributions to investors from operations
Debt principal reduction
Property appreciation upon sale

Strategy
To purchase high-quality single or multi-tenant commercial real estate properties located in key metropolitan areas throughout the United States with strong tenancy.

Diversification
Block Syndications actively manages investment risk through portfolio diversification across product type, geographical location, and tenant type including industry focus, size and credit rating, as shown in the table and charts.

Contributors:

Aaron M. Mesmer, Acquisitions & Investment Sales, LinkedIn

Brian Beggs, CFA, Director of Acquisitions, LinkedIn

Block Real Estate Services, LLC

Legal: Investors are cautioned that the financial performance information set forth herein is not necessarily indicative of, and has no bearing on, any future results or performance of the Properties. There can be no assurance that the Properties will be profitable in the future or that the value of the Properties and their assets will not decrease. The financial and other information contained herein is based upon the Manager’s reasonable estimates of the current fair value of the Properties and their assets. Although
the Manager believes such estimates are reasonable, the Manager has not obtained independent appraisals or other thirdparty valuations of the Properties or other assets. The information contained herein shall not constitute an offer to sell or the solicitation of an offer to buy any securities of the Manager.

Industrial And Retail Investment: Investors Buy Into KC

2012-02-07T13:58:00.000-08:00

Industrial

Like in years past, the industrial sector is always Kansas City’s most sought-after category for both local and institutional investors. Kansas City’s industrial market is very tightly held by numerous long-time local real estate developers, but there are several institutions that have made inroads into Kansas City over the last five years through acquisitions and development. These institutions include Colony Realty Partners, Welsh Property Trust, Cobalt, INVESCO, Blackstone, USAA, and Sun Life Assurance.

Along with the increased single asset sales that occurred in 2011, a large 24-building, 1,080,380 square foot portfolio owned by RREEF, was brought to market at year-end 2011. But while a buyer was selected, the closing is not expected until early 2012.

Welsh Property Trust continued to add to its Kansas City portfolio with the purchase of the 405,000 square foot Midpointe Corporate Centre in Edwardsville, Kansas for $21.5 million ($53.00 per square foot) at a 7.86% cap rate.

Also, the Block Funds completed the purchase of 6106 NE Parretta Drive in Executive Park and then a long-term lease was completed with PrimeSource to provide a going-in cap rate of 8.35%.

Colony Realty Partners remained active with the purchase of the 172,445 square foot Castle Metals building in Executive Park at a 9.35% cap rate from Quadrangle Development. See the KC Business Journal article.

Several significant owner/user transactions were completed, including the 412,699 square foot Ball Container building to UHAUL, the 245,000 square foot 1100 Blake to Glazer’s Wholesale Liquor, and the 97,053 square foot Olathe Millwork Building to Himoninsa Power Systems, Inc.

Retail

The lack of new development activity carried over from 2010 into 2011. Landlords continued to protect occupancy and manage existing tenants as their top priority. Retailers slowed their growth plans, which is expected to continue into 2012. Retailers with strong histories and solid business plans were still active and took advantage of empty buildings vacated by less successful companies.

Town Center Plaza, located in Leawood, Kansas

The two largest sales in the Kansas City market were both part of national portfolio transactions and included the Oak Park Mall sale from CBL & Associates to TIAA-CREF and Town Center Plaza from DDR to Glimcher Realty Trust, apart of a strategic asset swap. Oak Park Mall traded for $185 per square foot ($290 million) and Town Center Plaza traded for $337 per square foot ($139 million). A cap rate was not reported in either sale but industry experts expected them in the low 6% range.

There were also several smaller notable transactions that occurred in 2011. Tuileries Plaza was purchased for $16.2 million in Kansas City by Briarcliff Realty in a distressed purchase from a consortium of banks. The property had low occupancy and was a value-add purchase. Shawnee Village was sold by Weingarten Realty Investments to Five Star Investors, a group led by RH Johnson, for $6,769,500 at a 10.98% cap rate.

Although the number of transactions were still small, there are a number of buyers in the marketplace actively looking to purchase quality grocery-anchored retail centers and other well-priced retail properties.

Contributor: Grant Reves, Investment Sales, LinkedIn

Block Real Estate Services, LLC

Mergers & Acquisitions: How Real Estate Can Play A Key Role

2012-01-31T07:31:00.000-08:00

With M&A activity on the rise, a company’s occupancy terms can be a hidden asset, or an unexpected liability. On one hand, prevailing obligations might serve as a competitive advantage that contributes to greater profitability. On the other, they might add significant debt and thereby constrain the capacity for growth. Since facilities costs are typically the second or third largest spend category, the impact could be major. M&A events can be great opportunities to reevaluate the real estate function and how it supports the overall business goals.

Early in the M&A due diligence process, the financial and operational merits of the real estate interests – whether leased or owned – should be thoroughly identified. This can take considerable time, especially if it is a multiple location proposition, so the sooner it is started the better. A dedicated Tenant Representation team can help gather the necessary information quickly, and provide comprehensive and unbiased analysis, from which short term and long term objectives can be set to eliminate redundancies, monetize excess, improve efficiencies, engage market competition, increase flexibility, enhance image, formulate best practices, etc. Implementation of strategy without delay is imperative to maximizing value.

In our experience, corporate real estate can be an important source of liquidity and returns when it is treated not simply as an expenditure, but rather on the same level as human capital and technology (which round out the top three items on the balance sheet generally), and when it is planned annually instead of at expiration. Executives that view their commercial property as a lever to business, and not just as a place to conduct business, will have a leg-up.

Contributor: Ryan O'Rourke, Vice President, LinkedIn

Block Real Estate Services, LLC

Kansas City CRE Investments: The Office Market

2012-01-24T08:14:00.000-08:00

Last year, the Kansas City commercial real estate investment market came back to life. Sales activity rose to levels not seen since the first part of 2008. Low interest rates, the pressure to place equity, and the fear of missing out on good pricing, made commercial real estate investment activity rebound. However, these three factors alone would not have increased activity without sellers and buyers changing their mindset in 2011 as it relates to pricing and expected returns.

In all investment classes, the activity pace in Kansas City heightened in 2011. In actuality, the number and quality of sales completed outpaced prior year projections. Kansas City continues to have a large number of institutional buyers that have invested locally.

The Office Market
With the willing seller’s change of strategy, the vast bid/ask spread of the last several years began to tighten from a buyer’s and seller’s prospective. The largest office sale of the year was the US Bank Building in Overland Park for $38.2 million ($198 per square foot) at a 7.52% cap rate, bought by Whiterock Acquisition Corporation.

US Bank Building, located in Overland Park, was bought by the Whiterock Acquisition Company

The other notable office sales of 2011 included Park Central Plaza I & II on the Country Club Plaza for $18 million ($122 per square foot) at an in-place cap rate of 8.95% to Sun Life Assurance from TA Associates. TA Associates had the building under contract in 2007 for $30 million ($205 per square foot), but the buyer failed to close and the market deteriorated. Two other recent offerings on the building also failed to attract a buyer until Sun Life Assurance stepped up to the table. Also, the Midwest Trust building on College Boulevard was sold to lead user, Midwest Trust, for an 8% cap rate or $14.5 million ($123 per square foot).

Other smaller office sales included the Greenview Office Building in Prairie Village, Kansas, to the Price Brothers, the user sale of a Bank Building in Overland Park, Kansas, to Arvest Bank, and 7501 Tiffany Springs Parkway, in a distressed sale to a local investor. While there was significantly increased investment activity in the market, institutional and private investors continued to show favoritism for Johnson County and the Country Club Plaza. As referenced in years past, South Kansas City, Lee’s Summit, Independence and Blue Springs stay on investors’ radar when quality product becomes available.

New entrants in the Kansas City market in 2011 included Whiterock Acquisition Corporation, GoldOller Real Estate and Town Management. Kansas City will continue to be an attractive investment market as institutions see more stable investment returns at rates which are 75 to 125 basis points higher than other first tier markets.

Stay tuned to read more blog posts on Kansas City CRE investments and gain more insight into Industrial and Retail, Muli-Family markets and more.

Gather all the KC CRE investment market details. Like our Facebook page to download the 2012 BRES Market Report or get the report on our website.

Contributor: Grant Reves, Investment Sales, LinkedIn

Block Real Estate Services, LLC

KCI / Airworld: Minor Submarket With Opportuniy For Major Growth

2012-01-09T15:58:00.000-08:00

Though the KCI/Airworld Industrial submarket is a minor component of the overall Kansas City industrial market, it is an important submarket, due to its close proximity to Kansas City International Airport (KCI). KCI is the preferred location for air-cargo transporters in a six state region and is already a key player in the region’s distribution and logistics sectors. The location of the submarket does place it fairly far from some of the more active industrial parks, like North Kansas City’s Paseo Industrial and Kansas City, Missouri’s Executive Park. However, the excellent proximity to I-29 and I-435, allow easy access to all points in the city.

In addition, this submarket has exhibited more stability than the industrial market as a whole. This is partially due to the specialized nature of air transit-based tenants and the large national companies that are seeking a facility near an air cargo operation, like KCI. The flex portion of the submarket is the drag on occupancy with nearly 21% vacancy as opposed to only 3% in bulk warehouse space, demonstrating the area’s strength with large tenants. These statistics compare to the year-end 2010 occupancy rates, and the overall Kansas City industrial market’s $5.21 per square foot average rental rate, thus, making this submarket one of the bright spots in the Metro area.

KC Intermodal Business Centre

The KCI Intermodal Business Centre, which is now ready for vertical construction, will be a key factor in the growth of this market. This is planned to be an 800 acre development. Also, significant advancement took place in this submarket during 2011 with the Blount International lease for their 350,000 square foot distribution center, which is slated to be operational by early 2012. Click to read more about this transaction.

Due to the growth of this market and economic factors, I recommend that you keep an eye on this submarket as we progress into 2012.

Contributor: Brad Jacobs, Sales Associate, LinkedIn

Block Real Estate Services, LLC

The 2012 Multi Family Market

2012-01-03T08:14:00.000-08:00

Commercial real estate remains in vogue with investors despite marginal gains in the overall economic outlook and concerns stemming from the European debt crisis. For these investors, the multi-family market emerged as the clear favorite among the traditional four commercial property types in 2011, a trend that is expected to continue well into 2012. While office, industrial and retail grapple with weak demand, a strong fundamental recovery in rental housing demand has propelled apartments to a broad recovery in occupancy, rental rates and investor pricing.

With more than 3 million foreclosures since 2009, profound shifts in demographic, economic and social patterns have changed the way many Americans, particularly those of the millennial generation, feel about home ownership. This, combined with the entry of the first wave of “echo boomers” graduating from college, has resulted in the addition of an estimated 1.4 million renter households.

Apartment Development Activity

Permit activity increased significantly towards the end of 2011, indicating that as fundamentals recover, more developers are likely to initiate projects. Locals are leading the development push, including Briarcliff Development, Price Brothers and DST:

Briarcliff is planning a 298-unit, luxury apartment property on ground it recently acquired at the former Tuileries Plaza Shopping Center.

Price Brothers recently received approval for its 188-unit development at 46 Penn, which features a medium-density concept on the north side of the Country Club Plaza.

DST recently announced its plans to add 204 apartment units as a neighbor to its successful retail redevelopment at 51st and Main Street.

Tanner & White Properties is also planning a redevelopment of the Woodside Health Club into Woodside Village, a 330-unit property that recently received TIF and CID approval from the City of Westwood.

The Village at Mission Farms is expected to complete construction on its 212-unit apartment property on the west side of Mission Road in Leawood, the first “wrap” concept to be constructed in the Kansas City suburbs.

The Village At Mission Farms Concept

Apartment Investment

Apartment sales activity across the country was up by nearly 75% in 2011 as investors of all kinds moved significant funds into the sector. Similar to the rise in demand for gold, grain, farmland and other commodities, multi-family properties are being viewed by some as a way to hedge impending inflation anticipated as a result of the increased money supply pumped into the system by the federal government. Investors are also attracted to attractive financing, recovering fundamentals and less volatility when compared to the equities market.

Strong demand is expected to continue throughout 2012 as fundamentals are anticipated to remain strong and interest rates expected to remain low.

Contributor: Aaron M. Mesmer, Investment Sales & Acquisitions, LinkedIn

Block Real Estate Services, LLC

Leveraging For Success In 2012

2012-01-03T06:45:00.000-08:00

Although we have no crystal ball or the ability to peek into the future, we do understand an organization that is fully prepared with superior market knowledge has the ability to anticipate and quickly adapt to the market. While we anticipate the economic climate and general market demand to remain challenging, BRES would like to share some insight into leveraging opportunities to maximize the financial outcomes for clients in 2012.

Asset and Property Management

If you are an organization who has seen a continued growth in your management portfolio, you may recognize a need for a leadership team to guide the direction of your portfolio. BRES faced a similar situation. From our extremely experienced and qualified staff of property managers, we chose four individuals who had exhibited a strong dedication to the profession, as evidenced though their pursuit of continuing education and professional designations, coupled with an affinity for leadership. These four leaders were promoted to Director level positions with a goal to continuously improve and maintain our leadership position in property management service delivery. By creating this leadership team, BRES has continued its efforts to enhance the quality of our service to our owners and tenants alike by reviewing and amending policies and processes, formalizing training programs, enhancing tenant service, benchmarking property performance, and ensuring the safety and security of tenants.

Health Care Real Estate Division

There is a definite growth and need for professional service and support in health care real estate. Recognizing this, BRES formally structured a Health Care Real Estate division in 2011. This department will focus on building strong relations with health care systems and investors to support their investment and development needs.We believe this focused effort in the health care field will yield significant opportunity for the organizations who are leveraging themselves to meet the need of this market segment.

Corporate Social Responsibility Programs

Creating a successful relationship with the community is key to the success of any organization that wishes to integrate itself into a community. At BRES, we know that when our communities thrive, so does our business. This is why community engagement is so embedded in our corporate culture. We work to invest philanthropic resources in the areas most relevant to our business, customers and employees as efficiently and effectively as possible. If you are apart of an organization that finds your philanthropic budget tight for 2012, do not give up on your community connection. Rather, look for resources within your business that you can offer to the community. For instance, BRES donated an abandoned warehouse for holiday season use by Operation Breakthrough. This warehouse made a big difference in giving space for volunteers to store and organize gifts for less fortunate children and their families during the holiday season.

While we do not know for certain what 2012 will bring, we do understand the industry dynamics. We believe we have positioned our organization to the best of our ability to adapt to a rapidly changing environment. With a vertically integrated platform of services combined with a dedicated team of knowledgeable market experts positioned to react instantaneously, Block Real Estate Services stands prepared to seize the opportunities that will inevitably present themselves in 2012. Although we know that not all sections of our 2012 plans may apply to your organization, we hope that this post can possibly help provide insight into the departments that may need more focus as together we move into the uncertain waters of a new year.

Contributors:

Kenneth G. Block, SIOR, CCIM, LinkedIn

Harry P. Drake, CCIM, CPM, LinkedIn

Block Real Estate Services, LLC