Monday, January 28, 2008

Duke Realty Corp. New Project

Duke Realty Corp. plans to build a new industrial development near the Port of Houston that can accommodate 2.9 million square feet of warehouse space.
The project, named FairPort, will cost between $130 million and $140 million to build out over the next seven to eight years, according to David Hudson, Duke's senior vice president in Houston.
It is the Indianapolis-based firm's first real estate deal near Houston's port, a submarket that's been heating up since last year's opening of the Bayport Container Terminal (See related story below).
FairPort will be located on 161 acres recently acquired by Duke near the southeast corner of West Fairmont Parkway and Underwood Road. The southern part of the site sits in Pasadena, while the northern portion is in La Porte.
The undeveloped land was part of a multicity portfolio purchased in December from Powers Holdings LLC of Savannah, Ga.
The purchase price was not released, but a spokesman with Duke says the amount likely will be listed in the firm's Jan. 31 filing with the U.S. Securities and Exchange Commission.
As part of the deal, Duke also acquired a 12-acre container/chassis storage yard near the FairPort site and a 172,000-square-foot industrial building in the Cedar Crossing Business Park in Baytown.
Duke plans to break ground by early 2009 on a 400,000-square-foot to 500,000-square-foot building, Hudson says. The real estate firm is so confident in the port market it says it will build the structure whether or not it has any paying tenants lined up.
Once Phase I is 50 percent to 75 percent leased, Hudson says, work will begin on Phase II.
Duke also will market parcels for sale to companies that want build-to-suit facilities on the site.
Renewed interest
Ongoing development at the Port of Houston has given builders of industrial space a fresh interest in the area.
The $1.2 billion Bayport Container Terminal will substantially increase the number of containers that can move through the Houston area. The Port of Houston is already ranked first in the United States in foreign waterborne tonnage and second in total tonnage.
The increased capacity is fueling development of industrial facilities to handle the incoming cargo.
"The new terminal opening out there created lot of activity," says Steve Jaggard, president and CEO for the Vantage Cos. in Houston.
Vantage will finish construction in April on Bayport North Distribution Center Phase II, which is adjacent to Duke's FairPort acreage. Construction began on the 600,000-square-foot and 75,000-square-foot buildings on a speculative basis, after the 565,000-square-foot, Phase I building reached 87 percent leased and was sold.
"The absorption is pretty good," says Jaggard, noting that most facilities in the area were built in the last couple of years. "It's still a young market."
John Ferruzzo, an industrial principal with NAI Houston, says 5 million to 8 million square feet of properties are planned near the Port, some of which have already begun construction. The Port developments hope to attract users that need more than 100,000 square feet of space, he says, even though Houston's industrial market has traditionally targeted tenants needing 20,000 square feet to 30,000 square feet.
Ferruzzo questions whether there will be enough larger users to go around.
The uptick in Port activity has caused land prices to more than double in the last few years, Jaggard says, with prices now in the $3 per square foot range. Rents are following suit, he says, running 34 cents to 38 cents per square foot.
Duke, which focuses on port markets around the country, is pleased to finally have some acreage near the Port.
"It's a very good submarket to be in," Hudson says.

For more information see: or


One of the legacies of Torto Wheaton Researchs twenty-five years in the industry is its having popularized the idea that real estate demand is tied directly to employment growth in the economy. Over time, most commercial real estate researchers have become close students of the metro-level employment data that the government releases each month. Generally, then, we look to employment and other economic data to tell us about commercial real estate. Maybe, though, it is better to give than to receive. One of the storylines that seems to pop up everywhere lately is that perhaps we are already in a recession. Knowing that all of the major indicators are not showing negative readings, why is an existing recession such a popular concept? Well, in part, I think that pundits and journalists enjoy being cheeky about the matter also, however, the "real time" data have burned commentators in the past. In particular, the 2001 recession was not reflected in the data leading up to August of that year, but after revisions the recession was eventually deemed to have started in March. But perhaps these commentators are merely fighting the last battle. One unique aspect of the 2001 recession was that it was started by the failure of the many small dot-com companies chasing the exploding technology stock bubble of the previous years. As close observers of the employment data know, the employment patterns of small companies are the hardest for the government to get a handle on and the last to be incorporated into the data with anything other than estimates. But this is where the commercial real estate data of CBRE / Torto Wheaton Research can come in. As an independent data source, our measures of commercial real estate demand can be used as a check on government-published data, even as we use their data to suggest what demand should be. The results suggest that the talk of a present recession is coming from those caught in the emotion of the near-relentless bad news coming from Wall Street and the housing market. Using various measures of demand across three different real estate sectors, our analysis suggests that the economy is experiencing a slow-motion slowdown rather than an existing recession with negative employment growth. If the analysis holds, we expect that additional government data will not result in substantial revisions to its current employment estimates. So, while we have substantial concern about what 2008 will bring, there is no need to assume the worst when positive data does arrive. The economy is large, complicated, and, dare I add, resilient. There are many trends weighing down the economy today and perhaps this is why many say it feels like a recession, but until the statistics start showing negative values, the proper response is to wait and see. For more information see and

Friday, January 25, 2008

Simplified lease documents aid the need for speed, better tenant

With a lease agreement in plain English, negotiating parties have an easier time understanding the terms of the deal.

From Development Magazine Online published by NAIOP, National Association of Industrial and Office Properties
"Tenants often don't understand it. Brokers and owners have trouble negotiating it. And it requires hours of tweaking and finessing with each new deal.
But standard lease agreements don't have to be that way. A year ago, Spieker Properties cut the size of its standard lease agreement in half and the results have exceeded expectations.
The speed of doing business becomes more rapid with each day. When companies grow, their need for additional real estate space often must be fulfilled immediately. Deals must be executed quickly, with minimal time wasted in the negotiation process.
Most of Spieker's tenants are businesses occupying between 6,000 and 8,000 square feet. While the long-form lease still is a viable and even preferred option for some larger tenants, these smaller customers often do not have the resources to spend on extensive and sometimes exhausting negotiations.
A great deal of time was being spent negotiating terms irrelevant to many of these smaller tenants. In addition, the 16-page long-form lease included legalistic language difficult for tenants to understand.
Each provision was reviewed in terms of whether or not it was an issue that had bogged down negotiations unnecessarily in the past. If its elimination did not present any true risk to either party, the provision was simply removed. The search was aimed especially for provisions that had repeatedly become sticking points with tenants.
The short-form lease has completely changed the tenor of Spieker's relationships with tenants. No longer are they intimidated by a lengthy document written in complex language more suited to legal experts. With a lease agreement in plain English, negotiating parties have an easier time understanding the terms of the deal. They spend less time discussing interpretations of the language and more time pushing negotiations forward.
The legal time previously required to execute a lease reduced by 50-75%.
In some cases, legal costs are eliminated altogether and leases are signed essentially in their original form. For more information see :

Thursday, January 24, 2008

Dow Preleases 284,000 SF at The Plaza at Enclave

Dow Chemical Co. signed a 12-year lease for 283,953 square feet of Class A office space at The Plaza at Enclave at 1254 Enclave Parkway in Houston, TX. The diversified chemical company will relocate its operations from its old campus at 400 W. Sam Houston Parkway by September of this year and will occupy the first five floors of the Enclave building. Developed by Core Real Estate LLC and designed by Powers Brown Architecture, the currently under construction, six-story, Class A office building totals 343,541 square feet and is on a 7.96-acre parcel near Interstate 10, west of downtown Houston. Cody Armbrister and Bonnie Kelley of CB Richard Ellis represented the landlord, Core Real Estate and BayNorth Capital, the financial partner in the development. Craig Beyer from CB Richard Ellis' downtown Houston office, who was engaged by Jeff Cutler of CB Richard Ellis in Michigan, led the leasing effort for Dow Chemical. For more information see : or

Monday, January 21, 2008

H.P. Puts campus up FOR SALE

Hewlett-Packard continues to whittle down its real estate holdings at the former Compaq Computer Corp. campus in Northwest Houston -- this time through an effort to sell more than 2 million square feet of excess space.
The Palo Alto, Calif.-based computer company -- which purchased Houston-based Compaq for $19 billion in 2002 -- is consolidating employees into certain parts of its Northwest Houston campus so it can market 2.09 million square feet of space for sale, although HP will first have to lease out some of the space to better position the property.
The entire package -- which has an estimated replacement cost of $527 million -- consists of 2 million square feet of office space; a 900-seat cafeteria; a fitness center; a conference center; and parking garages with nearly 6,000 spaces. All of the buildings are connected by an air-conditioned walkway.
The 103-acre site also includes 20 acres of undeveloped land and five acres that could be redeveloped.
"It's a self-contained campus," says Stewart Robinson of Hines Interests LP who was tapped by HP's brokers to help market the property, located at State Highway 249 and Louetta.
HP plans to sell the eight buildings and four parking garages, but will first have to find tenants to lease a portion of the facilities. A lack of historical office leasing data in the FM 1960 submarket means it is difficult to place a value on the properties, brokers say, making it challenging for potential buyers to analyze the investment.
"They were grossly under-valuing the benefits of the asset and its location," says Ken Gilbert of Liberty-Greenfield Real Estate Advisors who was hired along with colleague Michael Raney in San Francisco to market the HP real estate. "That's what drove HP to decide to lease, and prove up the benefits of this particular submarket."
An asking price has not been placed on the buildings, which Gilbert estimates would cost $527 million to build today.
Gilbert says that once 15 percent to 25 percent of the square footage is leased, institutional buyers will have the data they need to properly assess the campus.
In the meantime, HP is moving forward as though a buyer will eventually be found.
HP employees are already relocating to the southern-most parts of the campus to free up what has been deemed as unneeded real estate. Most will be in their new work spaces by September, with all moves completed by October 2009.
Ed Woodward, an HP spokesman, says there has not been a reduction in the employee work force in conjunction with the corporate decision to sell this piece of Houston real estate. The company will not reveal how many employees work on the Houston campus.
"Houston will remain a very large facility for HP," Woodward says. "It's a very large facility, from both a physical and employee perspective."
At its peak, Compaq housed more than 16,000 employees in more than 5 million square feet and owned close to 1,000 acres of land in Northwest Houston.
Since HP acquired Compaq, the company has laid off an undisclosed number of workers; implemented plans to use facilities more efficiently; and divested under-utilized land and buildings.
HP will not disclose how much square footage it will occupy once the newest consolidation is completed, but according to a corporate map it appears to be less than half of Compaq's original main campus.
Previous HP divestitures were met with a flurry of bids from multiple would-be buyers.
The company sold a total of 632 acres of vacant land a few years ago to V&W Partners, which is developing the acreage as The Vintage -- a high-end neighborhood with homes, luxury apartments and Vintage Park, an upscale lifestyle center developed by the Interfin Cos.
Another divestiture came in 2006 when HP sold three office buildings and a manufacturing facility on 45 acres of its main campus grounds. The tract has since changed hands again, with the new owner marketing the property as 630,000 square feet of Class A office space for lease called Centre at Cypress Creek.
Room for more?
Jones Lang LaSalle data for fourth quarter 2007 shows that the FM 1960 submarket only has 589,000 square feet of Class A office space -- the smallest Class A inventory among Houston's submarkets, except Conroe. FM 1960 had a 5.8 percent direct vacancy rate and gross rental rates of $23.63 per square foot in the fourth quarter, the real estate firm reports.
"It's a large block of space," Gilbert says of HP's site. "The submarket it's in has never had a large block of Class A space before."
It's a large block of space," Gilbert says of HP's site. "The submarket it's in has never had a large block of Class A space before."
An office leasing track record may not be available, but HP contends that the location and amenities are strong tools in recruiting and retaining employees.
Robinson says the site is unique in that it has 1 million square feet of office space that's ready for immediate move-in.
"We have very little space available for current occupancy in our marketplace today," he says. "Most of the companies that have a campus now have had to construct it."
Todd Edmonds, a principal with Colliers International, says engineering firms may be likely tenants for the properties, but not other technology companies.
Compaq's vendors and suppliers likely would have been interested in the space back in the computer company's heyday.
HP's buildings will now be competing for tenants with the former HP facilities -- Centre at Cypress Creek -- which are right across the street.
HP will soon have even more competition, according the Jones Lang LaSalle report, which shows that 435,000 square feet of Class A office space is currently under construction in the FM 1960 submarket.
While the HP buildings were primarily constructed from 1989 to 1991, Gilbert says they are up for the challenge.
"The buildings are in excellent condition," he says. "HP has maintained them very well."
For more information see: or

Wednesday, January 16, 2008

Kimco Sells Stafford Power Center to Dunhill for $102M

Dallas-based Dunhill Partners, a self-proclaimed "aggressive" commercial real estate investment firm, is the new owner of Fountains on the Lake, a 589,201-square-foot open-air shopping center located on US Hwy 59 in Stafford, in the Fort Bend/Sugar Land submarket of Houston, Texas. Randy Fleisher, Managing Director, and Jason Piering, Vice President, both of CB Richard Ellis’ Dallas Capital Markets Debt & Equity Financing group, structured $100 million of equity and acquisition financing for a joint venture on behalf of Dunhill. The deal closed just before the end of 2007. Total transaction price is estimated at $102 million, or approximately $173-per-square-foot. According to CoStar Property Professional, previous owner, Kimco Realty, was marketing small shop space at the 98.6%-occupied shopping center for $18 to $22-per-square-foot, triple net. Built in 1996, the center is built atop a 43-acre plot and features Loews Theatre, Saks Off-Fifth, Borders, Hobby Lobby, Office Max, Bed Bath & Beyond, Sports Authority, Old Navy and Stein Mart as major tenants. Approximately 30 additional acres (partially occupied by a large pond and landscaping) included in the transaction have been earmarked for future development of additional shops and restaurants. Dunhill typically brings together investors in a limited partnership format to purchase assets intended to deliver strong returns for the long term. As a full service brokerage, Dunhill leases and manages its owned assets. For more information see or

Tuesday, January 8, 2008

50/50 Chance of Recession: Report by Ben Johnson

The national economy has a 40% to 50% chance of slipping into a recession, according to the latest research conducted by Robert Bach, senior vice president and chief economist for Grubb & Ellis Company.
“The times are as challenging as they have been since the last recession of 2001, and the possibility of a recession in 2008 is not off the table,” says Bach. “Tenants can look forward to better deals in 2008, but if the economy slows as expected, they may be less inclined to act on them.”
With or without a formal recession, Bach predicts that growth in gross domestic product and jobs, key drivers of commercial real estate demand, will slow moderately in 2008. He expects payrolls to tally under 100,000 new jobs per month, less than the 125,000 average for 2007 and far below the 189,000 average in 2006.
For the office market, Bach is predicting space absorption of around 36 million sq. ft., or about half the absorption recorded in 2007. But given the modest level of new construction coming online during the next 12 months — 55 million sq. ft. or a 22% increase over 2007 – office vacancies are expected to tick up only 20 basis points, from 13% nationwide to 13.2% by year-end 2008.
Rent increases will moderate significantly, with CBD rents increasing 3% and suburban rents rising 2%, much lower than the 19% and 9% increases, respectively, registered by landlords in 2007.
CBDs with the top rental rates at year-end 2007 included New York’s Midtown at $94.00 per sq. ft.; Calgary, Canada at $62.52 per sq. ft.; New York’s downtown at $61.20; Boston at $60.00; and Toronto, Canada, which registered $58.15 per sq. ft.
The nation’s industrial sector is well positioned to weather the storm, according to Bach. He expects industrial markets to remain balanced through the year, with slowing retail sales and consumer demand being offset by the weak dollar supporting demand for manufacturing space. Also the technology sector is increasing demand for flex and R&D space.
Industrial vacancies should grow from 7.6% to 7.8% in 2008, with net absorption slipping from 140 million sq. ft. in 2007 to 120 million sq. ft. this year.
Not surprisingly, the retail and hospitality industries are facing the steepest challenges in the year ahead, since they are so closely tied to consumer spending. Bach expects consumer spending to slow moderately over the course of the year, dragging down retail sales, while stronger retailers use the opportunity to grab market share through expansion and repositioning. Weakening corporate profits and slower job growth will challenge hoteliers, while the weaker dollar could bring more business to properties in big cities, resort destinations and markets near the Canadian border.
Apartments should fare well in 2008, given that market conditions likely will not change much from late 2007. Modest job creation and wage growth, high home foreclosure rates, and flagging home prices all favor renting.
2008 presents an entirely new landscape to the investment markets, and Bach expects investors to weigh in with gusto once buyers and sellers “close the expectation gap and meet somewhere in the middle.”
In a dramatic departure to the 2007 buy/sell dynamic, Bach expects all-cash and low-leverage buyers — institutions, REITs and foreign investors — to increase purchases as the credit squeeze restrains high-leverage private equity investors, the dominant players in 2007.
Transaction volume in office properties, though falling an expected 25% from the record levels of 2007, is expected to be brisk. Capitalization rates could rise by 100 basis points, with rates on Class-A properties in supply-constrained coastal markets seeing less movement than Class-B and Class-C properties in secondary and tertiary markets.
For more information see: or

Thursday, January 3, 2008

Essential option terms

The issue of what an option contract must contain to be enforceable has been subject to litigation.

from Negotiating and Drafting Office Leases, Law Journal Press

"The court must assure itself that there was a definite meeting of the minds between the option parties, and that the essential terms were not left to future negotiations. [Drost v. Hill, 639 So.2d 105 (Fla.
Dist. App. 1994)]

An option clause is a provision that gives a party, usually the tenant, a right within the specified time of carrying out a transaction upon stipulated terms. The instances for which options are typically given

a. Renewal;
b. First refusal;
c. Expansion or contraction;
d. Cancellation; and
e. Purchase rights.

All the material and central terms must be stated in the option contract before a court may grant an order for specific performance. There must be clear and convincing evidence that leaves no doubt as to the option terms. [Kruse v. Hemp, 853 P.2d 1373 (Wash. 1993)]. In Kruse v. Hemp, the court outlined the following material terms:

(1) Time and manner of transferring title;
(2) Procedure for declaring forfeiture;
(3) Allocation of risk regarding damages or destruction;
(4) Insurance provision;
(5) Responsibility for taxes, repairs, water and utilities;
(6) Restrictions, if any, on capital improvements, liens, removal or
replacement of personal property, and types of use;
(7) Time and place for monthly payments; and
(8) Indemnification provisions.

Landlords may want to use the following renewal option checklist provisions applicable to office lease renewals:

· No renewal options if tenant is in default. Tenant
compromise: minor nonmaterial defaults should not prevent renewal.

· No renewal by tenant with health, safety or building code
violations. Violations place owners at risk for fines. Compliance with law provisions should provide that tenant's failure to comply with any law, order, ordinance or regulation will be a default under the lease, preventing tenant from renewing its lease.

· Retain right to reject renewals for financially risky

· Require representation by tenant that it will continue the
same use during the renewal.

· Structure the renewal option so that it can be exercised
only by original tenant, and not by assignee or subtenant.

· Make renewal contingent upon guarantor's reaffirmation
of the guaranty.

· Required time for renewal notice should provide landlord a
reasonable time period to find a new tenant if tenant does not renew, usually at least 6 months.

· Obtain tenant's written renewal notice by certified

· Do not promise to send pre-renewal notices to tenants.

· Keep flexibility to renew using a new lease form or lease

· Provide for an increase in the security deposit if the rent
is going to increase.

· Exclude any concessions landlord does not want available
during the renewal term.

· Specify a definite method in the option to determine
renewal rent. Do not use vague language such as at a rate, acceptable to both parties or that the parties agree to agree on the renewal rent when the tenant exercises its renewal options."

For more information see:

Wednesday, January 2, 2008

REITS looking for a great 2008

After a decidedly up and down 2007, executives with many of the nation’s real estate investment trusts (REITs) may breathe a sigh of relief when 2008 draws to a close, according to a report by Steve Sakwa, research analyst with Merrill Lynch in New York.
Sakwa and his analytic team are forecasting high single-digit returns for REIT stocks when December 2008 rolls around, quite a turnaround from the dismal 21.6% drop in returns just registered for 2007 by the Dow Jones U.S. Real Estate Investment Trusts Index.
But that good news comes only after a challenging first six months. Sakwa is cautioning REIT investors to hold their money on the sidelines through the first half of the year, which he predicts will be rocky. “We expect to see cap rates move higher over the next six months, and real estate values to decline on the order of 10% to 15%,” he notes.
In the apartment sector, the growing risk of a recession, coupled with increased competition from the high volume of renters in single-family households, has Sakwa generally “cautious” on the group. His top stock picks include Aimco (AIV), Home Properties (HME), and American Campus Communities (ACC), while pans include Avalon Bay (AVB), BRE Properties (BRE) and Camden Property Trust (CPT).
In the closely watched retail sector, while mainstream investors are busy checking out holiday sales figures, Sakwa believes a better barometer of retail’s health is found in the pace of store closings and new store openings in early 2008. The reasoning is that store closings have an immediate impact on retail real estate, while slower revenue growth does not lead to immediate earnings reductions for retail landlords.
“We expect companies with lower quality assets – CBL & Associates Properties, Glimcher Realty Trust, Pennsylvania Real Estate Investment Trust, Cedar Shopping Centers – to be impacted to a greater degree than upscale retail owners,” says Sakwa. That explains why his top retail REIT picks include Federal Realty Trust (FRT) and Regency Centers (REG) in the shopping center sector, and Simon Property Group (SPG) and Taubman Centers (TCO) in the mall sector. Sakwa believes their strong balance sheets can best weather the financial storm and deliver consistent earnings growth.
When it comes to the office market, the nation’s largest office center, New York City, will be a closely watched barometer. Sakwa believes Big Apple office rents will decline by 10% this year, but rents could soften further if Wall Street job losses mount in the coming weeks.
Office space absorption nationwide is expected to slow to 50 million sq. ft., versus an estimated 59 million sq. ft. in 2007. And while the investment sales market has come to a screeching halt, foreign investors continue to aggressively source deals, particularly in New York.
“We expect well-capitalized investors to selectively pick off deals, while foreign capital could provide a floor to pricing across trophy markets such as New York City, Boston, Los Angeles and San Francisco,” says Sakwa.
His top stock picks are SL Green Realty Corp. (SLG) and Vornado Realty Trust (VNO), while pans include “suburban operators” HRPT Properties Trust (HRP), Mack-Cali Realty Corp. (CLI) and Brandywine Realty Trust (BDN) due to their concentrations in high-vacancy, low-job-growth, non-supply-constrained markets.
Industrial REITs were a shining star in 2007, returning 2.3% on a total return basis, more than 1,900 basis points higher than the broader REIT universe. But given the slowing U.S. economy, projected slowing in shipping volumes, and already high stock valuations, Sakwa is cautious on the entire sector.
So what company is Merrill’s shining star among top stock picks for 2008? Guess again, it’s Digital Realty Trust (DLR) which owns data centers and internet gateways in the U.S. and in Europe. Sakwa expects DLR to grow its funds from operations by 19% in 2008 on top of 25% growth in 2007. For more infomation see: