Thursday, January 14, 2010, 10:00pm MST | Modified: Thursday, January 14, 2010, 10:10pm

Commercial real estate: 2009 down from 2008

Denver Business Journal - by Paula Moore

(This is an expanded version of a report published in the Jan 15-21 print edition of the Denver Business Journal.)

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Commercial real estate sales and leasing were down in metro Denver for 2009 from 2008, with sales often driven by sellers’ need for cash to pay down debt.

Most selling prices for commercial properties last year were below replacement cost, or how much it would cost to replace the property, according to data from commercial real estate brokerage firm Cushman & Wakefield of Colorado Inc. in Denver.

Buyers, meanwhile, took advantage of the opportunity to get good-quality properties at bargain prices.

“The good news in Denver is that we’re a preferred market for investors, compared to markets we compete with like Phoenix and Las Vegas,” said Gene Pride, senior director and investment broker at C&W. “We don’t have too much [commercial real estate] supply … so it won’t take Denver as long to recover. We’re not doing well, but we’re doing better than most markets.”

Many lease transactions for office space in the metro area happened only because tenants faced expiring leases. But the industrial leasing market was buoyed by European and U.S. contractors of Vestas Wind Systems A/S that needed to be near the Danish wind-energy company’s Colorado operations.

Top ’09 property sales

The $134 million sale of downtown Denver’s 666,654-square-foot Seventeenth Street Plaza office high-rise was metro Denver’s largest commercial real estate deal of 2009. The skyscraper’s buyer was Newton, Mass.-based real estate investment trust HRPT Properties Trust (NYSE: HRP). REITs recently have been stockpiling cash for acquisitions.

Closed in the second quarter, the Seventeenth Street Plaza sale also was one of the largest commercial real estate deals in the country for that period.

Several of the metro area’s largest sales, though, happened late in the year. Buyers and sellers traditionally try to close deals by year-end for bookkeeping and tax purposes.

In one of this region’s biggest industrial sales of ’09, Panattoni Development Co. sold its 410,000-square-foot warehouse at 20900 E. 36th St. in Aurora in December for $32.35 million to Union Investment Real Estate GmbH of Hamburg, Germany.

Another major December industrial deal involved Denver-based ProLogis’ (NYSE: PLD) selling a three-building portfolio including nearly 500,000 square feet for a total of $18.5 million. The buyer was Cobalt Capital Partners of Irving, Texas.

Metro Denver’s two largest apartment sales happened last month, as well.

Los Angeles-based CB Richard Ellis Investors LLC picked up The Metro, a 415-unit property in downtown Denver, for $55 million cash, in the highest-priced metro-area apartment sale of last year. The seller was RREEF Funds LLC of San Francisco, which took a loss on the deal but opted to sell at this time partly to get some cash, according to brokers.

Private investor Trilogy Real Estate Group LLC of Chicago purchased the 360-unit Summitt Ridge apartments in Denver from UBS Realty Investors LLC for $22.7 million.

“With apartments, we’re seeing two types of sales — the fire sale where debt is an issue, but also the conventional sale where a property is performing well,” said Mark Favro, a C&W apartment broker.

Other significant ’09 commercial real estate sales, according to C&W, include:

• FlatIron Crossing, Broomfield — GI Partners LLC of Menlo Park, Calif., acquired 75 percent of this 1.4 million-square-foot regional shopping center for $116 million, providing a cash infusion to mall owner The Macerich Co.

• The Market at Southpark, Littleton — ACF Property Management Inc. of Studio City, Calif., partnering with Denver investor Gary Dragul, bought this King Soopers-anchored shopping center for $22 million. ACF and Dragul also bought the Broomfield Marketplace for $13.1 million.

• 24210 E. 19th Ave., Aurora 80019 — O’Reilly Automotive Inc./Ozark Automotive Distributors of Springfield, Mo., bought this 360,000-square-foot warehouse for $19.3 million for its own use.

• Terrace Tower, Denver — Private investor Alliance Commercial Partners LLC of Lakewood bought this 12-story, 241,200-square-foot office building in the Denver Tech Center for $18.4 million.

Top commercial leases

Major office-space leases were few and far between in ’09, and the handful that occurred generally were lateral moves — renewals, expansions and consolidations — rather than new leases, according to C&W.

“Last year was very challenging for office leasing,” said Steve Billigmeier, C&W associate director and office leasing broker. “The first part of the year, leasing was nonexistent, but in the second half, you had leases expiring, so tenants had to do deals. The larger deals got done in the fourth quarter.”

Minneapolis-based medical therapy provider Medtronic USA Inc. cemented one of the metro area’s largest office leases of ’09 in the fourth quarter, taking 108,362 square feet at Coal Creek Corporate Center in Louisville. The deal was a renewal and expansion.

Also in that period, Denver-based Catholic Health Initiatives took 97,000 square feet at the 198 Inverness Drive West building in Englewood’s Inverness office park for its new headquarters, expecting to occupy the space in June 2010.

Alternative energy companies dominated industrial leasing last year, followed by automotive, health care and food companies.

SMA Solar Technology AG of Germany, a maker of solar-power components, leased 153,000 square feet at Enterprise Park in Denver’s Stapleton neighborhood. “The SMA deal was the most significant industrial lease last year … and they plan to expand in the next year,” said Kirk Vanino, C&W associate director and industrial leasing broker.

Abound Solar, a Loveland-based maker of low-cost photovoltaic modules, leased all of the 126,384-square-foot manufacturing building at 9586 East Interstate 25 Frontage Road in Longmont. Property owner First Industrial Realty Inc. sold the building in December for $10 million to W.W. Reynolds Cos. Inc. of Boulder, partly because of Abound’s long-term lease.

Companies doing business with Vestas did major metro-area industrial leases, as well, including: Creative Foam Corp. (70,000 square feet), Hexcel Corp. (100,000 square feet), PMC Technology A/S (43,350 square feet) and SGB USA Inc. (12,600 square feet).

The first phase of retail space — 10,000 square feet — at the new Hilton Garden Inn on South Colorado Boulevard near Cherry Creek North has been fully leased by restaurants and stores, according to the Crosbie Real Estate Group of Denver, which handled the leasing.

“Tenants with good, smart programs can expand,” said Scott Crosbie, owner of Crosbie Real Estate Group Inc.

What Dubai Means for U.S. Commercial Real Estate

What Dubai Means for U.S. Commercial Real Estate

"Delay and Pray" Can't Continue For Long...

By Ian Cooper
Tuesday, December 1st, 2009

You've heard about the Dubai meltdown. But what the mainstream press isn't telling you could have serious implications for the U.S. commercial real estate market.

It was only a few years ago that Dubai floated the Bubble City idea — built on dreams, hysterical public relations campaigns, and billions in debt. It was supposed to be a "suspended architectural marvel, stationed 200 meters above the ground, powered by two helium balloons and an anti-gravity reaction motor."

But the idea never left the ground. And rightfully so...

Dubai did, however, build artificial islands in the shape of the continents; an island in the shape of a palm; a ski resort with five trails, encapsulated in a glass dome with chilled air; two of the tallest buildings in the world; and skyscrapers as far as the eye can see... all in the middle of a desert.

And it fueled these absurd development projects by issuing piles of debt... about $60 billion.

Yep, past times of prosperity were good to Dubai. The city grew rapidly. Property prices were exploding so fast that it was impossible not to make quick cash. And once a building — occupied or not — was finished, it could be used as security to borrow even more money to build something bigger and better.

This cycle went on for years.

But the boom would soon bust, as people decided (after watching the world financial crisis unfold), that they were no longer interested in buying into the luxurious life in the middle of the desert... leaving the area scarred with a lack of demand, no money, unfinished projects, and a depressing atmosphere.

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So Dubai World, a state-owned sovereign investment fund, asked creditors for an extension on billions in debt payments.

And depsite what analysts would have you believe, all is not okay. Defaulting on billions is a big deal for a sovereign nation. The Government of Dubai just said it would not stand behind Dubai World... wiping out that long-held belief that sovereign nations don't default.

Fortunately, We're Not Looking at a Crisis Here... Yet

Dubai World's attempt to restructure debt will have a "manageable impact" on HSBC Holdings and Standard Chartered, according to Goldman Sachs. Analysts estimated that potential credit losses at HSBC would come in around $611 million and about $711 million at Chartered. As for loans and commercial real estate losses, the analysts believe that in worse-case scenario, they "expect a manageable impact at less than 1% of equity, less than 5% of net profits."

Still, what we're seeing in Dubai is part of the commercial real estate crisis we're seeing elsewhere.

There are too many commercial projects up in areas where they're not needed. Prices have plummeted as vacancy has risen. And a lot of the buildings were built on serious debt... with questions now arising when or even if that debt can be repaid.

It's only a startling reminder of how fragile U.S. commercial real estate is, especially with certain U.S. properties sitting in Dubai World's portfolio. These include MGM Mirage and the $8.5 billion CityCenter project; the Mandarin Oriental and W hotels in New York; a 50% stake in the Fontainebleau Miami beach resort; and Barneys New York Inc.

All Dubai has to do is unload some of its properties... and commercial real estate prices will plunge. It's already seen its commercial real estate prices cut in half from 2008 highs.

Sure, it's still too early to tell what Dubai will do. But it's another look into how close we are to a complete commercial real estate meltdown.

Things Could Deteriorate Further

Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks — especially regional banks, which hold more than $1 trillion of mortgages backed by CRE, which is quickly losing value.

The sector will suffer from two things, one of which is bad underwriting. CMBS owners were lent money on the assumption that occupancy and rents would keep rising. But that never happened. The opposite did: "The result is that a growing number of properties aren't generating enough cash to make principal and interest payments."

And with values sinking, vacancies soaring, and a recession making it unlikely for us to see demand pick up, banks aren't exactly jumping up to refinance deals.

My colleague — Steve Christ — sees this as a recipe for disaster... and industry leaders have estimated that 200,000 businesses and 10 percent of the nation's shopping malls will close their doors over the next year. (You can read more about Steve Christ's views on commercial real estate here).

That means that we're maybe only in the second inning here as this crisis unfolds.

So, with roughly $530 billion in commercial mortgages coming due for refinancing in 2009-2011, and some estimates showing that as many as 68% of loans maturing during that time will fail to qualify for refinancing, Steve says one has to wonder how it will all get done.

The brutal answer: it won't.

"Federal Reserve and Treasury officials are scrambling to prevent the commercial real estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat," said a recent Wall Street Journal article. But "their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds."

And, according to Deutsche Bank AG, "as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks' $1 trillion 'core' commercial-mortgage holdings, or those backed by income-producing properties, would reach between 11.6% and 15.3%, or $115 billion and $150 billion."

"So far, banks in general have been reluctant to take losses on their commercial books," says the Wall Street Journal. "This 'delay and pray' strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses... "

Stay Ahead of the Curve,

Ian L. Cooper
Wealth Daily