A Weekly Report on Future Trends and Plans, Acquisition/Disposition Strategies

In CoStar Lead Street, we highlight the Federal Reserve's survey of economic conditions and while markets remain generally strong, the word robust no longer shows up. We also report on: Montecito's and ING's new venture to acquire medical office buildings; BP's sell off of gas stations; Comerica's plans to relocate to Dallas and give you the latest properties under contract, including 15 hotels.

CRE Markets Remain Generally Solid

Commercial real estate markets continued to firm in many districts and remained generally solid or strong elsewhere, according to the Federal Reserve Beige Book, the bank's nearly monthly survey of economic conditions.

New York did report a slight overall easing in the New York City office market, as vacancy rates edged higher in midtown Manhattan. However, asking rents throughout the city were up 25% from a year ago. Chicago also reported slightly slower expansion of nonresidential construction in the district as a whole but said office construction in downtown Chicago was quite strong and that office rents were increasing in the city. Boston reported considerable increases in commercial investment throughout New England over the past year. Atlanta also said demand for commercial development remained strong.

According to the Richmond district, one area experiencing some difficulties in its office market was greater Washington, DC, including northern Virginia, where high rents and lower optimism had reduced leasing activity.

More specifically, district banks reported the following commercial real estate market conditions.

First District-Boston

Commercial real estate investment in Boston doubled from 2005 to nearly $8 billion in 2006 according to one regional real estate contact. Other regional markets have also seen considerable increases in commercial investment. Contacts note that real estate yields continue to decline as prices increase faster than leasing fundamentals. Rents across the region remain steady to increasing while vacancies trend downwards. Boston's core business district features vacancy rates around 8%, with rents about $43 per square foot. Both Hartford and Providence exhibit stable rents and stable to decreasing vacancies.

Contacts cite overall job creation and industrial growth for life science and biotechnology sectors as sources for improved leasing fundamentals. Selected suburban office markets around Boston and Hartford enjoy particularly low vacancies and increasing rents. Contacts expect rents to continue to increase and vacancies to decline. Key concerns remain job creation and declining real estate yields.

Second District--New York

New York City's office market eased slightly in January, though rents remain markedly above comparable 2006 levels. Midtown Manhattan's Class A vacancy rate rebounded to 6.0%--up from 5.6% in December, but still a half a point lower than a year ago. In contrast, Lower Manhattan's vacancy rate slipped 0.3 points to 6.8% in January and was down dramatically from 12.3% a year ago. Throughout Manhattan, asking rents are up by 25% or more over the past 12 months.

Manhattan's apartment rental market has grown increasingly tight; a large real estate firm reports that rents have accelerated in recent months and have eclipsed previous highs set in 1999 and 2000.

Third District--Philadelphia

Commercial real estate firms reported that vacancy rates in the region's office markets have declined slightly in the past few months. Rents have risen for newer buildings and tenant concessions have decreased, but effective rents have eased somewhat for older buildings. The amount of leased space has increased in most markets throughout the region. Commercial real estate contacts expect rents to remain on the rise and vacancy rates to continue to decline through the rest of the year.

However, they expect office construction activity to moderate after several large buildings currently under construction or renovation are completed. Demand for industrial space remains strong, with rising rents and declining vacancies. Construction and sales of industrial buildings have been brisk, especially for warehouse and distribution facilities along the region's highways. Competition for prime locations has been pushing up the price of land suitable for industrial uses in many suburban areas.

Fourth District-Cleveland

Activity among the district's commercial contractors has increased for the most part since early January and on a year-over-year basis. A majority of builders are optimistic in their outlook for 2007 based on the level of inquiries and backlogs. Segments showing strong activity include health care, public works, and recreation.

Fifth District-Richmond

Commercial real estate agents gave generally mixed reports. A Washington, DC, contact said that retail leasing activity slowed in recent weeks due to "some resistance to high rents and less optimism going forward." A Northern Virginia agent noted softer demand for office space, though he said that rental rates remained strong despite recently higher vacancy rates. In contrast, the Raleigh commercial market continued to strengthen since our last report. The office and industrial segments were particularly active with lower vacancies and higher rents. Most other areas in the district reported little change in recent weeks.

Sixth District-Atlanta

Nonresidential construction in the district remained at healthy levels. Contacts reported that demand for commercial development continued to be strong in January and February. Vacancy rates remained low in several markets and rental rates were trending upward.

Seventh District-Chicago

Office construction in downtown Chicago was particularly strong, and the development of health care facilities was robust in many areas. A contact in Indiana said a number of speculative "big box" warehouses were under construction, and that net absorption in those properties was strong. Office rents were increasing in Chicago, but remaining flat in the Detroit area. Commercial vacancy rates were little changed.

Eighth District--St. Louis

Commercial real estate market conditions continued to improve throughout the district. The 2006 fourth-quarter industrial vacancy rate declined in Memphis and Louisville over the third quarter, while the industrial vacancy rate increased in St. Louis. During the same period, the office vacancy rate declined in St. Louis, Memphis, Louisville, and Little Rock.

Contacts in northeast Mississippi report that commercial development is strong. Contacts in west Tennessee reported that January 2007 commercial permits increased substantially over January 2006. In Louisville, contacts report that the outlook for the 2007 industrial market is positive with a few reservations, and contacts in St. Louis predict a healthy industrial market for 2007.

Ninth District-Minneapolis

Commercial construction was up. An industry publication forecasted activity in Minnesota and the Dakotas to be up slightly in 2007 from the strong activity last year. Authorities approved construction of a $300 million oil pipeline in Minnesota this year. A large railroad announced plans to make $54 million in track improvements in Montana. Developers in Sioux Falls, SD, began purchasing land for a $150 million mixed-use downtown redevelopment. Market analysts predict an expansion of retail and industrial construction in Minneapolis-St. Paul this year.

A shift toward multifamily construction was noted in several areas, including Minneapolis and Rochester, MN. Commercial real estate was robust. The overall office vacancy rate in Minneapolis-St. Paul at the beginning of the year was almost a full percent point lower than a year earlier; landlords are becoming more aggressive in pushing up rents. Strong demand for retail space was noted in Minneapolis-St. Paul and Sioux Falls.

Tenth District--Kansas City

Absorption of office space increased in most cities, and vacancy rates continued to decline throughout the district. Office prices and rents increased further, though sales were flat since the last survey. Commercial real estate contacts expected more new construction in the months ahead.

Eleventh District-Dallas

Demand for nonresidential space remains strong. There continues to be a lot of construction of new office space in Dallas/Fort Worth, and activity is expected to increase in other areas, such as Houston and Austin. Contacts note a lot of apartments and condominiums are still under construction.

Twelfth District--San Francisco

In a continuation of existing trends, vacancy rates generally fell and rental rates rose. Construction activity for commercial and public projects grew further, largely offsetting the decline in residential construction activity, though the pace of growth for nonresidential construction reportedly has fallen compared with last year.

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Strong Construction Growth Projected

Growth for non-residential construction markets may reach as high as 9% overall and almost all sectors, with the exception of religious buildings, will be well ahead of the growth rate for GDP in 2007, according to FMI Corp.'s newly released 2007 U.S. Markets Construction Overview

FMI predicts continued growth for the industry with an optimistic forecast of 2.2% increase for total construction put in place in 2007.

According to the report, continued growth will present two ongoing challenges, rising materials costs and the need to find skilled workers. Driven by demographic and social changes, FMI notes that the talent shortage is not likely to go away in the near future for the engineering and construction industry.

Overall, FMI notes that price increases for construction products and materials have slowed. FMI expects future increases to moderate and settle at a new level, although there will be continued market shortages of selected materials, such as cement, steel, copper and diesel fuel, causing project delays and cost escalation.

Montecito Teams Up with ING for Medical Office Purchases

Montecito Medical Investment Co., a joint venture with ING Clarion Partners, plans to acquire medical office properties across the country.

Montecito Medical noted that the company's interest in acquiring medical office properties is due to the rapid increase of the health care needs of aging Baby Boomers, and other demographic and medical trends.

"We are serious about this market," said Montecito Medical's CEO, Chip Conk. "Ours is a long term strategy. We will be in key markets throughout North America acquiring well-located, cash-flow stable properties with strong growth potential. Every piece of infrastructure is in place to put Montecito Medical at the top of the list for any hospital executive or medical building owner who wants to monetize one of their properties and utilize that freed up capital more dynamically. We can make that happen."

The new venture plans to expand by acquiring existing facilities, investing in properties with the potential for redevelopment and repositioning, and by undertaking new development in selected major medical markets throughout the U.S.

The firms have already acquired their first properties.

· El Dorado Senior Services Building in Tucson, AZ;
· Vero Beach Medical Suites in Vero Beach, FL;
· Gwinnett Medical Office in Lawrenceville, GA; and
· Knoll I and II, two off-campus medical office buildings in Columbia, MD.

The four facilities total 466,000 square feet and were purchased for more than $90 million.

Broad Street Advisors acted as an advisor to Montecito in forming the joint venture. Robert Rizzi, executive vice president and partner at Broad Street handled the transaction.

Presidential Hopeful Rudy Guiliani Sells His Firm

Sydney, Australia-based Macquarie Group plans to acquire the business and assets of Rudy Giuliani's firm Giuliani Capital Advisors LLC. Financial details of the transaction have not been disclosed.

With approximately 100 employees and offices in Chicago, New York, Los Angeles, Atlanta and Troy, Michigan, Giuliani Capital Advisors is a boutique investment banking firm specializing in providing restructuring and mergers and acquisitions advisory services to companies dealing with complex business challenges, strategic transactions or financial distress.

"The acquisition of Giuliani Capital Advisors is a significant strategic step forward for Macquarie and a highly complementary addition to our North American investment banking business," said Murray Bleach, head of Macquarie's Investment Banking Group in North America and co-CEO of Macquarie Securities (USA) Inc. "Giuliani Capital Advisors provides Macquarie with an opportunity to build upon and expand our existing U.S. capabilities, particularly in corporate restructuring transactions. At the same time we gain access to a wider geographic footprint of M&A professionals and clients, providing greater reach for our existing infrastructure, utilities, oil and gas, real estate, TMET and industrials expertise."

Under the terms of the agreement, following a transition period Giuliani Capital Advisors' platform and employees will become part of Macquarie Securities (USA). Giuliani Capital Advisors' current office locations will operate as Macquarie offices.

Completion of the purchase is subject to finalization of the employment of Giuliani Capital Advisors staff by Macquarie and regulatory approvals. Financial close is expected to occur in April 2007 with the transition period should be completed by the end of June 2007.

BP Continues Gas Station Sell Off

BP West Coast Products has retained NRC Realty Advisors to arrange and execute the sale of 37 ARCO stations on the West Coast.

The portfolio features 19 sites in California, eight sites in Washington, five sites in Oregon, and five sites in Arizona. All sites are currently operating stations with convenience stores. They are being sold with 20-year ampm franchises and fuel supply agreements from BP.

The ARCO branded network consists of both company-owned and dealer/franchisee-owned locations, which has proven to be very successful for both BP and its dealers/franchisees. BP's approach is to continue to grow and strengthen its brands by growing and strengthening its franchise network.

These sites will be sold through a sealed bid sale in a "buy one, some or all" format with bids due on May 22, 2007.

BP also has retained NRC Realty Advisors to coordinate the sale of 43 sites in the Chicago metro area to be re-imaged or developed as ampm franchise stores with BP branded gasoline stations.

Of the 43 sites to be branded as ampm franchise stores with BP gasoline stations, 36 are existing BP-branded sites, including:

· Eighteen sites that will have convenience stores rebranded to ampm prior to closing;
· Eight sites that the buyers will initially operate under current BP branding and complete the conversion and rebranding to ampm after closing; and
· Ten sites that will require complete redevelopment before opening with the ampm brand; closings for these sites will occur after buyers have obtained all necessary construction permits.

In addition, BP is offering seven vacant sites for construction by buyers of new ampm retail franchises with BP branded gasoline stations.

In addition to the ampm franchise sites, BP is offering 18 properties (including the seven vacant sites and one of the redevelopment sites described above which are being offered either for franchise or commercial use) for other commercial use, including the potential operation of de-branded gasoline stations on two of these properties.

The BP sites are being sold through NRC's sealed bid sale process. NRC requests sealed bids by May 8, 2007.

Comerica Moving from Detroit to Dallas

Comerica Inc. plans to relocate its corporate headquarters from Detroit to Dallas, where Comerica already has a major presence. The move is designed to position the company in a more central location.

"Today, a significant percent of Comerica's earnings is generated in the Texas, Arizona, California and Florida markets," said Ralph W. Babb, Jr., chairman and chief executive officer of Comerica. "Moving our corporate headquarters to Dallas will give us greater proximity to all of our markets, and the additional resources in these markets will lead to accelerated growth for Comerica. In addition, the vibrant and diversified economies of Dallas, Houston and Austin will be particularly helpful to Comerica as we seek to continue attracting and retaining talented employees."

The company currently has 71 banking centers in Dallas, Houston and Austin, and expects to significantly increase its growth in Texas. With more than $58 billion in assets, Comerica will be the largest bank holding company headquartered in the state.

Comerica will maintain a significant presence in Detroit, remaining one of Southeast Michigan's largest employers with about 7,300 employees following the relocation to the new Dallas headquarters office.

The relocation is expected to occur by the end of the third quarter of 2007.

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Nearly 2,500 people read CoStar Lead Street each week. If you want to be among the first to know when a new CoStar Lead Street is posted, e-mail me your name, title, company and e-mail address. You can reach me by clicking on the byline above or at mheschmeyer@costar.com

Supertel To Buy 15 Hotels

Supertel Hospitality Inc. agreed to purchase 15 Masters Inn hotels from entities in which two individuals own all or a majority of the capital stock. The purchase price for the hotels is $42.7 million.

The purchase agreement also provides for a management agreement to be entered into at closing. HLC Hotels Inc. (an affiliate of the seller) will manage the hotels for a two-year term at a management fee equal to 5% of the gross revenues derived from the operation of the hotels.

The closing of the transaction is expected to occur on or about April 30.

The hotels are as follows.

· 3600 McFarland Blvd., Tuscaloosa, AL;
· 8222 Jamaican Court, Orlando, FL;
· 5367 West Irlo Bronson Memorial Highway, Kissimmee, FL;
· 2945 Entry Point Blvd., Kissimmee, FL;
· 6010 CR 579, Seffner, FL;
· 6606 Dr. Martin Luther King Blvd., East Tampa, FL;
· 3092 Presidential Parkway, Doraville, GA;
· 2682 Windy Hill Road, Marietta, GA;
· 1435 Montreal Road, Tucker, GA;
· 3027 Washington Road, Augusta, GA;
· 4200 Highway 21 N, Garden City, GA;
· 300 Wingo Way, Mt. Pleasant, SC;
· 6100 Rivers Avenue North, Charleston, SC;
· 613 Knox Abbott Drive, Cayce, SC; and;
· 2125 Commerce Drive, Cayce, SC

Also Under Contract

SL Green Realty Corp. agreed to acquire 331 Madison Ave. and 48 E. 43rd St. in New York for a total of $73 million, from a group of private investors. Both buildings are adjacent to 317 Madison Ave., a 450,000-square-foot commercial office property on the corner of 42nd Street and Madison Avenue that SL Green acquired in 2001. Upon completion of the acquisition, SL Green will consider implementing a strategic capital improvement and marketing plan to reposition the assets and will also look closely at combining the property sites with 317 Madison Ave. Built in 1923, 331 Madison Avenue is an approximately 92,000-square foot, 14-story office building on the southeast corner of Madison Avenue and East 43rd Street. It is 100% leased to a diverse mix of finance, law and real estate tenants. The property also has a retail tenancy that includes Nine West Group and Shoe Mania. The 22,850-square-foot 48 E. 43rd St., situated between Madison Avenue and Vanderbilt Avenue, is an 86.2% leased, seven-story loft building built in 1900 that was later converted to office use. Written by Mark Heschmeyer


CoStar Lead Street (March 11-17): Generally Strong
and Properties Under Contract