From Volatile to Stable: How CBRE steadied and sold a functionally limited asset in a tough economic climate

Category: Asset Services, Investment Sales, Urban

Challenge

Heitman, a global pension advisory firm, purchased Galleria North in 2007. At the time, the 7-acre, 93,000 square foot center was 100% leased to several national home furnishing tenants, all of which had about five years remaining on their leases. When the recession hit, these tenants looked for ways to cut overhead costs. The anchor tenants all had a location performing well within 10 miles of Galleria North, and, with the rapid growth happening in Dallas’ northern suburbs, they made plans to abandon their Galleria locations in favor of new stores in these fast-growing neighborhoods. This created a potentially disastrous situation for Galleria North. If all these tenants left the center at the end of their leases in 2010, the center would be less than 40% occupied.

This wouldn’t be an easy center to re-tenant, as the configuration of Galleria North posed several unique challenges. Most stores were designed for that tenant’s specific use, making it difficult to divide and repurpose or to find new tenants to fill these boxes, and every store in the center had entrances and parking fields on both sides, creating two fronts and no true back to the stores. Another challenge was the changing landscape of the area. The trade area, which previously was known for its big box retailers, was transforming into a denser, multifamily residential area.

Heitman had seen CBRE enhance and manage its University Park Village property in Fort Worth and recruited CBRE’s Asset Services and Urban teams to work on the project in 2009 with the hope of achieving similar results.

Solution

Given the new reality of the economy and changing profile of the trade area, our team needed to start by reassessing the property’s position in the market. CBRE Asset Services conducted a Land Residual Appraisal of the center and surrounding area to set a basis for determining the highest and best use for the property. Next, CBRE worked with architects to develop a new site plan for a different use for the property that featured a multi-family, mixed-use development with retail on the ground floor.

CBRE calculated valuations of both the current and proposed uses and determined that the center in its current form was worth approximately $35 million less than what it could be worth if the site was developed into the proposed mixed-use development. With this information in its pocket, CBRE advised its client to work first to stabilize the property before deciding on how to proceed with the long-term vision for the asset.

Get creative with lease terms

When text-transform: lowercase; stepped in, The Container Store had secured a site in Frisco and planned to vacate its Galleria North location by the end of 2009, and Crate & Barrel and Restoration Hardware were in negotiations to make similar moves. Due to the recession, many retailers had slowed development initiatives, thus giving CBRE the opportunity to negotiate short-term leases and buy time to re-tenant the center. Crate & Barrel and Restoration Hardware signed on and stayed until the end of 2011, and The Container Store extended its lease for five years.

Z Gallerie was having some difficulty of its own. It also wanted to add distance between its stores but the downturn had forced the company to file for bankruptcy and corporate was now considering closing the Galleria North location permanently. CBRE worked with Z Gallerie to restructure its lease to allow it to stay open during bankruptcy and negotiate a new lease once the store came out of bankruptcy. While most other locations in the nation closed their doors, this location continued to thrive and eventually negotiated a long term lease in 2011. Today, this location’s sales are on par with its newer Plano store.

Work with the space you have

With short term leases in place, CBRE now had time to source quality tenants that would be a good fit for the space and stabilize the asset. Due to the unique configuration of the shopping center and layout of the shop space, CBRE decided the optimal strategy would be to pursue home furnishing retailers.

Crate & Barrel’s space posed the biggest challenge to re-tenant due to its three-level store layout. Local furniture retailer Gary Riggs Home had a small retail space in Dallas along with an office/warehouse in Allen and was looking for a large space to merge these locations and be closer to its customer base. CBRE worked with Gary Riggs for over a year to learn their concept and determine if the Crate & Barrel space would be a good fit. What the team realized was the Crate & Barrel space was not large enough, but if combined with the neighboring Restoration Hardware space, it would create the perfect 40,000 square foot showroom.

When Aneita Fern Stickley did not renew its lease, Rug Studio jumped at the chance to relocate closer to Gary Riggs Home. The two retailers already had a close working relationship but before the move, had locations on opposite sides of town. Both stores now exceed sales projections because of this relocation and the ability to collaborate more closely.

Stay ahead of change

By 2012, CBRE was able to stabilize the property and bring it to 100% occupancy, allowing Heitman to strategically look at the long term value of this asset. The Galleria area of Dallas had changed a lot in the time that Heitman had owned the center. The influx of businesses and families to the area because of Texas’ favorable business climate supported the analysis provided by CBRE Asset Services in 2009 that the area was moving toward dense mixed-use residential and retail developments. Heitman decided it was time to sell the now-stable property to a long term investor with the vision and resources to add value.

Enter CBRE Investment Sales. Our team was familiar with the asset and benefitted from CBRE’s collaborative environment, working closely with the leasing and management teams to gather information on current tenant’s leasing terms and real-time market rents. This close collaboration allowed the team to provide a more accurate assessment and properly underwrite the asset. They marketed the property to many, but knew it would take a special investor that was not only familiar with the Dallas neighborhood but also had the ability to redevelop the property to match the changing environment.

PegasusAblon, a Dallas-based development firm, was the perfect buyer for the center. The company’s deep roots in Dallas and its niche service platforms seamlessly integrate commercial real estate development, investment and asset management. Adam Howells negotiated on behalf of Heitman and in February, 2014, Heitman closed the deal and Galleria North was sold.

Results

CBRE, through collaboration of its property leasing, asset management and investment sales service lines, was able to develop and execute an overall property strategy including renegotiate existing tenant lease terms, stabilize the asset, locate and bring in new tenants and then sell an asset all during an economic recession.

The CBRE team was able to increase occupancy rates from below 40% to 100% when the asset sold and maximize the property’s sale price while limiting the client’s requirements for future redevelopment capital expenditures.

Lessons Learned

  • Having a collaborative work environment that allows the sharing of information can prove invaluable when assessing the best strategy for a troubled asset.
  • The long-term, highest and best use for a property and an asset may not always be in the asset’s current form.
  • Having the hard conversations and being upfront and honest with clients when renegotiating lease terms that suit the client’s needs over the center’s needs leads to a more trusting relationship.

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