December 2009

In today's placid leasing environment, developers look to what they already have rather than what they could have

Constructing a 12,500-square foot daycare center is not the kind of mega-project a development company usually seeks. Yet, with leasing at a near standstill and construction dollars difficult to come by, it's an example of a hidden opportunity that the developer, Denholtz Associates, found within its own portfolio.

In partnership with the Learning Experience, a daycare provider, Rahway-based Denholtz is building the school on a portion of the parking lot at its Two University Plaza complex in Hackensack. "It's a ground-up development deal," says Denholtz president Steve Cassidy. "Before it was just asphalt and a parking lot. Now it's going to be a fully functional daycare center servicing not only our building at Two University Plaza but also nearby Fairleigh Dickinson University and other surrounding buildings."

The project demonstrates how Denholtz is looking "to unwrap any value that may be in our existing portfolio," Cassidy says. "Frankly, there are not too many opportunities that have surfaced yet."

Denholtz is probably fortunate to be actually building something. Overall, the merchant development business has been hit hard by a lack of willing capital. Plus, current rents are below what could justify a new build. Just this year, three of the six operating companies of Minnesota-based Opus Corp. filed for bankruptcy. "The merchant builder model was successful for 53 years," said Opus spokesperson Winston Hewlett. "We were doing business regularly in 40 states. But we were the tipping point for the tsunami."

According to McGraw-Hill Construction, non-resident building in September dropped 7% to an annual rate of $150 billion. In the major commercial categories, offices slid down 33% followed by hotels (down 19%) and retail stores (down 14%). The only exceptions, warehouse construction saw a slight 3% upward blip and the manufacturing plant sector, boosted by some significant projects that got underway, climbed 61% in September.

In interviews with New Jersey-based developers, Real Estate New Jersey found that these entities are pursuing a variety of strategies. Either they are sprucing up their current buildings, continuing with developments already coming out of the ground, getting approvals for future projects or seeking to take over half-finished developments. All stress that they are unlikely to put shovels in the ground on any new major projects until the economy turns or they have a tenant.

Those sentiments were echoed in an online poll on GlobeSt.com last month. The audience was asked, "What are developers doing with their down time?" Of the three choices, "managing the assets they have," garnered the overwhelming majority of the votes, at 73%. "Waiting for the upturn" was next at 23%, and "doing build-to-suits" came in last at roughly 5%.

"Right now, we're spending the majority of our time upgrading existing facilities that we own," says David Sanzari, president and CEO of Alfred Sanzari Enterprises in Hackensack. "We are reviewing energy savings on properties, replacing HVAC systems and elevators and upgrading lobbies."

About a year and a half ago, Sanzari kicked off an $11 million renovation project at its Glenpointe Center in Teaneck, which included upgrading the common areas of the office complex and adding a 26,000-square-foot health spa. The company also recently hired two brokerage firms to lease up the 15,000 square feet currently untenanted at its 336,000-square-foot Court Plaza complex across form the Bergen County Courthouse in Hackensack and the 100,000 square feet vacant at the 650,000-square-foot Glenpointe project. "In this quiet market," Sanzari says, "we are also focusing on making our existing tenants comfortable, so they will stay with us upon their lease expiration. That is equally as important as filling empty space."

Of course, it helps that construction prices are generally cheaper nowadays. "They're not giving it away," Sanzari asserts, "but our costs are probably 15% to 20% less than normal because vendors are also looking for work."

Denholtz has embarked on a $5-million capital improvement program at its New Jersey properties as well. Projects include upgrades to the lobbies, roofs and HVAC systems at several of its buildings, such as the 423,000-square-foot Bridgewater Industrial Park in Bridgewater; the Business Center of Edison, a 125,000-square-foot property in Edison; and the 118,000-square-foot 1099 Wall Street West in Lyndhurst.

Cassidy says that the company has spent the past several years shoring up its capital structure. "We find ourselves with a vast amount of our portfolio debt in very strong lease terms, and we have a lot of cash on our balance sheet," he states, giving it an opportunity to upgrade its assets.

The aim is to make those properties "lease ready" for new tenants when they finally arrive. Denholtz caters mostly to small and mid-size tenants that usually do not require pricey fit-outs. "A tenant that makes a move can do so within a pretty short window, say, 30 to 90 days, depending upon how much they want to tweak the build-out we've already started," Cassidy says. "That helps a lot with our leasing efforts."

Taking care of one's own house, so to speak, is the first priority of a developer today, says Stephen A. Santola, executive vice president and general counsel for Parsippany-based developer Woodmont Properties. "We are definitely managing our existing assets, working with our existing tenants and leasing any vacant space that we have," he says. "Internally, we are repositioning our own projects to see if they can be more profitable in this market."

Woodmont is continuing with its redevelopment of the former Epstein's department store in Morristown into a mixed-use development with office, condos, apartments, retail and a parking garage, and it has just completed and is presently tenanting Phase I of SciPark, a 64,000-square-foot biopharma lab and office complex in East Windsor. It is also under construction on a high-end, 28-townhome project in Montvale. "It's in the sales phase and we are seeing some definite activity and a lot of interest," Santola says.

Likewise, Advance Realty of Bedminster is at work at its massive $1 billion Riverhead District redevelopment project in harrison. Plans call for a mix of residential, office and retail space.

According to Advance senior vice president Kevin Tartaglione, installation of the horizontal infrastructure is about three-quarters complete. It aims to gain the necessary site plan approvals so that it can start to erect the vertical structures by the end of 2010 or early 2011.

The City of Harrison designated Advance the redeveloper of the site, which is adjacent to the new Red Bull Arena soccer stadium, back in the early part of the decade. "We had a massive environmental contamination at the site," Tartaglione recalls. "We started that work in the summer of 2006, finished the demolition of the existing structures and the physical cleanup in the fall of 2008, and we started the horizontal infrastructure in February." Funding for the project has been a mixture of equity, traditional construction debt and public financing, Tartaglione reports.

In his view, more public-private joint ventures and the developers like the one in Harrison are on the horizon. "Towns and the state are very focused on redevelopment of these urbanized areas," Tartaglione says. "I don't know if it's going to be of this scale, because an 80-acre site is a very large urban area. But you will see more public-private partnerships."

Another avenue developers are pursuing is picking up the baton on stalled projects. "We are seeing from various sources, whether it's lenders or developers who are short on funds, a number of projects that are stuck in the mud for various reasons," Santola says. "Sometimes it's a lender, sometimes it's another developer or sometimes it's a landowner who had a contract purchaser walk away."

"The projects no longer meet the market, are not able to get financing or there is additional equity required," he continues. "We are looking at many-I can't put a number on it-jobs that are basically stalled and we are trying to either help acquire them or help the existing owners reposition them to where they might meet today's market."

In addition to acquiring an underway project, a developer can pick up an existing asset. But just because a developer looks doesn't mean it is ready to buy. "We have many properties come across our desk every day, and we try to look at the ones that interest us," Sanzari relates. "If we can purchase a property at a reasonable number, as compared to developing it, or if it's in a location we want to be in, we will try to purchase it."

Advance is similarly selective when it comes to potential acquisitions. "We will look at new opportunities but in this current market, the ones we would consider are distressed situations or something where there is a partnership potential with a landowner," Tartaglione states. "An outright purchase these days, unless it's for an incredible value, is really not in the cards."

A more likely scenario is simply getting all of a planned project's permits in order so when the economy turns, a developer can hit the ground running, so to speak. For example, Sanzari has two projects "on the boards ready to go," says David Sanzari: an 85,000-square-foot medical arts building near Hackensack Medical Center and a 230,000-square foot class A office building at the Glenpointe complex in Teaneck. "Typically our projects are put up on spec," Sanzari states. "However, in this economic climate we are just going to sit tight. If we obtained a user for any of these projects, we would start them, but right now we are going to wait until the economy improves."

Similarly, Denholtz is pre-approved to construct to 60,000 square feet of office at its 800-900 Lanidex Plaza in Parsippany, which fronts I-287. As for when developers can begin to slap up cranes or put shovels in the ground, it's anybody's guess, especially with the abundance of empty space luring in the background. "To get any deal to make sense now without a tenant is difficult," Cassidy states. "It's going to be that way all through 2010 and maybe into 2011."