9.16.16: ValueXpress Arranges Groundbreaking CMBS Conduit Loan for Office Suite Portfolio

ValueXpress has arranged a $28-million CMBS conduit loan secured by a portfolio of eight office buildings that are specifically designed and leased as office suites. The transaction is by far the largest office suite transaction completed since the restart of the CMBS conduit loan market in 2010. The properties are located in Indianapolis, Indiana, and the Dallas, Texas, suburb of Frisco. The properties were 100% occupied at closing and are owned by the Yeager Company.

The transaction was unique in that the buildings were designed specifically to be leased as small office suites. The average size of each office suite is 180 square feet (sf; 12 feet x 15 feet). All the buildings combined contain more than 700 tenants. These tenants share common amenities, including conference rooms, break rooms, office equipment, high-speed internet service and reception.

The transaction was challenging in that the lease term for tenants is month-to-month. The rating agencies had great concern regarding the stability (or instability) that month-to-month tenancy can have on the property revenue. The initial treatment by the rating agencies for rating purposes was similar to hospitality. This treatment is harsh (lease term = one night), so the rating agencies visited the sponsor to learn about the office suite concept. As a result, they viewed it more like self-storage, which has month-to-month leases and better rating treatment.

Additionally, the rents in office suite buildings appear high when viewed on a per-square-foot basis. The annual rent across the portfolio is $37.25 per sf, much higher than the typical $20-$25 per sf for traditional office space. But when looked at from a monthly rent/unit approach like apartments, the average rent/unit is a very reasonable $625 per month. We were able to secure rental comparisons from other office suite buildings for appraisal purposes and did not have to mark down rents for valuation purposes.

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9.13.16: More Takeaways from the Yeager Office Suite Transaction

One of the most fascinating takeaways from the Yeager Office Suite transaction is the extraordinary demand for office suite space. It was not uncommon for new buildings in the portfolio to absorb to 100% occupancy within 90 days. Knowing that traditional suburban office buildings are struggling in many cases, all the participants in the transaction were eager to learn why the office suite concept was in such high demand.

We discovered the following:

Demographics, lifestyle and business efficiencies are driving an evolution in office market demand throughout the United States. Traditional large block space office leases are declining in many markets, particularly in suburban markets. Highly competitive business environments for companies in an economy that is not growing are forcing expense reductions in order to grow profits and occupancy costs are on the hit list.

The evolution has generally moved from a time when everyone had a nice big personal office within a large block lease that consumed all or part of a suburban office building to a time of cubicles that could squeeze more employees/sf of office space became the norm. When that was not cost-effective enough, a portion of the cubicles became “shared” among employees.

Now employees are being forced out of their suburban office block space altogether. Telecommuting is the rage, but it is not perfect. There can be tremendous distractions with the “home office” from kids/wives/husbands, no office equipment (high-speed copiers, scanners), no professional phone pick-up/reception, awkward to bring clients to meet, etc.

Providing the best of all worlds, the office suite market is growing rapidly. The concept brings employees “in touch” with local clients by being able to place one or two salespeople right into the client market. It provides for short commutes locally versus long, stressful commutes, thereby maintaining quality of life for employees who might otherwise work for a competitor closer to home. Office suites provide a professional environment with reception/professional telephone service, conference rooms, high-speed office equipment and internet and no barking dogs or other distractions.

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9.7.16: Wellness Travel Is Latest Trend in Hospitality

Hoteliers often hear their guests say, “I really have a hard time staying in shape and eating properly when I travel.” Well, research points out many travelers feel this way. According to Joel Eisemann, chief development officer in the United States for Intercontinental Hotels Group (IHG), “Our research showed that 17 million travelers in the United States find it hard to stay active and eat right, and they ‘fall off the wagon’ when traveling.”

Providing wellness solutions for travelers may become one of the biggest revenue generators in hospitality in recent memory. Skift, an online travel-industry intelligence platform, shows that wellness is a $494-billion business and growing. The industry was up 12.3% between 2014 and 2015.

To capitalize on the wellness need, hotel franchisors are developing health-centric brands and incorporating wellness standards into existing brands. IHG launched its EVEN Hotels brand in 2012 as the first health-centric brand in the hotel industry. The brand’s website features a woman in workout gear on its home page. Its motto: “We set out to defy the idea that travel needs to be a total disruption to your routine. While travel is always a departure from the ordinary, EVEN Hotels helps you embrace wellness and even renew your motivation by giving you choices designed to help you stay on track. Whether dropping in for a short stopover or longer stay, keep active, rest easy, eat well and accomplish more every day.

Westin Hotels and Resorts is promoting its “For a Better You” philosophy to recognize the importance of wellness for travelers. According to Sarah Lipton, director of global brand management, Westin is “rooted in wellness, dating back to the game-changing debut of the Heavenly Bed more than 15 years ago.”

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ValueXpress Arranges a $28-Million CMBS Conduit Loan for the Refinance of an 8 Building Office Suite Portfolio in Indianapolis, IN and Dallas, TX

ValueXpress has arranged a $28-million CMBS conduit loan for the refinance of an eight building office suite portfolio located in Indianapolis, Indiana and Frisco (Dallas), Texas. The transaction provided significant cash-out loan proceeds to allow the sponsor, Scott Yeager, to continue to grow the portfolio by utilizing the excess loan proceeds as construction loan equity to build additional projects under the Yeager Office Suites brand. The next project will be located in Plano, Texas. Scott is eying the Phoenix market for additional Yeager Office Suites projects. The portfolio was 100% occupied at closing.

Yeager Office Suites – Frisco, TX

Yeager Office Suites – Frisco, TX

Yeager Office Suites – Greenwood, IN

Yeager Office Suites – Greenwood, IN

Nationally, firms have developed the office suite concept by developing entire space-purposed suite buildings or by developing leased block space in which the operator builds out block space into suite spaces and associated amenities, then subleases the individual suite offices. These firms make spread income between the total rents collected from the suites versus the rent paid to the landlord for the block space. Scott Yeager and Yeager Office Suites is one of few developers that has elected to develop and own suite space-purposed buildings.

The loan provides for a 10-year term with a 30-year amortization schedule and is non-recourse. Financing was provided by an active CMBS conduit lender that has an ongoing relationship with ValueXpress to arrange additional CMBS conduit loans.

 

 

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9.2.16: Dennis Suh to Represent ValueXpress at SSA Conference & Trade Show

Dennis Suh will be representing ValueXpress at the Self-Storage Association’s (SSA) 2016 Fall Conference & Trade Show. The conference, which will be held at Caesar’s Palace in Las Vegas, Nevada, begins on Tuesday, September 6 with conference and trade show registration. Concurrent education sessions begin at 1 p.m. on Wednesday, September 7, and run through 8:20 a.m. on Friday, September 9. The Trade Show is open Wednesday and Thursday 11:30 a.m.-3:00 p.m. For additional information, please click here.

Back by popular demand this year are Roundtable Discussions. These lively sessions are always packed, and the two Roundtable Discussions to be held in Las Vegas will offer a wide variety of topics — educational on Wednesday and exhibitor products and services on Thursday.

Dennis will be meeting with clients to discuss the benefits of CMBS conduit loans for self-storage owners during the conference. Self-storage loans have been one of the best performing asset classes in CMBS, and CMBS conduit loans for self-storage are highly sought after. As with all eligible asset classes, the CMBS conduit loan program provides for unrestricted cash-out for any purpose on a refinance and all CMBS conduit loans are non-recourse, meaning there are no personal guarantees for repayment of the loan.

“The self-storage industry continues to grow rapidly, and owners want to continue to build more units to satisfy demand,” commented Dennis. “CMBS conduit loans are really the only loan product that allows for unrestricted cash out that can be used as equity to obtain a construction loan to build additional self-storage facilities.” To visit with Dennis at the show, send him an email at dsuh@valuexpress.com or call him at 212-883-6487.

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8.31.16: Kroll Releases August CMBS Trend Watch

Kroll Bond Rating Agency (KBRA) released this month’s CMBS Trend Watch. In the August edition, we note that $4.2 billion of private-label issuance priced, bringing the year-to-date total to $37.3 billion, down 45% year over year. We expect September to be a busy month in terms of deal issuance, as we are aware of seven conduits and a number of single-asset single-borrower (SASB) transactions that are slated to launch by month’s end.

At the beginning of this month, WFCM 2016-BNK1 received very positive market feedback, pricing at Swaps (S)+94 basis points (bp) for its last cash flow AAAs. Since then, conduit spreads seem to have settled around S+105 bp for last cash flow AAAs and +500 bp for BBB-. Comparable spreads for the AAAs have not been seen since July 2015, but while BBB- spreads have greatly improved from earlier this year, they remain wide compared with the year-earlier period.

On the ratings front, KBRA published presales for four deals ($2.6 billion), including the aforementioned BNK1 deal. Surveillance activity consisted of 22 transaction reviews that resulted in 218 ratings actions, including 7 upgrades and 2 downgrades.

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8.25.16: Sears/Kmart Continue to Falter

Sears and Kmart continue to struggle in a retail environment in which only “best in class” retailers are able to grow sales and profits. Sales have declined for the last ten quarters, including a 7.1% decline in the fourth quarter of 2015 and an 8% decline in the first quarter of 2016.

sears-salesSears stores “now seem to be in a perpetual state of decline,” Neil Saunders, CEO at retail consulting firm Conlumino, wrote in a note to clients Thursday. “The underinvestment clearly shows, and as such, they are caught in a vicious cycle of seeing lower and lower customer traffic, which further weakens the case for investment and reinvigoration.”

Once one of America’s leading discount retailers, Kmart raked in $37 billion in sales in its 2000 fiscal year. Last fiscal year Kmart registered only $12.1 billion in sales. That’s a dramatic 67% sales plunge in a little more than a decade. Americans have likely noticed the decline in their towns. Kmart had 2,165 stores in 2000. Now it has only 979.

Both chains have reported years of losses and are continuing to survive through loans from its owner, Eddie Lampert, who bought Kmart when it was in bankruptcy in 2003 and quickly married it with Sears to form Sears Holdings. Today Lampert is the combined company’s chairman, CEO and leading shareholder.

CMBS pros are concerned about the health of Sears Holdings because Sears and Kmart anchor many CMBS conduit loans, particularly Class B/C malls, which are struggling with other poor performing retailers. A potential bankruptcy and liquidation of Sears/Kmart would put addition pressure on property owners with Sears/Kmart tenants, likely resulting in higher CMBS conduit loan defaults.

 

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