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IN THE PIPELINE (Jan. 4-10, 2009): Latest Construction Numbers Surprise Economists

CoStar Feature Spotlights Trends, New Projects and Construction Entering (Or Leaving) the Commercial Real Estate Development Pipeline
January 6, 2009
In The Pipeline returns from a brief holiday hiatus -- Happy New Year. 2009 kicks off with at least a measure of good news out of the U.S. Commerce Department, which reports that nonresidential construction spending showed unexpected staying power in November, though housing continues to falter. The Century Plaza hotel, which has bunked a host of U.S. presidents and a gaggle of celebrities ranging from astronauts to rock-and-rollers, will be razed in favor of a $2 billion mega-development in Century City, CA; in Chicago, Ernst & Young preleases more than 200,000 square feet in a development on North Wacker; and the first phase of the Mesa del Sol mixed-use development opens in Albuquerque, NM. Meanwhile, Grove Street Partners now has financing to build a new 130,000-square-foot office building in its one-million-square-foot, mixed-use Gateway Center development in Atlanta.

In The Pipeline is a column by Senior News Editor Randyl Drummer on significant land sales, transactions and trends affecting office, industrial, flex, multifamily, mixed-use, hotel and public works developers.Send us news leads about your new project -- and sign up to be added to our distribution list to receive future In the Pipeline columns for free by e-mail. Read the previous column.

Nonresidential Construction Numbers Defy Downturn

Here’s a little good news to start the year. Nonresidential construction spending rose a seasonally adjusted 0.7% in November, partially offsetting another dismal month for the nation’s homebuilders.

Overall construction spending fell 0.6%, stronger than expected compared with the 1.3% decline predicted by economists, the U.S. Commerce Department reported Monday. Residential construction fell to a seasonally adjusted rate of $328.3 billion in November, 4.2% below the revised figure for October.

Spending on private construction was $756.4 billion in November, 1.5% below the revised October number, while construction of public projects such as schools and highways rose 1.4% from October. Over the past year, total nonresidential spending has jumped 9.2%, driven by increases in construction of schools, highways, manufacturing, power plants and offices. In fact, 12 of the 16 nonresidential subcategories posted annual gains.

"The figures for nonresidential construction spending continue to surprise economists. September and October construction spending estimates were revised upward, indicating that the nonresidential construction industry's downturn has been softer than had been estimated earlier," said Associated Builders and Contractors (ABC) Chief Economist Anirban Basu. "

That being said, most of those projects were already in the construction pipeline when the economy began to tank 18 months ago. Analysts expect nonresidential construction to erode in coming months as developers struggle with a financial crisis that is making it harder to finance their projects. And the November residential decline shows that the nation’s two-year housing slump hasn’t yet reached a bottom.

"It is the future that is considerably more worrisome," Basu said.

Demolition of Century Plaza Hotel Part of $2 Bil. Project

Next Century Associates, LLC, a partnership between Los Angeles based real estate investor Michael Rosenfeld and an entity in the D.E. Shaw Group, have unveiled grand plans for a $2 billion mixed-use project on the site of the Century Plaza hotel.
The hotel, which has played host to former Presidents Ronald Reagan and Richard Nixon among other politicians, celebrities and business moguls since its 1966 construction, will be razed and replaced with two towers with a 240-room hotel, 163 hotel residences, 130 luxury condos, 100,000 square feet of office space and 106,000 square feet of retail shops and restaurants. The property will continue to operate one of the largest ballrooms in Los Angeles.

The project is being designed by the architecture and urban design firm Pei Cobb Freed & Partners, known internationally for its design of the Grand Louvre in Paris, Bank of China Tower in Hong Kong, the East Wing of the National Gallery of Art and the Holocaust Museum in Washington, D.C. Henry Cobb, the senior partner who designed Library Tower (now US Bank Building) -- the tallest building in Los Angeles -- will lead the project.

"What excites me about this project is the opportunity to reinforce the original design intent for Century City our firm helped create nearly 50 years ago," Rosenfeld said.

Next Century Associates purchased the 19-story, 726-room hotel at 2025 Avenue of the Stars from Sunstone Hotel Investors Inc. (NYSE: SHO) in May for $366.5 million, or about $505,000 per room. The mixed-use project will connect more 14 million square feet of existing office, retail and residential, Rosenfeld said. The project will be LEED Silver certified with green roofs and environmentally sensitive building materials. The $2 billion project will include more than $800 million in construction costs, with approvals expected to be complete in three years. The property will continue to operate as a Hyatt Regency Hotel.

Developer Awarded Orange County Student Housing Project

PCL Construction Services, Inc. has been awarded a $118 million design-build student housing project for California State University, Fullerton in Orange County, CA.

PCL and its design partner Steinberg Architects won the design competition to build the project consisting of five 5-story buildings totaling 1,080 beds and a dining facility. The buildings are situated around a piazza area that will serve as the focal gathering point for the students and the classroom buildings and arboretum adjacent to the site.

The project is designed to attain LEED Gold certification. The project is the largest design-build contract to date for Denver-based PCL, which has offices in 29 locations in North America and the Caribbean.

Ernst & Young Preleases 203,600 SF in Chicago

By Justin Sumner

Ernst & Young signed a 10-year lease for 203,618 square feet at The John Buck Co.'s new office development at 155 N. Wacker Drive in Chicago's West Loop. This latest deal, which is one of the largest downtown office leases of 2008, brings the 1.13 million-square-foot building to 72% preleased. Completion of the 46-story high-rise is slated for next summer.

The New York-headquartered firm employs 135,000 people worldwide and more than 1,700 in the Chicago area. Ernst & Young, an assurance, tax, transaction and advisory services company, will relocate from the Sears Tower, another high-profile local skyscraper in which it is the largest tenant, leasing almost 387,000 square feet. Ernst & Young also will be the largest tenant at 155 N. Wacker occupying floors 19 through 26. Bridge Finance Group, M3 Capital Partners, American Hospital Association and Skadden Arps Slate Meagher & Flom LLP are also on the tenant roster.

John Buck has reported intense negotiations with several other tenants for another 50,000 square feet at the development. The average asking rent is about $33 per square foot per year, according to CoStar Group information.

A joint venture including John Buck investment funds, Morgan Stanley's Prime Property Fund and Chicago-based investment firm Brijus Properties owns the Goettsch Partners-designed building. Goettsch also designed the recently completed 111 S. Wacker and the UBS Tower on North Wacker Drive.

Drew Nieman, principal, and Bill Truszkowski, vice president, at John Buck represented the landlord in-house. Elaine Melonides, international director, Bill Rogers, managing director, and Dan McCarthy, senior vice president, with Jones Lang LaSalle represented the tenant.

First Phase of Mesa del Sol Opens in Albuquerque, NM

Fidelity Investments has cut the ribbon on a 210,000-square-foot office building, the first phase of a 12,900-acre mixed-use project at Mesa del Sol in Albuquerque, NM co-developed by Forest City Enterprises Inc. and Covington Capital Corp.

The two-story building on the north end of Mesa del Sol's Innovation Park will house Fidelity’s human resource services business, which provides corporate clients with payroll, health and welfare, and human resources services. The company will employ 300 at Mesa del Sol initially but plans to increase that to 1,200. The second phase of the building is slated to be ready by March 2009.

The building shell was completed in six months and tenant improvements in eight months, said Michael Daly, Mesa del Sol president. Dekker/Perich/Sabatini designed the building, initially created to meet the Silver LEED certification but is now anticipated to meet the higher Gold LEED standard.

The general contractor was Klinger Constructors LLC. Other firms working on the project include Bohannan Huston, Allied Engineering and Design, CCI Engineering, Robin Hendrixson, Hanna Plumbing, TI Architect/BDHP and Chaparral Electric.

On Dec. 5, Mesa del Sol announced an agreement with Sandia National Laboratories to partner on research, development and demonstration of energy technologies, including solar projects. Mesa del Sol is already home to solar industry companies Schott Solar and Advent Solar.

The partnership is developing Mesa del Sol in conjunction with the New Mexico State Land Office and the University of New Mexico. Mesa del Sol’s industrial space houses Albuquerque Studios, Advent Solar and the under construction Schott Solar plant, among others.

Pilot Travel Center Acquires 20 Acres in Tyler, TX

Knoxville, TN-based Pilot Travel Centers purchased 19.8 acres of raw land at Interstate 20 and Farm-to-Market 14 in Tyler, Texas, for construction of a new travel center. The sale price was not disclosed.

Jerry Yoder, executive vice president of Henry S. Miller Brokerage, brokered the sale by Yoder Partners Ltd of the property to Pilot Travel Centers LLC, which has assets in 41 states with more than 300 retail properties.

Developer Gets Financing For Project Near ATL Airport

Grove Street Partners has secured construction financing for a new 130,000-square-foot office building planned in its one-million-square-foot, mixed-use Gateway Center development near Hartsfield-Jackson International Airport.

The office building will be a joint venture between Grove Street Partners and Fidelity Investments. The Boston-based investment firm was also a joint venture partner with Grove Street Partners on Gateway Center’s Marriott and SpringHill Suites hotels. Park Avenue Bank, located in Valdosta, GA., acted as the primary lender for the office development. The planned office development will join the two hotels already under construction in Gateway Center next to the APM, the first expansion of the airport’s internal transit system.

Architecture firm Rule Joy Trammell + Rubio (RJT+R) designed the office building, and construction firm Brasfield & Gorrie began construction this week. Colliers Spectrum Cauble Senior Vice President Chandler Spratlin will manage the leasing.

Spratlin expects Gateway Center's proximity to the airport and other key transportation amenities to have a significant impact on its leasing prospects. "As with the booming markets surrounding O'Hare, Dulles and Hong Kong international airports, we are convinced that Gateway Center will be the core of the next great aerotropolis in Atlanta," he said.

A total of 400,000 square feet of office space and an additional 60,000 square feet of retail space is planned in the Gateway Center development. Construction on the first office building is expected to be completed in August 2009. (By CoStar Research)

Wind Farm Wins Approval in Iowa

Wisconsin Public Service Corp. (WPS), a subsidiary of Integrys Energy Group, Inc. and enXco, an EDF Energies Nouvelles company, closed on the acquisition of the Crane Creek Wind Farm, a 99-megawatt wind facility to be built near Riceville in Howard County, Iowa.

The closing clears the way for EnXco to begin construction of the wind farm early this year, eventually turning it over to WPS in a turnkey transaction. The Public Service Commission of Wisconsin approved the purchase in April.

The two companies earlier reached an agreement in which WPS will contract with enXco Service Corporation to operate and provide maintenance for the 66 turbines, including 24/7 remote monitoring from their Operations Control Center located in Chandler, MN.

The wind farm is expected to be operational in late December 2009.

In The Pipeline is a column by Senior News Editor Randyl Drummer on significant land sales, transactions and trends affecting office, industrial, flex, multifamily, mixed-use, hotel and public works developers.Send us news leads about your new project -- and sign up to be added to our distribution list to receive future In the Pipeline columns for free by e-mail. Read the previous column.

More New Development and Land Sales

American Chemistry Council (ACC) signed a lease for about 90,000 square feet of office space at Station Place III, an under-construction project in the NoMa submarket near Capitol Hill in Washington, D.C. ACC plans to move its headquarters into the district in the summer of 2010 from 1300 Wilson Blvd. in Arlington, VA. It signed a 15-year deal for most of the top three floors of the building. Located at 700 2nd St. NE, the 10-story building broke ground in late 2006 and will total 507,273 square feet of office space. Louis Dreyfus Property Group and Fisher Brothers are jointly developing the project. Gregory Lubar and Eric Antonini of Jones Lang LaSalle brokered the deal for ACC, along with Mark Montgomery and Colin Haynes from Jones Lang LaSalle's Project and Development Services group. The CB Richard Ellis team of Bruce Pascal, Robert Blair, Andrew Felber, Timothy Hutchens, Mark Klug and Roberta Liss handled the deal for the developers. CB Richard Ellis currently continues to market the entire building for lease. (By Josiah Tindor)

Buzbee Properties is planning a $9 million, 61,000-square-foot mixed-use project in Friendswood, TX. The development at 502 S. Friendswood Drive was named HomeTown Center and will break ground this quarter. Buzbee, HomeTown Bank, a coffee shop and a title company have preleased office and retail space on the first and second floors. The three-story development will include nine residential lofts on the third floor. (By Krystal L. Thomas)

Chevy Chase Bank FSBacquired a 1.889-acre land parcel at 2059 Generals Highway in Annapolis, MD, from a joint venture called Generals Highway Retail LLC for $4.35 million, or approximately $53 per square foot. The 82,285-square-foot property is on the northeast corner of Generals Highway and Bestgate Road. The floor-area ratio is two, allowing for a buildable size of 164,570 square feet. The property has frontage of approximately 211 feet on Generals Highway and 173 feet on Bestgate Road. Reportedly, there were no brokers involved. (By Melanie Skinner)

Coleman Co., the Wichita, KS-based camping and outdoor sports equipment manufacturer, will expand into a 1.1 million-square-foot distribution facility in Gardner, KS. The project will be part of Midwest Commerce Center, a 155-acre development near Interstate 35 along Old 56 Highway. The site is 3.5 miles from where BNSF Railway is developing an intermodal facility. The 1.1 million-square-foot distribution center will offer 100 loading docks, and has room for future expansion of an additional 200,000 square feet and 50 loading docks. Site construction for the distribution center has begun and the expected completion date is set for October of next year. Local firm LS Commercial Real Estate and USAA Real Estate Co. of San Antonio are developing the project jointly. (By Anna Sholl)

Forest City Enterprises last month marked the opening of the first building at Hamel Mill Lofts, an apartment community in Haverhill, MA in the greater Boston area.The project is an adaptive re-use of a century-old shoe factory complex. Amenities include a WiFi cafe, theater room, fitness center and landscaped courtyards. The project includes three different finish packages and more than 40 floor plans. The second phase is scheduled to be completed this year. (RD)

The city of Sandy Springs, GA closed on its $8 million purchase of the former Target property on Johnson Ferry Road, an eight-acre site where the new City Hall complex is being planned. Target Corp. collected a little more than $1 million per acre in the sale, which included a 96,000-square-foot building that the discount retailer shuttered last month. Funds for the acquisition were approved about a month ago by the Sandy Springs City Council, although the city has not provided a timetable for its relocation or said whether it plans to renovate the existing building or develop a new structure. David Rubenstein, a principal with The Miller Richmond Co. of Atlanta, represented the city in the purchase. Maranda Walker, Suzanne Hayes Washburn and Wood Belcher of CB Richard Ellis handled the deal for Target. (By Andrew Burr)

A joint venture of SAXA Inc. and Triyar Cos. has received unanimous approval from the Tempe, AZ Development Review Commission and City Council for University Square, a $200 million mixed-use development. Slated to break ground in third quarter this year, University Square will be comprised of a 242,000-square-foot hotel featuring 328 rooms, a 95,000-square-foot convention center, 111,000 square feet of retail and 27,000 square feet of restaurant space. The development will be constructed on a 3.2-acre parcel on University Drive, across from Arizona State University. Delivery is set for 2011. (By Andrew Deichler)

Stillaguamish Tribe of Indians acquired a total of about 60 acres on 316th St. NW in Stanwood, WA, from Robinett Development Co. for $3.8 million, or about $63,700 per acre. Information is based on the deed. At the time of sale, the site included two two-story wood frame buildings. The buyer's plans for the property were not disclosed. (By Liliana Gonzalez)

Trinity Real Estate acquired 0.36 acres at 2820-2830 Fairview Ave. East in Seattle from Wards Cove Packing Co. for $2.8 million, or about $7.7 million per acre. The property consists of five lots that the buyer plans to develop into a townhome development called Wards Cove. Arthur Wahl of CB Richard Ellis represented the seller. (By Liliana Gonzalez)

Wann Properties Inc. sold three acres in Sewickley, PA, for $4 million, to a private buyer. The commercial land is at 1604 Carmody Court in the I-279/I-79 Northwest submarket. Gregory Broujos and William Leone of NAI Pittsburgh Commercial represented the seller. (By Sophia Ratliff)

West Jefferson LLC, an investment partnership, sold a 2.012-acre lot at 240 West St. in Annapolis to a local union using the investment entity 240 West Street Trust for $5.75 million, or about $2.86 million per acre. The Silver Star Site has a 14,544-square-foot auto repair building at the northwest corner of Jefferson Place and West Street. Lou Hyatt of Hyatt Commercial represented the seller, while Scott Kaufmann of JM Zell Partners Ltd. represented the buyer. (By Melanie Skinner)

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