Real Estate Strategic Plan Presentation
Real Estate Strategic Plan Briefing Item No: - _supp------------------ ------ Meeting Date: October 27, 2020 1 Overview Market Update Real Estate Principles Port Property Profiles and Recommendations Acquisitions and Partnership Opportunities Mar April May June July August September October November December January Port Commission x Port RE Team x x x External Advisory x x x Committee Port Property Acquisitions & Research and Partnership Recommendations Research 2 Market Context Region Unemployment: Initial Claims with Continued Claims, Jan - Sep 2020 Number Of Claims Number Of Claims 160,000 160,000 140,000 140,000 120,000 120,000 100,000 100,000 80,000 80,000 60,000 60,000 40,000 40,000 20,000 20,000 0 0 January-20 February-20 March-20 April-20 May-20 June-20 July-20 August-20 September-20 Snohomish Initial Claims Pierce Initial Claims King Initial Claims Snohomish Continued Claims Pierce Continued Claims King Continued Claims 3 Market Context OFFICE INDUSTRIAL Rent Collections: 96.4% Rent Collections: 99.4% CMBS Mortgage 2.3% CMBS Mortgage 1.2% Delinquencies: Delinquencies: US VACANCY 10.7% US VACANCY 5.7% Current: Current: Forecasted Peak: 12.7% Forecasted Peak: 6.9% in 2023 in 2021 BIG QUESTIONS BIG QUESTIONS WFH impact on vacancies? Who are the winners in the Rise or fall of coworking? supply chain disruption? Will telemedicine reduce Will manufacturing demand for medical office? meaningfully increase space demand? 10/20/2020 Sources: NAREIT, Trepp, Costar, STR, Zillow, US Census Bureau 4 Note: Mortgage delinquencies represent CMBS delinquencies. Data as of Aug 2020 where not specified. Market Context RETAIL HOSPITALITY/LODGING Rent Collections: CMBS Mortgage Free standing: 90.5% 23.0% Delinquencies: Shopping Center: 80.1% Hotel Occupancy: CMBS Mortgage 47.0% 14.8% Jul: Delinquencies: Aug: 50.2% US VACANCY 10.2% Recovery to 20-year historical average Current: expected in 2023. Forecasted Peak: 14.6% in 2021 BIG QUESTIONS BIG QUESTIONS Will $50 billion in delinquent Which retail categories will CMBS debt trigger a survive? broader financial crises? Which retail typologies will How many independent be successfully redeveloped hotels will not make it in the near term? through the downturn? 10/20/2020 Sources: NAREIT, Trepp, Costar, STR, Zillow, US Census Bureau, Moody's Analytics 5 Note: Mortgage delinquencies represent CMBS delinquencies. Data as of May 2020 where not specified. Market Context Regional Industrial Total Inventory and Deliveries, 2016-2020 YTD Puget Sound Industrial Vacancy, 2016-2020 YTD Total Inventory 8.0% (in Millions of SF) Total Deliveries (in Millions of SF) 7.0% 335m 4m 6.0% 5.0% 330m 3m 4.0% 3m 3.0% 325m 2.0% 2m 1.0% 320m 2m 0.0% 2016 2017 2018 2019 2020 315m 1m Seattle Metro King County 310m Pierce County Snohomish County 1m 305m m Avg. Rent* Vacancy Avg. Rent* Vacancy 2016 2017 2018 2019 2020 YTD Metro $11.69 5.4% Magnolia $13.83 2.6% King County $13.06 4.9% Ballard $16.89 5.5% Pierce County $8.20 7.8% Duwamish N $13.16 6.1% King Co Deliveries Pierce Co Deliveries Snohomish County $10.14 3.4% Duwamish S $12.75 1.3% Snohomish Co Deliveries Total Inventory *Avg. Annual NNN rate per square foot 6 Market Context Regional Office Total Inventory and Deliveries, 2016-2020 YTD Puget Sound Office Vacancy, 2016-2020 YTD Total Inventory Total Deliveries (in Millions of SF) 8.5% (in Millions of SF) 8.0% 216m 5m 7.5% 214m 5m 7.0% 212m 4m 6.5% 210m 4m 6.0% 208m 3m 5.5% 206m 3m 5.0% 204m 2m 4.5% 2016 2017 2018 2019 2020 YTD 202m 2m 200m 1m Seattle Metro King County Pierce County Snohomish County 198m 1m 196m m 2016 2017 2018 2019 2020 YTD Market Avg. Rent* Vacancy Submarket Avg. Rent* Vacancy King County $36.57 6.8% Belltown/Denny Regrade $41.76 4.7% King Co Deliveries Pierce Co Deliveries Pierce County $26.23 5.8% Pioneer Sq/Waterfront $40.60 8.7% Snohomish Co Deliveries Total Inventory Snohomish County $25.42 6.4% Queen Anne/Magnolia $37.47 12.2% *Avg. Annual Full Service rate per square foot 7 Real Estate Principles 8 Port Real Estate Principle Framework "The Port of Seattle will use its real estate, capital Framework assets and financial capabilities to accomplish the Century Agenda. These are tools to thoughtfully steward, rather than areas well-suited for specific Strategic Principles 25-year goals." Existing Properties Manage for the Mission Strategies for Operational Existing Strategic Principles Opportunity Properties Cashflow Use to Continually Evaluate Real Leverage Expertise Property Performance and Acquisitions Alignment with Operational Acquisition Principles Opportunity Strategies Partner to Amplify Cashflow 9 Port Real Estate Principles Illustrative Examples: Manage for the Mission Fishermen's Terminal: Set clear objectives for each Opportunity to significantly advance the port's agenda property and the portfolio related to maritime industries Frequently evaluate each High cost of development Unlikely to produce market returns (low ROI per property's contribution to the traditional financial measures) mission Consider selling underperforming properties to Harbor Marina Corporate Center: redeploy capital and amplify A challenged property that doesn't make a strong impact contribution to the Port's mission Value can be re-allocated to amplify the Port's mission and agenda 10 Port Real Estate Principles Illustrative Examples: Leverage Expertise Achieving Multiple Missions (Lower Duwamish Industrial Identify opportunities to Area) advance multiple Port policy Engage in development that works towards multiple Port objectives with each mission objectives: environmental policy advancement, investment social justice, supporting neighboring industrial lands, job creation Adopt processes that allow for efficient value-add input Internal Coordination (RFP Pre-Launch review to Streamline) from multiple departments Establish an internal RFP pre-launch process to streamline review, evaluation and implementation Increase effectiveness in execution and decrease risk and uncertainty 11 Port Real Estate Principles Illustrative Examples: Partner to Amplify Impact Ground Leasing and Private Partnerships (Des Moines Creek PUBLIC AGENCIES West) Where real properties and shared Partnering or leasing to private entities to maximize the policy objectives align efficient use and development of the Port's lands INDUSTRY STAKEHOLDERS Operational Partners (Harbor Marina Corporate Center) Where joint investments can improve Initiate a working group with other public agencies to sector performance identify opportunities where publicly owned properties can be optimized PRIVATE INVESTOR/DEVELOPERS Financial Partners (EDA) Where private capital can more Partnering with other public agencies, such as the Economic efficiently redevelop Port properties consistent with Port objectives Development Agency (EDA), could provide access to funds that the port could leverage to meet larger goals 12 Port Real Estate Principles Property Classifications: OPERATIONAL PROPERTIES Formalize property classifications and Primary purpose of the property is to apply to each property within the support Port operations. portfolio. Capital investments are made to optimize functions by the Port and industry partners/tenants. OPPORTUNITIES Property classifications can change Property is over time. CASHFLOW PROPERTIES primarily an unrealized opportunity. More than one classification can apply Primary purpose of the property is to hybrid properties. to generate net cash flow. Manage to market based metrics. Reinvest to enhance net cash flow. Apply appropriate evaluative metrics to each property classification. 13 Contents Properties Being Evaluated FOCUS PROPERTIES Focus Properties: The 2020 Real Estate Strategic Plan will focus on this group of eight properties in the Port of Seattle's real estate portfolio. 2016 PROPERTIES REVIEW Review Properties: The 2016 Real Estate Strategic Plan evaluated these properties. These properties are not the focus of the 2020 Strategic Plan Update. *Properties now under the purview of the Sustainable Airport Master Plan (SAMP). 14 Property Profiles 15 Fishermen's Terminal Property Type: Operational Cashflow Opportunity Key Observations HQ of Seattle's commercial fishing fleet Strong occupancy (94% occupied) Retail square footage is a key driver of overall revenue for the uplands portion of the property Deferred maintenance (Downie and Nordby for example) is a key issue for the uplands facilities Near term need for capital improvements and/or redevelopment Occupancy Largest Occupants 94.2% | 21k SF Available Fishing Vessel Owners Marine Ways (51% RSF) Chinooks (3% of RSF, Largest Gross Income) Annual Rental Income Use Summary $ 2,355,251 Office, Retail, Restaurant, Warehouse, Dock, Yard Weighted Avg. Lease Term 33 months Leases Expiring In 2020/2021 29% of RSF | 104k SF 16 Fishermen's Terminal Property Type: Operational Cashflow Opportunity Staff/Stakeholder Input Large CIP outlay required to attend to deferred maintenance, necessary but will not generate a positive NPV Capital investment in existing facilities needs to be invested strategically FT is expensive to develop due to the quality and nature of the site fill Could provide an opportunity to explore EDA funds Strategies Keep operationally critical organizations in place to support maritime industry Identify and implement new developments to support both the existing maritime industries and incubate new maritime industries to sustain the industry over the long term Revaluate needed capital investments at existing facilities as part of broader site improvements and investments Improve visitor experience thru wayfinding signage and interpretive displays (1% for art project) 17 Salmon Bay Marina Property Type: Operational Cashflow Opportunity Key Observations Originally purchased based on adjacency to FT, protection of industrial land, and uplands development potential Currently serves as a recreational marina adjacent to FT Underutilized areas permitted for development under seller's MUP Seller's MUP at uplands still active from acquisition (mini- storage and commercial) Occupancy Largest Occupants 100% Special Needs Group INC, 62% Cascade Adventure Vans Annual Rental Income Use Summary $49,715 | $12.31/OSF Office, Retail Storage Warehouse Weighted Avg. Lease Term 17 months Leases Expiring In 2020/2021 62% | 2.5k SF 18 Salmon Bay Marina Property Type: Operational Cashflow Opportunity Staff/Stakeholder Input Focus on the development of the uplands at Salmon Bay Permits for in water and uplands are separate Interest in defining how this property can potentially serve/benefit FT and fulfill its economic potential Need to address in water uses and relationship to uplands Strategies Evaluate the opportunity to utilize/modify the MUP at the uplands prior to its expiration Explore the opportunity to develop uplands to support uses at Fishermen's Terminal Use uplands development to support reinvestment in docks and waterside facilities 19 Terminal 91 Uplands Property Type: Operational Cashflow Opportunity Key Observations Facilities largely occupied Critical cruise ship and maritime facilities on P90 &91 Industrial land capacity on Uplands Expensive for the Port to self-develop but will provide benefits to the Port's core mission over the long-term Occupancy* Largest Occupants 100% City Ice (26% of RSF) Lineage (34% of RSF) Annual Rental Income* Use Summary $3,212,034 Warehouse, Yard, Storage WALT (Months) 108 *Note: Inclusive of land/yard leases Leases Expiring In 2020/2021* 9.8% | 97k of RSF * 20 Terminal 91 Uplands Property Type: Operational Cashflow Opportunity Staff/Stakeholder Input Issues around Magnolia Bridge replacement Maritime and Cruise both highly seasonal; the conflict of how to support both industries slows development progress Need to relocate Maritime Ops facilities Opportunity to locate maritime industry tenants from other locations in City (Lower Duwamish for example) Magnolia and Queen Anne communities sensitive to Port operations and development Strategies Keep planned growth in motion. Continue to move Phase 1 development of light industrial buildings through design and permitting Make utility and infrastructure investments needed to support Phase II development of Uplands Target maritime industries for occupancy in Phase 1 and Phase II; Provides an alternative space option to maritime industry suppliers to locate next to their key customers Explore how to improve freight mobility and access for employees (especially as new development unfolds) 21 Harbor Marina Corporate Center Property Type: Operational Cashflow Opportunity Key Observations West Seattle Bridge Fall zone creates uncertainty Future light rail alignment needs will likely impact site Low occupancy lost two large tenants in 2019 (72% currently occupied) Relatively short lease terms and significant expirations in 2020/21 Difficult leasing environment overall Occupancy Largest Occupants 72.0% | 38k SF Available The Mountaineers INC (12.5%) Tideworks (8.5%) Annual Rental Income Use Summary $1,253,000 | $12.85 Avg Lease Rate Office WALT (Months) 19 Leases Expiring In 2020/2021 26% of RSF | 36k SF 22 Harbor Marina Corporate Center Property Type: Operational Cashflow Opportunity Staff/Stakeholder Input The West Seattle Bridge closure is affecting this site in multiple ways including location withing the fall zone, and site access limitations Tenants have been made fully aware of fall zone dangers by SDOT In addition to the issues with the West Seattle Bridge, ST3 will also likely impact HMCC. Strategies Pursue partnership opportunities with potential partners (KC, SDOT, ST) to support required infrastructure improvements associated with planned bridge repairs and light rail alignment Consider putting property on market for sale Complete a feasibility study to determine highest and best use for property (including marina) Evaluate relocation of commercial in water uses to other Port properties Explore a strategy to allow leases to expire and/or only extend on the short term to allow for maximum flexibility in the near term 23 World Trade Center West Property Type:Property Type: OperationalCashflow Cashflow Opportunity Key Observations Achieving below market rents Significant vacancy (75% currently occupied) WTC Club a Port Operation (7,000 sf) and revenue producer for Port Home to Port's event operator, Columbia Hospitality Mix of office tenants Occupancy Largest Occupants 75.2% occupied | 17k available Opus Solutions (27%) Columbia Hospitality (18%) Annual Gross Income Use Summary $797,000 | $17.94 Avg NNN Lease Office, Retail, Event Center (WTC) Rate WALT (Months) 31 Leases Expiring In 2020/2021 15% of RSF | 10,293 SF 24 World Trade Center West Property Type:Property Type: OperationalCashflow Cashflow Opportunity Staff/Stakeholder Input WTCW was a significant property for the Port's vision in establishing an international business hub along the Seattle waterfront at the turn of the century. Original focus was on building non-profits focused around trade and international development Waterfront revitalization disruptions have impacted office markets prior to COVID Strategies Evaluate the Property in terms of its fit and alignment with Port's mission and objectives Evaluate the implications of a sale of the WTCW property Maintain mission supportive uses in the Building such as the World Trade Center Club through a long-term lease of the space or consider relocation of such uses 25 Pier 69 Property Type: Operational Cashflow Opportunity Key Observations Has served as the Port headquarters (145,420 SF) since 1993 Represents a major investment by the Port in the City's waterfront revitalization Includes a mix of water dependent tenants Water dependent uses required on site (approximately 25%) Occupancy Largest Occupants 100% Port of Seattle (77% of building) Clipper Navigation Annual Gross Income Use Summary $658,904 Office, Dock, Storage/warehouse Retail WALT (Months) 53 Leases Expiring In 2020/2021 0% 26 Pier 69 Property Type: Operational Cashflow Opportunity Staff/Stakeholder Input Pier 69 is a Port legacy project and important property for the long term Focus should be on leasing strategies in the near and long term Consider leasing strategies that reflect changes in the Port's office space needs Strategies Consider future leasing efforts tied to the in-water dependent uses and releasing (key lease expiration in 2022) Re-evaluate Port's office needs post COVID to determine space requirements at P69 Evaluate how to reuse Clipper Caf space Evaluate P69 leasing options based on forecast of Port office space needs 27 Portfolio Management Capital (equity) within a real estate portfolio is a resource. New Capital Market fluctuations, policy priorities and Competes with other investment property level opportunities/ challenges impact opportunities. the quantity, performance and risk profile of invested capital. Recycled Capital Active portfolio management requires a constant review and balancing of policy Harvested from existing performance (mission), cash flow and equity properties and redeployed to growth. better achieve portfolio goals. ILLUSTRATIVE EXAMPLE 1. Sell WTCW (lease back or relocate WTC) 2. Fund Pre-Con for Phase 1 @ T91 Design and permitting @ FT Acquire DMCW WSDOT Prop & RFP for development 28 Evaluate Acquisition and Partnership Opportunities Manage for the Mission Leverage Expertise Partner to Amplify Impact What types of properties are What secondary policy What other organizations have an being considered? objectives can be achieved interest in the success of this within the scope of the investment? primary business plan? What is the business and performance plan? How can others be brought into an Are there alternative investment to amplify impact? structures/approaches that What is the Port's mission would produce outsized objective? benefits compared to other When should the Port partner? initiatives? How will success be measured in the near, mid and long term? 29 Next Steps Evaluate acquisition and partnership opportunities Evaluate funding options and strategies Develop methodology to rank/prioritize acquisitions/partnerships Incorporate key findings/recommendation into Maritime/EDD CIP Implement key real estate development recommendations within strategic plan 30
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