Hankowsky said the guidance had been reduced from the previously announced range of between $400 million and $500 million after Liberty decided to put some projects on hold. "I am pleased with Liberty's results in the first quarter, which reflected solid leasing velocity and our ability to secure opportunities for selective development," Hankowsky says in a prepared statement. "However, the prolonged stagnation of the credit markets and the increasing economic slowdown is slowing our tenants' decisions and thinning market demand, meaning we are working harder for every piece of business. Given the environment, I am very glad we are a defensively-positioned company with a strong balance sheet, minimal lease rollover, and no need to access the capital markets this year."
The quarter ended with the closing of $324 million in permanent financing $324 million permanent financing for Comcast Center, a development property in Philadelphia which was transferred from Liberty to an unconsolidated joint venture in which Liberty has a 20% interest. That capped a six-month period in which Liberty secured more than $1 billion, "a noteworthy achievement given the significant challenges in the capital markets," said Hankowsky during the conference call.
Hankowsky characterized the current market as one in which buyers often find it difficult to get financing and sellers are expecting last year's prices. "We remain disciplined in these areas and will be patient," he said. "Therefore, we would anticipate being at the lower end of our guidance for both acquisitions and dispositions, and seeing most of our activity in the second half of the year."
The quarter has also seen job losses nationwide average nearly 80,000 per month, a slowdown that Hankowsky said is "manifesting itself in the real estate market in a variety of ways. One, the number of prospects continues to thin out; there are fewer prospects by quarter end than at the first of the year, but there remains a steady flow of prospects. Two, markets continue to behave appropriately, with development starts declining and continuing to allow for a market equilibrium. And third, market equilibrium remains generally in place. But we are beginning to see a few idiosyncratic instances of owners getting more aggressive to fill a particular building. There's also a modest increase in sublet space, driven by firms' layoffs and consolidations."
COO Robert Fenza noted that development leasing "substantially improved" the prelease percentage of scheduled 2008 deliveries from 21.1% to 54.3%. The product that is scheduled for delivery in Q2 '08 is 100% preleased; Q3 new product is 82% leased, said Fenza.
As of March 31, Liberty's in-service portfolio of 73.8 million sf was 92.2% occupied, compared to 92.9% at the end of last year, a dip that Hankowsky said was expected. During the quarter, Liberty completed lease transactions totaling 5.3 million sf.
During the quarter, Liberty brought into service three development properties totaling 237,000 sf for a total investment of $23.2 million. Two of the properties are fully leased, while one distribution facility is currently unleased, according to a release from Liberty Additionally, 22,000 sf of the nearly 1.3 million-sf Comcast Center development came into service during Q1.
Fenza said that among five new development projects totaling 1.4 million sf, including one with a JV, Liberty started construction on a 452,000-sf distribution center in the Lehigh Valley community of Breinigsville for Home Depot and a 95,000-sf headquarters for the Tastee Baking Co. at the former Philadelphia Navy Yard. As of March 31, Liberty had 6.5 million sf of wholly owned and JV properties under development, representing a total projected investment of $749.3 million, with an expected yield of 8.3%. The properties were 35.5% leased at March 31, according to the release.
"We are pleased that we continue to find opportunities to add value through development," said Fenza during the conference call. "We will remain agile and disciplined, leveraging our deep market knowledge for opportunities for build-to-suits while at the same time building flexible, time-tested product where identified demand and pre-leasing warrant construction."
In addition, Fenza said, "We will continue to use our bench strength to entitle and pre-position development projects with government approvals and utilities and infrastructure where cost-effective. In this way, we will assure both our tenants and our shareholders that we remain 100% ready to capitalize on future opportunities as the economy recovers."
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
