CrowdStreet is pleased to announce the addition of 1600 Market Street, a $204 million capitalization owned by an affiliate of American Real Estate Partners (“AREP”), to the CrowdStreet marketplace.
1600 Market Street is an 825,000 SF, Class A office tower located in the heart of Philadelphia’s thriving Market West sub-market of Center City Philadelphia. This is the largest capital raise, and first high-rise building in a Central Business District (CBD) on our marketplace. This institutional-quality offering represents a notable shift in the growing confidence of internationally regarded sponsors to utilize online fundraising to raise capital for some of their highest profile assets, including this Class A office space.
High Quality Product
American Real Estate Partners is a top tier, vertically integrated real estate investment management company that specializes in acquisitions of Class A assets. The principles of AREP have sponsored, through affiliated entities, a total of approximately 16 million square-feet of Class A office and flex assets in some of the top tier markets of the Northeast, of which 7.3 million is still under ownership. AREP acts solely as an owner/operator, rather than a capital allocator. They typically fund their investments through a combination of their discretionary fund in joint venture with institutional private equity groups, state pension plans, insurance companies, and a variety of other institutional equity partners. Their choice to fundraise a portion of the equity requirement for the 1600 Market Street offering through online syndication reflects a shift of the traditional commercial real estate landscape as firms begin to utilize technology as part of an omni-channel approach to raising equity capital. AREP’s decision to enter the online fundraising world with CrowdStreet shows their confidence in the CrowdStreet platform to raise capital for one of their premium assets. As this shift is becoming more and more mainstream, and an increasing number of sponsors shift to online fundraising, investors benefit from having exponentially larger investment options available to them.
1600 Market Street offers investors a chance to be part of a premium office deal in a burgeoning submarket. The building’s anchor tenant, PNC Financial Services Group, recently signed a lease extension for 233,000 SF of their current 362,000 SF space through May 2023, while planning to vacate four contiguous floors totaling 113,000 SF at the end of 2018. In order to capitalize on this vacancy, AREP has planned $13.6 million in building capital improvements, including renovations to the lobby, bathrooms, and floor common areas, as well as a new tenant amenity and conference space. They also have substantial allowances for tenant improvements, leasing commissions, and capital expenses allocated for vacant space in order to both re-position the building as a more highly improved asset, as well as to capture a large, 100,000+ SF user. In addition to the four floors PNC is vacating, the 32nd floor tenant is also projected to vacate at the end of the year, which will leave floors 28-32 available. AREP recognizes the potential these vacancies offer as being one of the largest contiguous blocks of high quality view spaces in the market to be coming available in Philadelphia. AREP has underwritten leasing this space in late 2019 at $33.00 PSF, which the Sponsor believes should be readily achievable given the above factors.
AREP acquired 1600 Market in February 2018, for $160 million ($194 PSF), and is targeting a future sale at a 6.75% cap rate (resulting in a total sale price of $263.6 million, or $319 PSF). The offering has a $25,000 minimum investment, targeted 16.2% IRR, quarterly distributions upon stabilization, and a current loan-to-cost ratio of 64.8% (which will increase upon leasing as the loan provides for tenant improvements, leasing commissions and 65% of the budgeted capital improvement projects.
Key deal details:
- Class A Office in Strong Market
- Tenured Sponsor
- No Acquisition Risk
- Significant Sponsor Co-Investment
- Strong Anchor Tenant with Long-Term Lease
- Long-Term Cash Flow
- Projected Large-Block Availability
- Significant Capital Improvement budget
Class A Office in Strong Market: 1600 Market Street is a 825,968 SF, 39-story Class A office tower located in the Market West submarket of Philadelphia’s thriving Center City Central Business District. Market West is widely recognized as the preferred location for office users in the Greater Philadelphia region.
Through the third quarter of 2017, Class A office vacancy for this submarket was just 10.7%. Moreover, Class A asking rents averaged $32.31 PSF, setting a new high watermark for this submarket.
Tenured Sponsor: AREP is a vertically integrated fund manager, developer and operator of Class A real property located in top tier Mid-Atlantic and adjacent markets along the eastern seaboard of the United States. Through its affiliated entities, the firm has invested alongside a cross section of domestic and international institutional partners. Since October 2003, AREP has acquired 84 Class A office buildings, totaling approximately 16 million SF and a total value of $3.5 billion.
No Acquisition Risk: The Sponsor purchased 1600 Market on February 14, 2018 for $160 million. CrowdStreet Investors will participate at this original basis without any acquisition risk.
$8.925 Million Co-Investment by General Partner: The Manager of the CrowdStreet entity, AREP Strategic Office Fund II LP, is a discretionary commingled fund whose institutional investors have an aggregate net worth of over $50 billion. The General Partner has invested $8.925 million (15.0% of total equity of the Project-owning entity) in the Property, while the Sponsor itself has invested 5% of this amount.
Strong Anchor Tenant with Long-Term Lease: 1600 Market is anchored by PNC Financial Services Group, who currently occupies 362,000 SF. PNC has been a tenant since 1996 and recently extended 233,000 SF of their lease through May 2031.
Long Term Underlying Cash Flow: 48.8% of the building’s NRA is leased through 2027 or later, providing a very strong foundation of creditworthy cash flow. Per above, PNC will vacate a four-floor block of space in the high-rise, along with several thousand feet of below-grade space, at the end of 2018.
Large Block Availability: In addition to the four floors to be vacated by PNC, the 32nd floor is also projected to vacate the Property at year end. The Sponsor believes that this space represents one of the only contiguous large block (113,000 RSF) spaces, and the only one with comparable views based on its location on floors 28-32 that will compete in the Market West submarket. AREP has underwritten leasing this space in late 2019 at $33.00 PSF, which they believe should be readily achievable.
Capital Improvements: AREP has designed a $13.6 million capital improvement program with the intent of maximizing 1600 Market’s profitability. The capital program will focus on: (a) the lobby and building entrances; (b) floor common areas and bathrooms; and (c) an amenity/conference space for the benefit of the whole building. Additionally, AREP has programmed in a to-be-identified restaurant to take a currently-vacant space in the lobby which has access to an outdoor plaza area.
Additional Upside Potential: Further avenues for upside are available at 1600 Market, including: (a) to split the building into condominium units, which would facilitate selling the PNC long-term leased portion at a cap rate premium and thereby buying down the basis on the balance of the building; and (b) leasing the amenity space to an operator and collecting revenue on it, and doing a full re-measurement of the building to update its original 1983 measurements.
American Real Estate Partners is a fully integrated private real estate investment company operating in major markets of the Mid-Atlantic along the Eastern Seaboard of the United States. Its co-founders, Doug Fleit, Chief Executive Officer & Chief Investment Officer and Brian Katz, President & Chief Operating Officer have assembled a highly-experienced senior management team with an average tenure in commercial real estate of 29 years.
Since 2003, American Real Estate Partners has invested $3.5 billion in 84 buildings comprising over 16 million square feet of first class office buildings located in the major office markets along the Eastern Seaboard of the United States, including Washington, D.C., Northern Virginia, Suburban Maryland, Raleigh-Durham and Northern New Jersey.
How You Can Invest
Technology is changing the way we invest, and making it more accessible to investors by breaking through the previous barriers to entry that individual investors encountered. The 1600 Market Street offering provides investors with the opportunity to invest in institutional grade product that may not have been accessible to individuals previously. We’ve made it as easy as possible to invest in AREP’s 1600 Market Street asset. All an individual has to do to participate in this private offering is join CrowdStreet, create a profile, and invest. Registration takes about 5 minutes, and the minimum investment is set at a low $25,000.
Of course, this offering is just one of many offerings currently available on our marketplace. Our platform has raised more than $240 million of equity to date, with nearly 200 total projects funded. This year, we expect to fund an additional $300 million in equity on the CrowdStreet marketplace.
To learn more about the CrowdStreet marketplace and how get started, click here.