Staying the Course through Development’s Wild Ride
By: Anthony Pricco, principal, Bridge Development
At Bridge Point Woodridge, Navistar’s high-end tenant improvements include a training facility, photography studio, compressed air distribution system and vehicle exhaust track system.
In fall 2008, we all watched uncertainties unfold — the Lehman Brothers debacle, rapidly growing unemployment, stocks plummeting, world market unrest and the beginning of a deep recession. It was a painful time to have one new commercial development started, but imagine two projects – a two-building industrial complex and a green office building, both barely out of the ground in suburban Chicago.
Bridge Development Partners, LLC, an 11-year-old, privately-owned Chicago-based firm, confronted this predicament and fought against some of the worst market conditions to complete these projects. How they survived and prospered is a testament to perseverance, patience, trust and teamwork.
Everything Looking Uphill
In rosy 2007, entrepreneurial Bridge boldly planned $100 million in new development starts, following its pursuit of infill real estate transactions that conventional developers and public REITs overlook. It had already developed two successful business parks in southwest suburban Woodridge, Ill., one of which sold for $65 million in 2006. In a joint venture partnership with Globe Corporation, Bridge planned and secured financing for two new projects:
Bridge Point Woodridge, a 383,305-square-foot, two-building industrial complex in Woodridge; and
555 Corporate Center, a 162,739-square-foot, four-story Class A office facility in north suburban Lincolnshire, Ill. The office building would become the only LEED-Gold certified speculative building in the submarket’s history.
Both of Bridge’s projects were 100 percent speculative, with the same capital partner and lender. Globe Corporation, its capital partner, is a privately-owned diversified investment company concentrating on real estate, asset management and private equity. The lender for the projects was Chicago-based The PrivateBank.
Denver-based REIT, Industrial Income Trust Inc. (IIT) purchased Bridge Point Woodridge in June 2011 as part of a larger portfolio of suburban Chicago industrial properties.
Decelerating Through Lead Time
When Bridge broke ground for Bridge Point Woodridge and 555 Corporate Center, each of the respective submarkets was healthy and desirable with strong market fundamentals. Southern Lake County, where 555 Corporate Center was planned, boasted the largest concentration of Fortune 500 headquarters, including Abbott, W.W. Grainger, Inc. and Takeda Pharmaceutical Company Limited. At the same time, the submarket had no new, state-of-the-art, LEED-certified office buildings available.
“In design and geography, 555 Corporate Center completely met the needs of its Lake County submarket, which traditionally attracts one or more large corporate users each year,” said Bert A. Getz, Jr., Co-CEO of Globe Corporation.
Bridge had well-thought-out strategies and solid partnerships. Yet, the lead time to build, which so often plagues developers, changed Bridge’s timing and plans.
In the months that followed groundbreaking, the market began to slow considerably. The banking industry was collapsing and the nation was in panic. User demand plummeted, with companies downsizing and going out of business. Companies, even those few doing well, wouldn’t consider new space because of uncertainty and high moving costs — they simply renewed their leases and stayed put.
Freefall — What Next?
Faced with bleak market dynamics, Bridge encountered problems pushing the development process along on both properties. Bridge’s four principals held personal recourse on the projects. To their credit, they aligned themselves with high-quality, adaptable and patient partners. The PrivateBank, which has a strong relationship and history with both Bridge and Globe, maintained their belief in the projects and the team. Globe Corporation, managed by fourth-generation family members, understood the cycles of commercial real estate, as well as the value of the assets. Globe looked beyond the original pro-forma and was able to adapt to the rapidly changing market conditions.
As you can imagine, there were many uncomfortable conversations. Yet, Globe was able to think in terms of generations, not in years as many money managers would. They understood what we were going through, and the need to finish the projects and get them leased. Bridge believed the investment market would return and pay a premium for a fully-completed property with predictable cash flow. Thankfully, that happened sooner and more strongly than ever could have been anticipated.
At the time of 555 Corporate Center’s completion, the Lake County submarket had reached a nearly 23 percent vacancy, and large blocks of available space provided new competition.
Riding the Bumpy Entitlement Road
The 19-acre infill site of Bridge Point Woodridge proved challenging and costly. One of the last available sites in the eastern I-55 submarket, it required a road extension with considerable intersection improvements, a municipal dedication, as well as off-site utility extensions. To make matters worse, nearby residential neighbors protested the project. Fortunately, with the assistance of the Village of Woodridge and some politicking and compromise with the community, Bridge was able to overcome these bumps.
Bridge follows the belief that the best product in the best location will be the first to lease and the last to go vacant in any market. Bridge Point Woodridge captured its niche of flexible, highly-divisible, multi-tenant industrial product type, which captures the widest share of the user market.
A Scenic Turn
Itasca, Ill.-based Cornerstone Architects Ltd. designed the two precast concrete facilities, totaling 264,183 and 119,122 square feet, and Des Plaines, Ill.-based Premier Design + Build Group, LLC constructed them. Bridge hired Lee & Associates of Illinois LLC to exclusively market Bridge Point Woodridge to targeted light industrial warehousing and distribution users seeking 15,000 to 50,000 square feet.
Navistar required $1.5 million in high-end tenant improvements that other developers and owners could not accommodate at the time. Bridge structured its long-term lease to make these modifications financially reasonable.
Bridge and its marketing team found few competing properties targeting these users in the eastern I-55 submarket. They were also pleased to find smaller, local users who were less interested in saving nickels and dimes than obtaining the best possible location for their employees and customer base. These small businesses tended to make decisions differently than users of the highly-commoditized big box space where price becomes the most significant differentiator.
Bridge, through its partnership with Globe, was also able to accommodate users’ needs for excess tenant improvements when other developers could not. Navistar, an international manufacturer and marketer of trucks and diesel engines, required 16,604 square feet of office build-out as part of its 65,531-square-foot lease. Its high-end tenant improvements — including a training facility, photography studio, compressed air distribution system, and vehicle exhaust track system — totaled over $1.5 million. Bridge was able to structure its long-term lease to make these accommodations financially reasonable.
From January 2010 to May 2011, Bridge signed long-term leases totaling approximately 270,000 square feet at Bridge Point Woodridge, bringing it to 70 percent occupancy.
Holding on to Strategy
Sysmex wanted to occupy the entire building, thereby owning the identity and lobby space.
With 555 Corporate Center, Bridge again employed Premier Design + Build Group, LLC as general contractor. Chicago-based Archideas was project architect. At the time of the office’s completion in January 2010, market conditions were at an all-time low. The Lake County submarket reached a nearly 23 percent vacancy rate. Corporations were suddenly giving back large blocks of office space, providing new competition for the project originally planned for a single corporate headquarters user.
Bridge hired commercial brokerage firm Colliers International to lease 555 Corporate Center during this economically difficult time. The team knew the flexibility of new construction coupled with the LEED certification made its project a rare opportunity and marketed it as such. Even so, a handful of prospective deals totaling more than 100,000 square feet fell through over the summer of 2010.
Bridge had numerous joint discussions to change strategy and break up the property to accommodate smaller users. In the end, the team stuck with their original strategy of a single user building and stayed the course, even though it meant the painful decision of carrying the building for a longer period of time. Bridge knew they had something that would be highly sought after once the large-user demand returned. At times, the original premise to seek a single corporate tenant was debated, but despite all the noise and external economic turmoil, the core aspects of the market hadn’t changed.
Patience Pays Off
The team’s perseverance paid off. In fall 2010, Sysmex America, Inc. sought a new corporate headquarters for its North and South American operations and selected 555 Corporate Center because of its new construction, LEED certification and corporate identity. Sysmex agreed to a 162,739-square-foot, 15-year lease valued at $80 million with right of first option to purchase.
Premier Design + Build Group, LLC handled the office build-out for Bridge Point Woodbridge.
“This deal never would have gone into a multi-tenant building, so the team’s strategy not to open up the building for smaller users made it happen. Sysmex wanted their own identity and the ability to completely control the building”, said Steve Kling, principal with Colliers International and one of the brokers representing ownership in the transaction.
In Summer 2011, Bridge was able to successfully and profitably sell Bridge Point Woodridge as part of a larger portfolio to a Denver-based REIT, Industrial Income Trust Inc. (IIT). The sale achieved premium pricing through a portfolio effect, and Bridge was able to provide a return for investors at a time when that was an anomaly.
The wild ride of development takes a penchant for pain, patience and perseverance, particularly over the last three years. There was a tremendous amount of pressure. Yet when asked would they do it again, Bridge co-founders and principals Steve Poulos and Ron Frain replied, “Yes, as long as we had the same foolproof team committed to seeing the projects through the challenges, particularly the economic storm none of us could have predicted. We have all learned a lot from the past few years and will definitely appreciate future successes more than before, but we hope never to repeat what we just went through.”
“This recession was the worst I’ve seen in my 40 years in the commercial real estate industry,” added Frain, “but the fact we were able to successfully weather this wild ride demonstrates the importance of a strong, complementary team.”