How Shorenstein is mapping out its $500M real estate pipeline in Charlotte
How Shorenstein is mapping out its $500M real estate pipeline in Charlotte
Author

By Ashley Fahey  – Real Estate Editor, Charlotte Business Journal

Oct 26, 2020, 6:25am EDT

Amid the uncertainty that's served as the theme of this year, a national commercial real estate firm feels good about its big bet on the Queen City.

San Francisco-based Shorenstein has $9 billion in assets and 23 million square feet of mostly office space across the U.S. Much of its portfolio is in major gateway cities but the firm has recently become a bigger player in secondary markets, including Charlotte.

It's in a joint venture with ATCO Properties at the massive Camp North End adaptive-reuse project north of uptown and mapping out, with Stiles Corp., a 23-story office tower next to the Lynx East/West Station in South End. In University City, Shorenstein closed on the former Flextronics campus, at 6800 Solectron Drive, where it's beginning an overhaul to create 21st-century office space.

The company owned Carillon Tower in uptown in the 1990s before selling it to Cornerstone Real Estate Advisors in 2004 but had since been absent from the local market until securing the deal with ATCO at Camp North End in 2018.

Matt Knisely, managing director of Shorenstein's East investment group, is based in the firm's New York office but — pre-Covid-19 — spent much of his time flying down to Charlotte. Knisely, who has been with Shorenstein since 2006, is responsible for sourcing, evaluating, negotiating and closing capital transactions on the East Coast for the firm.

He has been intimately involved with all three investments Shorenstein now has here in the Queen City.

The Charlotte Business Journal caught up with Knisely recently about why Shorenstein is investing millions in Charlotte, its three local projects and how Covid-19 has impacted its deals. The following excerpts have been edited for brevity and clarity.

Tell me about Shorenstein's recent reintroduction to the Charlotte market and why it's made three substantial investments so far.

Charlotte was a market that we had been studying. We had been watching it closely starting six or seven years ago. That meant visiting the market, looking at acquisition opportunities, getting to know people in the market — other owners, brokers and tenants. That takes time to properly study and get a good feel and get comfortable with the market. The more we did that, the more we thought Charlotte was an interesting place for our capital to be put to work.

Then we started actively looking for opportunities. We were introduced through a friend of ours to ATCO and the Camp North End project and we were instantly struck by the similarities that project had with some we had done on the West Coast. We had completed the conversion of an old Ford factory building in Los Angeles.

As we started talking to ATCO and spent more time working with them, I think we were struck by some of the similarities (and) what the incredible campus had to offer.

What's interesting about your local deals is that they're all markedly different properties and in different submarkets — urban and suburban, adaptive reuse and new construction. Was that intentional?

We have different locations, price points and product types but they’re all within that Charlotte metro area that is showing very positive signs on job growth, population growth, etc. We think Charlotte itself is a very interesting and dynamic market. Being able to diversify our portfolio ... we thought was very, very interesting.

On the East/West Station site — we’re planning to rename it — that's in South End and it’s very dynamic, a lot of restaurants and apartments. It's really an exciting submarket that has some nice similarities (to markets) that we’re investing in around the country.

At Camp North End, we were struck by some similarities of projects we have done on the West Coast. We were eager to apply that track record, if you will, into the Charlotte market. That's just such a fascinating place ... the history of the site and the way we’ve been engaging the community, open spaces and great retailers. Long term, we think it’s going to be fabulous office space as well.

We like what’s happening in the (University) area. We think UNC Charlotte is a growth engine up there, we think the folks that are working on behalf of University City are doing a great job driving business. We thought, "Here's an opportunity to take something that’s really fallen on hard times," (at 6800 Solectron). We thought we had a great opportunity to reposition something and make it fit within the University City submarket. We’re not trying to create South End product in University City, we’re trying to create something that works well for the tenants in the University City submarket.

Each is a different price point and deal size but when you add it up, it’s over $500 million (in investment and market value).

6800 Solectron was a massive, single-tenant building with office and warehouse space for so long. What are you doing there to bring it up to date?

With 6800 Solectron, it was a 450,000-square-foot single building — most of it was one story, a portion was two stories. We’re creating a courtyard right through the middle of it. We’re taking some space out ... and creating what we think will be a very interesting courtyard and tenant amenity and open space in the middle of what was the old building. We’ve commenced that and we plan on delivering space in the second quarter of 2021. It's going to be office space, but we’re going to transform what you knew as the old Flextronics campus as very functional office space, tailored to the types of tenants that are in the University City area. It's underway and we’re really excited it.

You have a rezoning out for land adjacent to the 6800 Solectron property. What's planned there?

It’s flexibility for the future. Our near-term goal is going to be on the existing structure, but the rezoning petition is flexibility for the future and also flexibility for the site in terms of ingress and egress, connecting out to Mallard Creek (Road) and IBM Drive. Our immediate objective is to work on the existing structure there. We're in the middle of that now and are excited about that. It's such a dynamic little area up there. There's a lot of great stuff happening. We think the site was wholly underutilized.

The building has really been designed for one giant user. University City does tend to attract larger tenants. Is the strategy to go after one big tenant at 6800 Solectron?

What we bought only worked for one company. That's 425,000 or 450,000 square feet. That would be fantastic — there are lots of large corporate users in Charlotte — but to wait for that tenant, that didn’t seem to be the right plan.

What we'll effectively do is create four different quadrants of varying sizes, but it cuts it up. It's not divided by four evenly. One is 50,000 square feet, one is 125,000 square feet. We’d be happy to lease it to one tenant but we are creating and designing something that works for multiple tenants, but multiple large tenants. If the campus is big, the spaces are big, but not 450,000 square feet. It’s a pretty cool plan.

What about the office tower you have planned with Stiles Corp. in South End? Is that still on, given the Covid-19 pandemic and some of the anxiety around the future of office?

We're going full steam ahead. Our plan — we bought it almost exactly a year ago — over the past year, we’ve been working with our architect, our contractors and our design and planning process. In a strange way, we haven’t lost any momentum through Covid because you’re still able to do architecture, design and planning work. I was just on the phone with our architect and we’re moving full steam ahead with the plans. Our anticipated construction date is second quarter of 2021.

Has anything changed about the project's size or scope?

The size, scope and scale have not changed. We’re going forward with what we originally put up, which is that 375,000-square-foot building, a parking garage and retail on the ground level. We have made changes around the design that are reflecting the environment we’re living in. We’re in the process of that — we’re looking at the latest and greatest in building safety and technology, to incorporate those into this design. Touchless entry systems, air-purification systems — all the latest and greatest, we’re planning to incorporate here.

In a way, the timing actually worked out well for us, to step back and say, "What best practices can we incorporate into the design?"

Would you build speculative or require an anchor tenant before going vertical?

We’re planning to proceed and commence our construction in the second quarter. We hope to have a tenant in hand but if we don’t, we have confidence in the market and plan to proceed. Our plan is to build this building.

Since Shorenstein works nationally, I'm interested in hearing what your firm has seen as far as office-market impacts and challenges brought on by Covid-19.

It's different market by market. On a general basis, we’ve seen our rent collections slightly north of 90% each month. Considering what’s happening in the world, we’re encouraged by that. Our retailers and smaller tenants are struggling and we’re trying to work with those folks as best as we can in these trying times. Generally speaking, we’re cautious, we are trying to act prudently, whether it’s financially or working with tenants.

Nationally, it’s been a challenging year. We do think, from a firm view, that the concept of working in and being in office buildings is not going away. We do think that things and the way tenants and companies use space can change over time. That's not necessarily a bad thing, that can be a really good thing for our buildings and companies and help us design buildings in the best way possible, based on tenants’ needs. It's been a challenging year but we’re making our way through it and we’re trying to take a long-term view.

We’ve been around for 75 years. We've seen lots of upcycles and downcyles. We’re trying to be cautious ... and have an eye for optimism in the future, hopeful that we’ll come out of this one day. Cities like Austin, Charlotte and Denver and San Diego, Seattle, places like that, we’re just seeing tremendous growth.

Tell me about Shorenstein's capital structure and what you're observing with the debt and equity markets.

We raise our money primarily from endowments, foundations and high-net worth individuals from around the world. From the equity side, we’re fortunate to have plenty of capital at the ready.

By and large, other than some CMBS transactions, the debt market has been effectively turned off. It feels, right now — here we are in mid-October — it feels like it’s slowly coming back to life but very slowly and they’re very cautious right now.

Could that cautious debt market impact the East/West project and securing a construction loan?

Candidly, if there’s no debt market or no construction loans to be had, that will make it very hard for us. We will have to rethink it.

Even though the future is still uncertain because of the pandemic, do you see Shorenstein doing more projects in Charlotte?

The short answer is, yes. It's a market we like, it’s a market we think has great fundamentals, both now and looking into the future. Yes, I believe we will do more deals in the Charlotte market.

In each of these three projects, we’ve got a lot of work to do. We’ve been able to assemble three great sites, with two that have great partners and one on our own. I think right now, the burden is on us to deliver and execute and show the Charlotte market the kind of product we create. The focus is going to be executing on those three deals. Long term, we like the city and the market fundamentals.