Plano, Texas made headlines in late December when developer Sam Ware and his Silos Harvesting Partners snapped up the city’s 2.13 million sq. ft. J.C. Penney office campus for over $353 million. But as the saying (kind of) goes, one magnate’s loss is another’s treasure: Redevelopment opportunities for the massive deal seek to ride the wave of Dallas-Fort Worth’s strong employment fundamentals by creating a property that targets a new wave of office workers by incorporating the most desirable office trends.
Ware is the developer behind Silos Harvesting Partners, the company that purchased J.C. Penney’s Plano Campus. Silos is held in partnership under Dreien Opportunity Partners, which focuses on value-add commercial development. Ware is CEO of Dreien, while his managing partner Jeffrey B. Blakely serves as chief strategic officer.
“To buy this building today would run around $400 per square foot. If we had to create this building today, the land alone would cost $100 million and it would cost $800 million to build it. That was part of the attraction,” according to Ware.
Plano sits within the Dallas-Fort Worth Metroplex (DFW) to the northeast of Dallas and southwest of Frisco. The area has been experiencing robust job growth and corporate expansion recently. The U.S. Bureau of Labor Statistics has pegged 2016 unemployment at just 3.9 percent, about one percent higher than the U.S .as a whole (4.8 percent).
Job growth in the metropolitan area increased 3.8 percent year-over-year, with the economy adding 120,000 jobs in 2016, according to Kyle Palmer, regional manager at Marcus & Millichap’s DFW office. This is more than one percent above the state of Texas as a whole. Net office space absorption in Dallas-Forth Wroth has been positive for 81 consecutive months, according to real estate services firm Transwestern.
Total office vacancy in East Plano averaged 18.9 percent in the fourth quarter of 2016, according to real estate services firm CBRE, and year-to-date net space absorption in the city was 1.78 million sq. ft. That breaks down to 1.2 million sq. ft. for class-A space and 483,000 sq. ft. for class-B space for the year.
The total office vacancy in the West Plano and Frisco submarkets, which includes the Campus at Legacy West, stood at 11.6% for the fourth quarter 2016, according to Colliers. Year-to-date net absorption was 843,000 sq. ft. Class-A properties accounted for 791,000 sq. ft. t of net absorption, while Class-B properties added 51,000 sq. ft.
Reasons to sell, reasons to buy
J.C. Penney relocated to Plano in the late 1980s, and moved into the completed building in 1992. Originally, it held about 400 acres in Plano, referred to in the industry as “Grandma’s Land.” Recently, corporations such as J.P. Morgan, Fed Ex, Toyota and Liberty Mutual were among those to chip away at these land holdings with build-to-suit office development.
Meanwhile, the right-sizing that J.C. Penney had undertaken in the past five years reduced its total workforce in the building. When the department store approached CBRE for specific guidance on its Plano property, the brokerage firm recommended that the retailer needed to utilize only 65 percent of the building. And when J.C. Penney decided upon its sale-leaseback approach in February 2016 to reduce its debt, it broached the market with the request that the prospective buyer must also purchase 45 acres of surrounding land it owned.
“Plano is very self-sufficient, it is its own hub,” says John Conger, executive vice president in the Dallas office of real estate services firm Colliers International. Conger and David Quisenberry head the leasing efforts for the Campus at Legacy West, which includes the J.C. Penney campus, and will soon take over from CBRE who headed the sale-leaseback. Colliers forecasts that within 18 months, 20,000 new employees will be moving into the area.
The department store chain could use the liquidity from the sale. As of October 29, J.C. Penney is carrying a long-term debt load of about $4.5 billion, including total current liabilities of $2.9 billion, according to SEC documents. But its credit has been improving, with three credit upgrades since Ware closed on the deal, he says.
Ware and Blakely call the acquisition of the building a “once-in-a-lifetime opportunity,” saying they were fortunate to be selected. After touring the building prior to the sale, Ware says they discovered an additional 300,000 sq. ft. on the mezzanine level, taking total leasable square footage to more than 900,000 sq. ft. At approximately 2.13-million-sq.-ft., the complex is one of the largest multi-tenant corporate buildings in Texas, he notes.
Ware has now undertaken master-planning for the 45 acres of land and has hired two land brokers from Davidson & Bogel to facilitate.
Now releasing efforts for the remaining 35 percent of space call for more corporate tenants, according to Ware, who has hired Colliers International as the property’s tenant representative. Colliers is currently touring the building with all of its tenant reps in the market, he says.
“The remaining vacancy will be used for large office tenants, as the property has large and efficient floor plates,” Conger notes. Conger would not say what companies are being targeted.
However, according to Palmer, the top engines for job growth in the area over the past year have been technology, financial services, telecommunications and transportation. He notes that the DFW Metroplex is home to about 43 percent of the state's high-tech workers and added 44,000 jobs between 2011 and 2015, second only to the San Francisco Bay area.
‘Amenities on steroids’
Redevelopment is being funded with more than $100 million for building upgrades and tenant amenities, targeting what Blakeley calls “amenities on steroids” for employees working there. Blakeley’s firm will contribute nearly $70 million to the endeavor, and J.C. Penney will invest more than $30 million.
“We inherited a spectacular amenity package, to which we will add more. We approached our on-site amenities with the theme of ‘we want to save your Saturday,’” Ware says.
At the moment, the complex is the only Plano office property with a Starbucks, a Subway sandwich shop and a pharmacy on site, according to Conger. Overall amenity space at the property totals 50,000 sq. ft. and includes a health clinic, a child care center, a gym, a Walgreens and a food court, in addition to the Starbucks and Subway.
“It’s hard to do massive amenities in smaller buildings, but this one will house 7,000 to 8,000 people. Economies of scale make it easier,” Blakely notes.
New amenities at the property will include expanded medical offices to accommodate two dozen doctors and a dentist; upgraded child care facilities for over 250 children; a dog kennel; and a food cafeteria offering $5 take home-meals that come with a salad and two sides. Beginning in three weeks, there will be a dry cleaning drop-off service with text message alerts for when to pick up clothes. Ware is also building out an on-site car wash and Ware and Blakeley are in talks with J.C. Penney to add a Sephora and a salon to the property, citing the strong relationship between J.C. Penney and Sephora. They are unable to comment further until the deal has been finalized.
Although Ware’s firm is working on integrating current service providers into the space (as well as bringing in additional ones), he had a tough time instituting new rules. J.C. Penney had granted the original service providers a serious sweetheart deal: they went rent-free.
“Every one of those service providers paid no rent for 25 years. We had to tell them 'party’s over' and they did avoid us for the first few weeks,” Ware says. “But we structured a gradual rent increase: as services in the building make money, they will pay more over time. We had to tell them ‘we love offering amenities, but guys, we are not Penney’s. We are a private investment company and our investors don’t like free.'”