Trophy Properties can add prestige and stability to a property portfolio

By Michele Lerner

When the average tourist visits the Ala Moana Mall in Honolulu or gasps at the architectural beauty of the R.R. Donnelly Building at 77 Wacker Drive in Chicago, he doesn't usually think about who owns this prime real estate. But in the world of commercial real estate investment, owning a familiar landmark can add prestige and glamour to a property portfolio along with a dose of financial security.

Prestige or trophy properties run the gamut from upscale shopping malls and elegant hotels and spas to office towers, swank apartments and mixed-used buildings with both retail and commercial space. What makes these properties stand apart from other strong properties is something unique to each one, whether it is a spectacular location along the waterfront in San Francisco such as Pier One, or a beautiful 70-acre desert site in Arizona such as the Canyon Ranch Spa, or simply the distinction of being the largest mixed-use building in New England, such as the Prudential Center Complex.

REITs and REOCs choose to invest in prestigious properties for a variety of reasons, including the establishment of name recognition and the corporate identity of their company.

Reputation Matters

"Our company places a high emphasis on quality, with our total portfolio oriented toward high-end Class A and Class AA components," said Ken Moczulski, president of investments and chief investment officer for Crescent Real Estate Equities Company. "We recognize that the risks and returns associated with quality assets are positive. Quality properties will always have a higher occupancy rate, and they are more recession-proof, whether they are apartments, offices or hotels. When we decided to invest in the two Canyon Ranch spas, we looked at the 10-year history of high-end resorts and realized that higher-end resorts outperformed other properties over the balance of time."

When Boston Properties, Inc. acquired the Prudential Center Complex in Boston and the Embarcadero Center in San Francisco, the REIT's goal was to place trophy properties within its portfolio.

"A retail investor or an institutionalized investor can understand the type of asset our company owns when they see a highly familiar property such as the Prudential Center or the Embarcadero Center as part of our portfolio," said Elaine Quinlan, director of investor relations for Boston Properties. "While it is nice to be able to say we own these trophy properties and therefore benefit from a public relations standpoint, it is also financially beneficial to our company."

In May of 1998 when Boston Properties signed the letter of intent to acquire these two prestigious properties, Chairman Mortimer B. Zuckerman said, "Both the Prudential Center and the Embarcadero Center are irreplaceable premier office complexes in two of the best and most restrictive office markets in the country with significant barriers-to-entry. Both projects will be flagship properties for the company. Both properties offer high ratios of parking space to tenant space, which contributes significantly to revenue and income, and both provide extensive retail space that is fully integrated with office and public spaces. The office space in both the Prudential Center and the Embarcadero Center is 99 percent leased to tenants which are among the elite in their fields."

According to Philip Hoffer, vice president of real estate operations and asset management for Prime Group Realty Trust, "Having a significant property in our portfolio brings the rest of the portfolio up, and it certainly increases the comfort level with our REIT among our investors. Owning the R.R. Donnelly Building in Chicago and some of our other Class A buildings such as the IBM building in Chicago adds stability to our company. The savvy investor recognizes that trophy properties won't lose their value and can't be replaced, which makes investors more comfortable with their investment."

The strategy at Brookfield Properties Corporation, according to Rick Clark, president and CEO of Brookfield/US Commercial Properties, is to maintain the company's long-term profitability by investing primarily in prestigious properties.

"Our strategy is to own Class AA properties which are well-located, close to transportation hubs and technologically advanced, which will therefore attract highly creditworthy companies as our tenants," said Clark. "The reason we invest in these types of assets is that they outperform the market in good times and bad. There are no vacancy issues to deal with, and tenants are usually easy to attract and keep. This stability adds to our profitability."

Maximal Malls

General Growth Properties, Inc., owners of the Ala Moana Center in Honolulu and Tysons Galleria in Tysons Corner, Virginia, manages regional shopping malls throughout the United States.

"It helps to have these two prestigious properties in our portfolio for a variety of reasons, including the fact that they are both great malls which will retain their prominence and dominance in their markets for a long time," said John Bucksbaum, CEO of General Growth Properties. "From a retail perspective there are certain places where upscale retailers have to be, and both Honolulu and Tysons Corner are among those places. From a marketing and promotional standpoint, owning these two prestigious properties helps us attract both retailers and investors. However, we're a company rather than a collection of assets, although some of our assets are more notable than others. We don't shy away from marketing our prestigious properties, but they are part of our entire company. Other properties bring other things to the company."

The Ala Moana Center, a local landmark since it was built in 1959, is located just 1.25 miles from the heart of Waikiki and the new Hawaii State Convention Center. One of the most visited and profitable shopping centers in the world, The Ala Moana has been renovated and expanded several times. Today it is a three-level open air mall with an enclosed food court and 234 stores anchored by Neiman Marcus, Shirokiya, Sears, JC Penney and Liberty House.

"The tourist business that this mall receives is tremendous along with local business," said Bucksbaum. "We are positioned very well to serve mainland tourists, Asian tourists and locals, with a merchandise mix which ranges from local surf shops to Louis Vuitton and Chanel-type stores. We've been able to expand and improve the shopping center and we've been influenced by the customer traffic, not losing sight of the differences in what tourists and locals want."

General Growth Properties acquired the Ala Moana Center in 1999 through a highly competitive bidding process, and acquired Tysons Galleria as part of a package deal in 1995.

"Tysons Galleria, anchored by Saks Fifth Avenue, Neiman Marcus and Macy's, had a wonderful line-up of department stores and a first-class hotel, The Ritz-Carlton, as another anchor, but it wasn't doing well," said Mr. Bucksbaum. "Even though it has a beautiful setting, it's located near Tysons Corner Center, one of the top malls in the nation. The challenge was to figure out how to make our mall stand out even though there was this tremendous mall across the street. The demographics showed that an international mix of people live and work in the area, which supports having more upscale and high fashion retail stores including European retailers. We've gone heavily into fine dining, adding upscale restaurants to the mix."

The average household income of $95,000 in the immediate area, almost twice the national average, also helps the shopping center's profitability.

General Growth has also recently joined the bidding for its larger neighbor, Tysons Corner Center. The others with bids in place for the huge mall are Simon Property Group and Wilmorite, Inc. The Rouse Company is also reported to be interested in the property.

Mixed-Use Gems

The Prudential Center in Boston, acquired by Boston Properties along with the Embarcadero Center in San Francisco in 1998, also has a retail component within its 2.2 million square feet complex. Located on a 23-acre site in the heart of Boston's Back Bay, the Prudential Center is the largest mixed-use property in New England, including a multi-level retail complex with 465,000 square feet, three residential buildings and three office buildings. The 52-story Prudential Tower, the second tallest building in Boston, was developed in 1965. The complex is adjacent to the Hynes Convention Center, major hotels, shopping and residential areas and has over 3,000 underground parking spaces. Commuter access, an important part of attracting and keeping tenants, is provided by an on-site station of the Green Line of the MBTA mass transit system, along with a direct dedicated exit off the Massachusetts Turnpike.

The Embarcadero Center, sited on 8.4 acres of waterfront property in the heart of San Francisco's Financial District, is believed to be the largest mixed-use business complex in the western United States, consisting of an aggregate of approximately 3.66 million square feet of net rentable office space, 354,000 square feet of retail space and over 2,000 underground parking spaces. The six Class A buildings of the Embarcadero Center enjoy sweeping views of San Francisco Bay, the Golden Gate and Bay bridges and the San Francisco Peninsula.

In April 2001 Boston Properties acquired another trophy property, the Citigroup Center in New York City, a 59-story building with 1.6 million square feet and a highly recognizable silhouette built in 1977 and designed by Hugh Stubbins & Associates and Emery Roth & Sons. This 100 percent leased property brings to 4.5 million square feet of Class A office space owned and managed by Boston Properties in midtown Manhattan.

"We are delighted to complete the acquisition of Citigroup Center, an irreplaceable landmark asset in midtown Manhattan, one of the most supply-constrained office markets in the country. With it's high visibility on the New York City skyline and its high quality tenant roster, Citigroup Center will be a flagship property in the company's portfolio," said Zuckerman.

The retail portion of one of the best-known properties in New York City, the World Trade Center, was recently leased for 99 years to Westfield America, a Los Angeles-based REIT that owns and manages regional malls throughout the United States. Westfield's net leasehold covers approximately 427,448 square feet of retail space, which will be named "Westfield Shoppingtown World Trade Center." The World Trade Center's retail component has one of the highest producing sales volumes in America, with sales in excess of $900 per square foot. It serves 40,000 office workers, 150,000 daily commuters and is an important business and tourism hub.

"This is a special opportunity for us," said Westfield's CEO, Peter Lowy. "The World Trade Center is one of the most prominent office and retail complexes in the world, and we look forward to putting our management, leasing and development experience to work at this premier property."

Near the World Trade Center is the complex known as the World Financial Center, owned and managed by Brookfield Properties.

"The World Financial Center is basically a city unto itself," said Clark. "It consists of four buildings connected by a public space, called the ‘Wintergarden', which is a glass-enclosed atrium with unique architecture. The whole complex has over 10 million square feet, with about 200,000 square feet of retail space. It offers a unique office environment that is attractive to large companies looking for the best possible work environment. The building is technologically highly advanced and convenient for commuters as well."

A premier Chicago property, the R.R. Donnelly Building on prestigious Wacker Drive on the Chicago River, stands out even in a city known for its spectacular architecture. The building has achieved notable commercial success, opening in 1992 with 91 percent occupancy. Ricardo Bofill, a celebrated European architect, served as design consultant to the building, and the Chicago firm of DeStefano+Partners served as the architect. Particular attention was devoted to the building's lobby details and elevator cabs. The 42-foot ceiling height of the lobby creates a monumental space for museum-quality sculptures, natural bamboo plants, and a reflecting pool, and admits natural light from three directions. The award-winning building is included in the Chicago Architecture Foundation's tours of downtown office buildings. The R.R. Donnelly Building is up-to-date technologically, with microwave Internet connections, a fiber-optic network and a state-of-the-art, digitally controlled HVAC system.

Develop Your Own Trophy

AMB Property Corporation, a San Francisco-based REIT with primarily industrial properties, chose to create their own trophy property as their headquarters, known as Pier One, part of a massive waterfront redevelopment plan.

"We chose to invest in this project, which marks the first major renovation of one of San Francisco's piers in order to preserve this historic formerly industrial space," said Christine Schadlich, vice president for corporate communications for AMB. "We formed a partnership with the Port of San Francisco in 1998, at a time when we were both looking for new headquarters. This project seemed to be a metaphor for what we do. It's an industrial space, and we are an industrial company. We are not a glitzy company and we were sensitive about moving into some really expensive place. We wanted instead to create a unique environment that we could identify with our core business strategy. If people come to visit this space, it says a lot about AMB's culture. It has an open floorplan where even the CEOs sit in cubicles, we're very egalitarian that way, without a lot of hierarchy. There's a spectacular living room space at the tip of the pier where people can gather, which also increases our internal communication."

AMB worked with a local architecture firm, SMWM, on Pier One, which has over an acre of public space with an arched walkway and public promenade. While the windows were purchased from the English company which provided the original windows for the pier, modern innovations include state-of-the-art technology, underwater improvements to the stability of the structure and a unique environmental system which uses Bay water to cool the building, along with plenty of natural light and operable windows.

Getting Away From It All

Natural light and fresh air are part of the pleasure at both Canyon Ranch spas, one located on 70 acres in the foothills of the Santa Catalina Mountains in Tucson, Arizona, and the other sited on 120 lushly wooded acres in the Berkshire Mountains in Lenox, Massachusetts. Crescent Real Estate Equities Company, as part of the company's strategy to expand beyond their portfolio of office space, acquired both year-round luxury vacation destinations in 1998.

"We recognized that both of the Canyon Ranch properties are world class assets which can never be reproduced in the same manner," said Moczulski. "At the same time, the spas offer a unique lifestyle approach for their guests. We saw the value in acquiring properties which appeal to the baby boomer generation's work hard and play hard philosophy."

The Canyon Ranch spas offer fitness classes, tennis and hiking and biking programs along with a variety of spiritual awareness classes such as yoga, tai chi, chi gong and meditation. They also offer preventive health care assessments and guidance including consultations on stress management, transition and lifestyle change, along with skin care and beauty treatments. Canyon Ranch has been a pioneer in the development of spa cuisine.

Under the development of Crescent Real Estate, Canyon Ranch is spreading their healthy lifestyle philosophy through Canyon Ranch SpaClubs, which are day clubs that will be located in metropolitan areas. The first to open is the 65,000 square foot facility in The Venetian Resort-Hotel-Casino in Las Vegas.

While not all prestigious properties offer such a healthful environment as Canyon Ranch, trophy properties can be a key element in a healthy financial lifestyle for today's REITs and REOCs.