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High Street

Situated in Desert Ridge, Arizona’s largest master-planned community, in the Scottsdale Trade Area of Phoenix. High Street, formally CityCenter of CityNorth was a mixed-use development that had had the misfortune of opening on September 1, 2008. When it came on the market, we knew it deserved serious consideration. Our extensive due diligence revealed an opportunity poised for significant growth, buoyed by a recovering economy, high residential occupancy rates, compelling demographics, and proximity to attractive amenities.

We moved quickly, partnering with a private equity group, to purchase the property for $67 million in 2013—23% of the original construction cost in 2008. We rebranded the project as High Street, an up-market, live-work-play district, and committed over $30 million in tenant improvements and capital enhancements.

By stabilizing and repositioning the project, we have increased office occupancy from 41% to over 90%, increased retail occupancy from 38% to over 60%, and maintained the already high residential occupancy rates—exceeding projections. Today, High Street is known as the only “Don’t Miss District” in North Phoenix.

THE OPPORTUNITY

High Street is a 628,000 SF, Class A, mixed-use project on 24.2 acres located in the Desert Ridge area of North Scottsdale, a Phoenix submarket. At the time of the offer (March 8, 2013), High Street comprised 99 residential units; 330,000 SF of Class A office space; 175,000 SF of ground-level retail space; a 1,418 stall six-level parking garage; 458 surface parking stalls; and a 4.9 acre land parcel.

The project was a real estate owned (“REO”) asset offered for sale by a special servicer representing two lending institutions. It was developed and opened in December 2008 by a joint venture of Related Companies in NYC and Klutznick of Chicago.

SKB’s pre-purchase due diligence demonstrated that High Street was exactly the kind of exceptional, but under-appreciated asset in which we historically invest. In this case, we felt the project would benefit from a rebounding local economy and:

  • High occupancy of the residential units, which covered a majority of project operating expenses at acquisition
  • Close proximity to desirable residential communities (Scottsdale, Desert Ridge and Paradise Valley) with strong demographics, which include average annual household incomes of $115,000 and median housing prices of $350,000 within a 10-mile radius of the project, according to a 2012 Nielsen Company report
  • Being located less than a mile from the Mayo Clinic, a 750,000 SF treatment facility currently undergoing expansion work to consolidate its cancer treatment centers with its other Scottsdale location, which is expected to add over 800 jobs to the facility over the next 10 years
  • Close proximity to the JW Marriott Resort Hotel (a 950-room resort style hotel, considered Arizona’s largest hotel with an average daily rate of over $200 per room) and the Desert Ridge Market Place (a 1.2 million SF outdoor shopping center blending big brand retailers with outdoor recreation space and an 18-screen cinema)
  • Easy access to major freeways (the 101 Loop and the SR-51 running North/South) and excellent visibility from the freeways
  • Absorption for the Phoenix metropolitan statistical area (MSA) of over 1.8 million SF of Class A and B office space and over 1.5 million SF of retail space in 2012

THE RESPONSE

The purchase price of $67 million represented a substantial discount from the project’s 2008 development cost of $330 million. At the time of the offer, the property was approximately 50% occupied and was offered at 23% of its construction cost.

Based on our thorough assessment of the opportunity, SKB acquired 100% of the leasehold interest.

SKB acquired High Street by co-investing with a private equity group based in Wayzata, Minnesota that focuses on opportunities in undervalued debt, equity and assets. They also recognized the upward momentum in the High Street area and agreed that the High Street property had the potential to benefit from higher occupancy of the residential units. Its close proximity to upscale residential communities and the JW Marriott Resort Hotel, as well as easy access to major freeways underscored what appeared to be a significant opportunity for success.

SKB’s business plan for the property focused on repositioning the project as an entertainment district to live, work and play in, featuring themed and higher-end restaurants, high-end multifamily rental accommodations and Class A office space, and possibly developing a hotel or residential project on the 4.9 acre excess land parcel.

SKB and our partner moved quickly to:

  • Acquire additional land and construct a 236-stall parking structure
  • Increase office occupancy from 41% to over 90%
  • Increase retail occupancy from 38% to over 60%
  • Maintain residential occupancy
  • Rebrand the project as High Street, an up-market mixed-use project
  • Improve interior and exterior signage
  • Reposition lobbies to drive office occupancy towards creative uses
  • Place financing on the project
  • Lease up retail space with best-in-class restaurants.

Overview

$

67

million

PURCHASE PRICE

$

45.1

million

TOTAL EQUITY

4.3

years

HOLD PERIOD

9.4

percent*

REALIZED IRR

*This overview does not necessarily reflect or predict the performance of any future transaction, or the actual performance of any other past transaction. The returns shown do not represent an overall track record, and returns and performance vary substantially transaction to transaction. In some cases transactions have resulted in the total loss of investment.

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