COVER STORY, JUNE 2008

RESPONDING TO THE MARKET
Acadia Realty Trust is focusing on urban retail development.
Stephanie Mayhew

For the past several years, Acadia Realty Trust, a fully integrated and self-managed real estate investment trust headquartered in White Plains, New York, has been taking cues from the marketplace and planning accordingly. Acadia, which specializes in the acquisition, redevelopment, operation, management and leasing of retail properties throughout the United States, recognized that the commercial real estate market was favoring the seller, so Acadia in turn, pared down its portfolio. According to Ken Bernstein, president and chief executive officer of Acadia, the company has sold the bottom half of its stabilized portfolio, totaling approximately 5 million square feet. The REIT then redeployed that capital into various value-added fund investment vehicles, spending most of its time and energy either on the opportunistic side, with their Retailer Controlled Property Venture, or the value-add side of the marketplace with urban/infill redevelopments.

Acadia Realty Trust’s mixed-use project, located on Fordham Road in the Bronx, will include a mix of tenants such as Best Buy and Walgreen’s.

While Acadia has spent much of its time and investment dollars on properties ranging from Washington, D.C. into New England, the REIT has been focusing heavily on the Northeast markets, especially New York City. “So far to date, we have felt that the opportunities are better in New York City and we know this market,” says Bernstein. “New York City has a host of attributes that are very unique to it in terms of its barriers to entry, so as long as we see opportunities here we are going to continue working in this market.”

Throughout the five boroughs, Acadia has 10 projects totaling 2.5 million square feet of urban mixed-use redevelopments that primarily contain retail space, and the company is projecting approximately $1 billion in development and redevelopment costs overall for these projects. Acadia is developing these projects through its multi-year venture with P/A Associates. Although in the past, Acadia had focused its attention on suburban markets, Bernstein remarks that urban markets are the best place to be for the REIT right now. “Our view has been that the higher barrier to entry assets, whether they are suburban or urban will outperform the projects that are in a less supply constrained market,” he says. “Over the past few years as cap rates continued to decline and risk premiums continue to compress, the cap rate differential from A product to B product or B to product to C product had become so narrow, it made sense to spend our resources in the highest barrier to entry and the highest supply constrained markets.”

Acadia Realty Trust is currently developing the retail portion of City Point, a 1.5 million-square-foot project set within downtown Brooklyn on Flatbush and Fulton streets.

Acadia’s current projects range from a multi-level and mixed-use project on Fordham Road in the Bronx, which will include a Best Buy and Walgreen’s, as well as a mix of existing tenants, to a larger transaction in downtown Brooklyn on Flatbush and Fulton streets, the 1.5 million-square-foot City Point project. “Fulton Street is the number one retail corridor in Brooklyn,” says Bernstein. “It has more then $1,000 per square foot in sales and a very strong tenant demand for space.” The City Point project is currently in the demolition stage with construction set to commence in the next 12 months. Bernstein notes that the area has gone through a major renaissance over the past 5 years and is a great place for families to live; therefore, all types of retailers are looking to capitalize on the growth and set up shop in the Brooklyn area.

In Pelham Manor on the Bronx/Westchester border, Acadia is developing the Pelham Manor Shopping Plaza, a mixed-use development that is set to be complete by year-end. Signed retailers include Home Depot and Circuit City, as well as another 50,000 square feet of retail tenants. In addition, a Storage Post will be situated on top of the retail portion. “Self storage is in demand in the boroughs, but it is hard to find land to build self storage that justifies the cost on its own,” explains Bernstein. “However, when you put it on top of the retail component, the cost works. And since self storage does not need a significant parking demand, it is complementary to the retail use as opposed to other types of tenants.” The 234,822-square-foot project is being developed in partnership with P/A Associates. The development is only 10 miles north of Manhattan and is accessible from Exit 7 of the Hutchinson Parkway and is just off Boston Post Road.

On 161st Street and Morris Avenue in the Bronx, Acadia is redeveloping an existing 13-story office building adjacent to the bustling Concourse Shopping Plaza.

On 161st Street and Morris Avenue in the Bronx, Acadia is redeveloping an existing office building just 3 blocks from Yankee Stadium. Bernstein believes that the project, located at 260 East 161st Street, will meet the high demand for retail in an underserved area. The 13-level project is adjacent to the bustling Concourse Shopping Plaza and across the street from the new Bronx Courthouse Complex.

In Upper Manhattan, across the street from Fort Tryon Park, Acadia is redeveloping a parcel for a 216,000-square-foot mixed-use project at the triangular intersection of Broadway and Sherman Avenue. Sherman Plaza will feature 25,000 square feet of retail space on the street level. “Ten years ago, the area was blighted, but now there are a significant amount of families moving there,” noted Bernstein. “Retailers stayed out of this area, but as the density increases there is a huge demand to be here.” Sherman Plaza is also being developed in partnership with P/A Associates.

Canarsie Plaza, a mixed-use project located at the intersection of Remson Avenue, Avenue D and Foster Avenue in Canarsie, Brooklyn, will feature retailers such as Home Depot and Storage Post.

Acadia is also developing Canarsie Plaza in Canarsie, Brooklyn. Located at the intersection of Remson Avenue, Avenue D and Foster Avenue, the mixed-use project will include retailers such as Home Depot and Storage Post. “There are certain neighborhoods in New York City that are under retailed, and the city has such great fundamentals that in good times and even in difficult financial times, there is always demand by strong retailers to get into prime locations,” notes Bernstein. “In the U.S. there are 22 square feet per capita of retail, but in New York City, the ratio is more like 6 to 1, so there is just a huge demand from retailers.”

In addition to a plethora of redevelopment in the five boroughs, Acadia keeps an eye out for opportunistic and value-added acquisitions located throughout the United States. “When we can buy opportunistically existing assets, we absolutely will do it,” says Bernstein. “Acadia is as interested in buying existing assets as building new ones.” Acadia was part of the investment consortium that acquired   Mervyn’s Department Stores and Albertson’s Grocery Stores.

The Mervyn’s/Albertson’s investments were purchased through a venture that was created in 2004 with Acadia’s long-term capital partner, the Chicago-based Klaff Organization. “The fund is specifically focused on buying real estate from retailers or buying retailers themselves where there is a strong real estate opportunity,” notes Bernstein.

The majority of the REIT’s acquisitions and redevelopment efforts are financed through discretionary investment funds. The company’s first fund was launched in 2001 and its most recent fund was launched last summer — a $500 million equity fund to buy or build $1.5 billion of assets. “I expect to see other REITs start funds, but it is a different type of skill set, so it may not be adopted as easily as it may appear. The operating of discretionary investment funds like ours where we are fiduciaries and have sole discretion is a complicated process,” Bernstein explains. “It can take a long time to build the kind of investor base needed to get these type of funds up and running.”

Despite many economic rumblings, Acadia sits in a strong financial position with a significant amount of cash and line availability on its balance sheet. The REIT also has limited financing risks and no debt returning to its balance sheet until 2011. “Acadia’s recently launched fund will enable it to almost double its assets under management in the next couple of years, and we can afford to be patient and opportunistic,” says Bernstein. He also notes that for the remainder of 2008 and on into the future, Acadia will continue the kind heavy lifting development that company has been doing in the New York area, as well as continue to seek opportunistic investments, whether it is by distressed debt, by restructuring partnerships or buying into retailers for their real estate.

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