H&S Propeties' Michael S. Beatty (right) on the development's scale: "Harborplace is 130,000 square feet for both pavilions. Inner Harbor East [will have] over 400,000 feet of retail. So it's three-plus times the size of Harborplace." (January 7, 2002) |
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bal-question0107
John Paterakis Sr.'s H&S Bakeries built a fortune selling bread. Now his H&S Properties Development Corp.
is betting that making buildings rise in Fells Point will move downtown's center east. H&S Properties' Michael S. Beatty recently discussed the firm's big plans and its efforts to continue development in a downturn.
How many development projects do you have under way in the city now?
We look at it as one big project, but if you look at it individually, we have the Bond Street Wharf office building, the Fells Landing garage and condominiums, and the Bond Street townhouses. That stuff is either under construction or just about to be under construction. Then at Inner Harbor East we have two projects that are about to come out of the ground. A big office building at 800 Aliceanna Street -- it's a 330,000-foot office building, about 50 loft apartments, 150-unit extended stay hotel, a 50,000-foot health club and about 60,000 feet of retail space. We also have 801 Aliceanna Street that will start construction around the same time. That's 330 apartments, 30 waterfront condos and about 60,000 square feet of retail and restaurant space.
Inner Harbor East is by far your biggest project isn't it?
Inner Harbor East is about 3 million square feet total. If you look at all the holdings we have along the water there, we can build about 7 million square feet. So, it's close to half of the project. I look at it as the biggest because it's without question the densest.
And it will cost about $210 million?
The next phase, just those two buildings, is $210 million. Inner Harbor East, total, we've already spent $250 million and we still have two big blocks left. At the end of the day, it's going to be $450-, $550-, $650-million project.
It's been described as the largest by a private developer ever in the city. Bigger even than Harborplace.
I certainly believe so. Here's an example: that next project I just talked to you about has 50,000 square feet of health club and 60,000 square feet of retail, so that's 110,000 square feet of "retail" space just in that one parcel. Harborplace is 130,000 square feet for both pavilions. Inner Harbor East [will have] over 400,000 feet of retail. So it's three-plus times the size of Harborplace.
Developing something of that size in this economy, has the downturn kept you up at night?
The project keeps me up at night, without question. It's just not an easy project. The problem is that you've got a project that spans 70 acres effectively. And you are building a parcel at a time. So you've got to make each parcel work as a project, but then you've got to make it work when it's done too. Trying to figure out the center of the project, trying to create a Main Street, is really difficult.
The way the economy is going, there are some positives to it. Interest rates are low. Tenants are not making decisions right now. We feel strongly about the overall economy in this country and we feel strongly about the economy of Baltimore. Our focus has been attracting suburban tenants to the city. That's what we've tried to do, and we've been successful with Sylvan Learning Centers being our largest [win so far.] And we've been successful in saving tenants that would have otherwise moved out of downtown. We think we get there by offering a quality of life that is better than the suburbs.
Has the city's real estate market peaked? Combined with what Cordish is doing, there is a tremendous amount of building going on downtown right now.
Baltimore does not have a lot of hotels. It does not have a lot of residential downtown and it doesn't have a lot of offices, in reality. So, the city can afford growth. What you want to avoid is growing too fast.
The whole idea is grow as fast as you can to keep the vacancy rate at something that's reasonable so the developers don't get killed. The question is, do we put too many buildings downtown? Who really knows that? There are a lot of arguments to be made for cities that got a lot of buildings up even in tough times. It made the city a stronger city. When the economy turned around, they had a lot of space available.
As the economy peaked there was a big push up in land values. That has all come back down again. I think people need to be realistic about the value of projects and rents and things that are going to drive tenants and development. I think we're still in an economy that a lot of these projects need assistance to keep the momentum going. If you take Inner Harbor East as an example, we built the [Marriott Baltimore Waterfront] hotel that we just did. There was a lot of controversy about it. But from the city's point of view, yeah, they gave up some real estate taxes on that hotel, but that hotel has generated 800 new jobs, and it has already paid millions of dollars in sales taxes and taxes on construction. It's just a huge generator of economic development for the city.
Speaking of tax breaks, how important are the state and city tax subsidies to what you do?
The projects just don't happen without them. The bottom line is this: of all the projects we've done, not one penny has come out of those projects. We put it back in to build other projects. Paterakis and our team do very aggressive deals. Even though we get some subsidies on our projects, normal developers wouldn't do them.
We build projects for substantially lower returns than a lot of people that are in the development business. We look at things differently. John Paterakis builds these projects because he thinks they're right for the city in a lot of cases.
One of the last big pieces of undeveloped real estate around the harbor is the old Allied Signal chrome plant site in Fells Point. Has anything moved forward with your plans there?
We're working with Honeywell on the acquisition of that, and we feel we'll be moving forward within this next year. We're parking cars on it now.
Any idea about what's going to go there and when?
It's approved for 1.8 million square feet of mixed-use development. People get concerned; they say, "Oh my God, that's a lot of space." To give you an idea, that site is 28 acres, so it's almost a third again the size of Inner Harbor East, and we're building 1.8 versus 3, so it will be a much lower density, and we will have a very large park on the site.
Any sense of a timeline yet?
We think that parts of it could happen quickly. Within the next year we could be under construction on some parts of it. One of the important components of that is we need to work out another point of access to it other than just Caroline Street. We've been working on a bridge, and we need to get some resolution to that before development goes forward.
Is Baltimore's center of gravity moving east?
Without question. All of the new buildings, the private sector has all come down to the waterfront and to the East. That's really where the private-sector growth has been. That's where people feel safe and secure.
Is development replacing baking as H&S' main business?
No. Real estate is a peanut of the H&S operation. Yeah, we have a lot of development going on, but H&S is like a billion-dollar-a-year company. Our entire real estate development is smaller than probably their smallest bakery's business. The bakery is the breadwinner.
How many development projects do you have under way in the city now?
We look at it as one big project, but if you look at it individually, we have the Bond Street Wharf office building, the Fells Landing garage and condominiums, and the Bond Street townhouses. That stuff is either under construction or just about to be under construction. Then at Inner Harbor East we have two projects that are about to come out of the ground. A big office building at 800 Aliceanna Street -- it's a 330,000-foot office building, about 50 loft apartments, 150-unit extended stay hotel, a 50,000-foot health club and about 60,000 feet of retail space. We also have 801 Aliceanna Street that will start construction around the same time. That's 330 apartments, 30 waterfront condos and about 60,000 square feet of retail and restaurant space.
Inner Harbor East is by far your biggest project isn't it?
Inner Harbor East is about 3 million square feet total. If you look at all the holdings we have along the water there, we can build about 7 million square feet. So, it's close to half of the project. I look at it as the biggest because it's without question the densest.
And it will cost about $210 million?
The next phase, just those two buildings, is $210 million. Inner Harbor East, total, we've already spent $250 million and we still have two big blocks left. At the end of the day, it's going to be $450-, $550-, $650-million project.
It's been described as the largest by a private developer ever in the city. Bigger even than Harborplace.
I certainly believe so. Here's an example: that next project I just talked to you about has 50,000 square feet of health club and 60,000 square feet of retail, so that's 110,000 square feet of "retail" space just in that one parcel. Harborplace is 130,000 square feet for both pavilions. Inner Harbor East [will have] over 400,000 feet of retail. So it's three-plus times the size of Harborplace.
Developing something of that size in this economy, has the downturn kept you up at night?
The project keeps me up at night, without question. It's just not an easy project. The problem is that you've got a project that spans 70 acres effectively. And you are building a parcel at a time. So you've got to make each parcel work as a project, but then you've got to make it work when it's done too. Trying to figure out the center of the project, trying to create a Main Street, is really difficult.
The way the economy is going, there are some positives to it. Interest rates are low. Tenants are not making decisions right now. We feel strongly about the overall economy in this country and we feel strongly about the economy of Baltimore. Our focus has been attracting suburban tenants to the city. That's what we've tried to do, and we've been successful with Sylvan Learning Centers being our largest [win so far.] And we've been successful in saving tenants that would have otherwise moved out of downtown. We think we get there by offering a quality of life that is better than the suburbs.
Has the city's real estate market peaked? Combined with what Cordish is doing, there is a tremendous amount of building going on downtown right now.
Baltimore does not have a lot of hotels. It does not have a lot of residential downtown and it doesn't have a lot of offices, in reality. So, the city can afford growth. What you want to avoid is growing too fast.
The whole idea is grow as fast as you can to keep the vacancy rate at something that's reasonable so the developers don't get killed. The question is, do we put too many buildings downtown? Who really knows that? There are a lot of arguments to be made for cities that got a lot of buildings up even in tough times. It made the city a stronger city. When the economy turned around, they had a lot of space available.
As the economy peaked there was a big push up in land values. That has all come back down again. I think people need to be realistic about the value of projects and rents and things that are going to drive tenants and development. I think we're still in an economy that a lot of these projects need assistance to keep the momentum going. If you take Inner Harbor East as an example, we built the [Marriott Baltimore Waterfront] hotel that we just did. There was a lot of controversy about it. But from the city's point of view, yeah, they gave up some real estate taxes on that hotel, but that hotel has generated 800 new jobs, and it has already paid millions of dollars in sales taxes and taxes on construction. It's just a huge generator of economic development for the city.
Speaking of tax breaks, how important are the state and city tax subsidies to what you do?
The projects just don't happen without them. The bottom line is this: of all the projects we've done, not one penny has come out of those projects. We put it back in to build other projects. Paterakis and our team do very aggressive deals. Even though we get some subsidies on our projects, normal developers wouldn't do them.
We build projects for substantially lower returns than a lot of people that are in the development business. We look at things differently. John Paterakis builds these projects because he thinks they're right for the city in a lot of cases.
One of the last big pieces of undeveloped real estate around the harbor is the old Allied Signal chrome plant site in Fells Point. Has anything moved forward with your plans there?
We're working with Honeywell on the acquisition of that, and we feel we'll be moving forward within this next year. We're parking cars on it now.
Any idea about what's going to go there and when?
It's approved for 1.8 million square feet of mixed-use development. People get concerned; they say, "Oh my God, that's a lot of space." To give you an idea, that site is 28 acres, so it's almost a third again the size of Inner Harbor East, and we're building 1.8 versus 3, so it will be a much lower density, and we will have a very large park on the site.
Any sense of a timeline yet?
We think that parts of it could happen quickly. Within the next year we could be under construction on some parts of it. One of the important components of that is we need to work out another point of access to it other than just Caroline Street. We've been working on a bridge, and we need to get some resolution to that before development goes forward.
Is Baltimore's center of gravity moving east?
Without question. All of the new buildings, the private sector has all come down to the waterfront and to the East. That's really where the private-sector growth has been. That's where people feel safe and secure.
Is development replacing baking as H&S' main business?
No. Real estate is a peanut of the H&S operation. Yeah, we have a lot of development going on, but H&S is like a billion-dollar-a-year company. Our entire real estate development is smaller than probably their smallest bakery's business. The bakery is the breadwinner.
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