Block makes a $19M bet on the big box that started it all
By: Rob Roberts, KCBJ
An investment group led by Block Real Estate Services has acquired the Olathe distribution center operated by Pacific Sunwear of California Inc., which a decade ago became the first of many industrial big-box users to begin flocking to Southern Johnson County.
Brian Beggs, BRES director of acquisitions, said he could not comment on the Pac Sun property, which is at the northwest corner of 167th Street and Lone Elm Road. But according to sources in the brokerage community, Block paid about $19.4 million — or $43.60 a square foot — for the 445,000-square-foot distribution center.
Under the sale-leaseback deal, Pac Sun, which entered and exited Chapter 11 bankruptcy last year, signed a long-term lease for the building, which is its sole distribution center. In addition, a source said that the BRES investors received about 20 acres that Pac Sun had viewed as an expansion parcel during sunnier days for the Anaheim, Calif., seller of West Coast-style casual apparel, footwear and accessories for teenagers and young adults.
In 2006, Pac Sun announced plans to spend more than $39 million to build the distribution center on the Olathe site and eventually to double its investment, square footage and workforce there as sales continued to rise.
Olathe, where sewers were opening 800 acres for further industrial develoipment, supported the deal with a 10-year, 50 percent property tax abatement. And Ed Elder, then a broker representing Pac Sun and now president of Colliers International’s Kansas City office, correctly predicted that the catalytic project would heighten the entire metro area’s stature as a distribution hub.
With the subsequent recession and explosive growth in e-commerce, however, Pac Sun has struggled.
In 2008, when it consolidated all of its distribution at its year-old Olathe facility, Pac Sun operated 1,121 stores in 50 states and Puerto Rico.
Pac Sun had about 590 stores when it entered bankruptcy in April 2016, and it closed about 20 more during the Chapter 11 reorganization proceedings.
Pac Sun exited bankruptcy in September through a combination of cost cutting and a debt-for-equity restructuring agreement involving its senior lender, Golden Gate Capital.
But Dan Jensen, an industrial broker and developer with Kessinger/Hunter & Co. LC, said Pac Sun remains in a precarious position, accounting for part of “the hair on the deal” that allowed the BRES investors to acquire the Pac Sun property for an attractive price.
“The other factor,” Jensen said, “is that all the other buildings in that area have real estate tax abatements, but it no longer does.”
If Pac Sun survives, Jensen added, “then Block made a decent deal and got some ground for free. If it blows up, they’ll have to roll up their sleeves and retenant the building" at a rate competitive with neighboring buildings still under abatements.
Jensen, who referred to BRES Managing Principal Ken Block as “a gunslinger,” has made some bets on his own on the Olathe industrial market. In 2008, he led the Kessinger/Hunter and Sun Life partnership that developed what was then the largest area distribution center ever built on a speculative basis, meaning without tenant commitments. That 602,000-square-foot building is immediately south of the Pac Sun building, and there it sat empty until FedEx SmartPost signed a long-term lease for 126,000 square feet midway through 2009.
At the time, Jensen described the FedEx lease as “a real endorsement” for the spec distribution center and for the Southern Johnson County industrial market in general.
A few months later, Bushnell Outdoor Products, represented by BRES, signed a lease for 222,000 square feet in Jensen’s spec. And from there, the Southern Johnson County market has exploded, with developers such as VanTrust Real Estate joining the spec fray and with Jensen and NorthPoint Developmentslugging it out for “largest-ever Kansas City spec” status.
Kessinger/Hunter & Co. held the title in 2012, when it announced a 821,663-square-foot spec in its new I-35 Logistics Park in Olathe. But NorthPoint seized the record, by 441 square feet, in 2015 with a new 822,104-square-foot speculative industrial building at Logistics Park Kansas City in Edgerton.
Last year, NorthPoint announced an even larger spec, a 927,000-square-foot spec building at Logistics Park Kansas City.
By the end of this year, NorthPoint will have finished 16 buildings totaling nearly 9 million square feet in LPKC, which has capacity for 17 million square feet of warehouse and distribution facilities.
Meanwhile, the Kansas City-area industrial market that got a jolt from Pac Sun 10 years ago has surged to No. 7 on the list of U.S. markets that have added the most industrial space since 2010.