Phila. fund buys 2d half of Gallery mall Under new leadership, "different things" to come for shopping complex

Posted: March 17, 2004

A Philadelphia real estate investment fund is buying another big piece of the Gallery at Market East mall in Center City.

The so-called Gallery II, built as an expansion of a complex that includes the original Gallery, is being purchased by Pennsylvania Real Estate Investment Trust from the state's Public School Employees' Retirement System.

PREIT will pay $32 million in cash for the purchase from a credit line with Wells Fargo Bank.

Shoppers are not going to notice any quick and sweeping change once the transaction is completed in the next quarter, PREIT chief executive officer Ronald Rubin said in announcing the sale yesterday.

FOR THE RECORD - CLEARING THE RECORD, PUBLISHED MARCH 30, 2004, FOLLOWS: Five stories since early December have misidentified the real estate consulting company run by M. Walter D'Alessio. He is president and chief executive officer of NorthMarq Advisors, a real estate consulting group. At the end of September, NorthMarq Capital Inc. completed its acquisition of Legg Mason Real Estate Services Inc., which D'Alessio had run for years. The following incorrectly listed the previous name of NorthMarq: A Dec. 8 story in the Business section on hotel tax breaks, a Jan. 4 profile of Ira Lubert in the Sunday Business section, a graphic that ran with a March 14 article that ran on Page 1 on the Delaware River Port Authority, a March 17 article in the Business section on the sale of the Gallery at Market East mall, and a column in the Monday Business section on WHYY.

In fact, he said, there has been no big change yet at the original Gallery, which PREIT acquired in April 2003 from the Rouse Co., of Columbia, Md. The entire complex runs along the north side of Market Street from Eighth to 11th Streets. Rubin said a piece of the shopping mall, that includes a Kmart, is owned by Vornado Realty Trust of Paramus, N.J.

PREIT will first try to fill vacancies in Gallery II, he said. It is slightly more than 78 percent occupied. Among its tenants are Burlington Coat Factory Warehouse, Old Navy, Foot Locker and Bath & Body Works.

A spokeswoman for the school retirement system declined to comment on the sale, saying it was a pending transaction. The property was valued at $23 million in early 1999, according to unaudited records of the retirement system.

Walter D'Alessio, chief executive of Legg Mason Real Estate Services in Philadelphia, which was an adviser to the retirement system years ago, said the mall had struggled with several handicaps. They include its urban location, which makes it less attractive to retail enterprises, D'Alessio said.

It also poses unusual challenges and brings special costs for its owners because it must provide access to the Market-East SEPTA station, atop which it sits, to maintenance crews, he said.

PREIT is paying $97 a square foot for the acquisition. It paid more than $140 a square foot in 2000 when it bought the Willow Grove Park mall from Lend Lease Real Estate Investments of Atlanta, according to Robert Fahey, now a broker at CB Richard Ellis in Philadelphia, who represented Lend Lease in that transaction.

The retirement system was a partner with PREIT in that deal, though the system soon sold its share to the investment trust.

"It is a classic PREIT acquisition - buying assets that are undervalued and creating value through more effective management," Fahey said of the Gallery deal.

PREIT also will be able to unify the marketing for both sections of the Gallery, he said. He noted that PREIT had lured a Macy's store to Willow Grove and renovated its interior.

Besides the original Gallery, which is more than 90 percent occupied, PREIT's local properties include the Exton Square, Plymouth Meeting and Cherry Hill Malls.

PREIT, a publicly held pool of money for real estate investments, owns 54 malls and shopping centers and four industrial properties along the East Coast - including 20 malls in Pennsylvania.

In recent years, it has shed stakes in apartment buildings to concentrate on retail property. In November, it completed the $1.4 billion acquisition of Crown American Realty Trust, of Johnstown, Pa., owner of a string of small-town malls.

"This is a business we know," Rubin said in an interview. Retail-store tenants offer a greater opportunity for expansion than office or residential tenants, he said. "You could put a retailer into half a dozen properties," he said.

With the acquisition of the Gallery extension, PREIT will own half of the 1.1 million square feet of shopping space at Market East.

The company's stock rose 32 cents yesterday to close at $35.75 on the New York Stock Exchange.

Rubin said PREIT would be "doing different things," including changing some tenants, to try "to improve the Gallery properties so they can be properties Philadelphia will be proud of."

One thing not currently part of the calculation is bringing gambling slot machines to the shopping center, Rubin said.

While he has been among those who have discussed the possibility that the state could authorize slots, there is no legislation yet on the issue, he noted.

In any case, he said, "it's not the reason we acquired the property."

Contact staff writer Porus P. Cooper at 215-854-4761 or pcooper@phillynews.com.

Staff writer Joseph N. DiStefano contributed to this article.

The Gallery II

Opened: 1983.

Location: Market Street between 10th and 11th Streets.

Size: 328,000 square feet.

Sales: $393 per square foot, as of Dec. 31, 2003.

Occupancy: 78.3 percent, as of Dec. 31, 2003.

Anchor tenant: Burlington Coat Factory Warehouse.

Other tenants: 51 stores, including Old Navy, Foot Locker, Bath & Body Works, Limited, Express and Lerner.

Current owner: Public School Employees' Retirement System.

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