🔒Greenwich investor sees upside after $40M Blue Back Square bargain buy

Retail property investor-operator Charter Realty & Development has long coveted West Hartford’s Blue Back Square as a potential crown jewel for its Connecticut portfolio, and now the Greenwich-based firm’s patience has paid off.

Charter saw the 450,000-square-foot mixed-use center slip through its fingers eight years ago when it was outbid by Greenwich neighbor Starwood Capital Group, which paid nearly $105 million for the upscale development with anchor retail tenants like Crate & Barrel, West Elm, Barnes & Noble and Cinépolis Luxury Cinemas, as well as 48 apartments and 200,000 square feet of office space, all adjacent to trendy West Hartford Center.

“Since that time, we’ve obviously done a lot of other work, but we’ve always had an eye on Blue Back and always felt it was a terrific asset,” said Paul S. Brandes, Charter Realty’s co-principal.

Being the runner-up bidder in 2013 may have been a blessing in disguise, it turns out. Charter and its joint partner Rialto Capital of Florida recently scooped up Blue Back for just $40 million, according to public land records.

Why the drop-off in value?

“We purchased the property at a market price and I would tell you that is dictated by the fact that there is a significant amount of vacancy that needs to be filled and there are a number of weaker merchants that over time we suspect will be replaced,” Brandes said.

Charter posted Blue Back’s leasing map on its website this month, showing nearly 57,000 square feet of commercial and retail space — approximately 27% of the total — available for lease.

Available space doesn’t necessarily equate to vacant space (for which rent is not currently being paid). Brandes declined to disclose the property’s vacancy rate, which has historically been low at Blue Back (less than 10% when Starwood bought it in 2013).

Blue Back bar

Many retail properties face increased uncertainty, but it’s not exactly clear why Starwood would sell Blue Back at such a discount — 62% less than what it paid in 2013.

Starwood didn’t respond to a request for comment for this story. However, its CEO Barry S. Sternlicht told investors in February that more retail tenants in general have sensed greater leverage during the pandemic and used it to push for rent concessions from landlords anxious they wouldn’t be able to refill the space if the tenant walked away. The quickly-evolving dynamics have made it more challenging for Starwood, which competes in a number of other real estate sectors, to underwrite loans for retail properties.

“Having said that, I believe people are going to shop again in physical retail,” Sternlicht said. “It’s just, where will it stabilize? Rents won’t be higher. I don’t see that happening.”

Tim McNamara is a retail broker with Farmington-based SullivanHayesNE who has represented several Blue Back tenants, including a recent lease signed by Sola Salon Studios. He said Blue Back has fetched high rents during many of the 14 years since it was built, and the rates have priced out some would-be tenants.

“It’s a great space, but the rents in Blue Back have been prohibitive for some folks,” McNamara said, citing restaurants as facing particular challenges.

Given the price Charter is paying Starwood, McNamara says he’ll be watching whether the new ownership might be more flexible on leasing terms, particularly for otherwise desirable tenants that could boost foot traffic.

However, he doesn’t expect to see major discounts. While there has been some downward pressure on rents in the region, the retail sector has done better than some expected during the pandemic.

“You’ve got holes here and there but you don’t see widespread retail desolation here,” he said. “The market is actually bouncing back.”

Brandes, whose firm has properties in 10 states, agrees with that.

“Our portfolio held up exceedingly well,” he said. “At no time was our [overall] occupancy less than 95%.”

For brick-and-mortar stores, COVID-19 mostly accelerated the impact of pre-existing trends like online shopping.

“I would equate it to a forest fire that took place,” Brandes said. “Retail was overbuilt, certain merchants were undercapitalized or underperforming and over time they would have disappeared, but no one thought it would happen in one moment.”

A growing CT portfolio

Charter is experienced in the Greater Hartford real estate market, where it operates a dozen properties including Westfarms Center adjacent to the Westfarms mall, Hartford’s Front Street District and a number of grocery-anchored retail plazas.

Charter manages leasing for many properties, but is increasingly moving toward an ownership model.

Its Blue Back Square purchase comes not long after it acquired South Windsor’s Evergreen Walk, a 450,000-square-foot open air retail center that Brandes said is struggling with elevated vacancies.

Charter is working to bring a grocery store anchor to Evergreen, which Brandes said could be announced soon, and he also sees benefits from several new or ongoing adjacent South Windsor projects, including construction of an Aldi’s and Costco store.

“The area could use more density to drive the customer base to this location,” he said. “Evergreen Walk 2.0, we’ll call it, will not solely be a lifestyle center, it’ll have attributes of a community center with lifestyle retail but also services and grocery.”

Charter’s Blue Back vision

After more than a year of pandemic safety restrictions and declines in store traffic, Gov. Ned Lamont gave Connecticut businesses the greenlight to fully reopen a month ago.

Not all have come back though. At Blue Back, fitness operator New York Sports Clubs remains shuttered after its ownership chain filed for bankruptcy last year and its nearly 33,000 square feet of space is listed as available for lease on Charter’s website.

Meanwhile, the former Bar Louie’s space is still vacant and Balos Estiatorio, which closed just prior to the pandemic to rethink its menu, has not reopened.

“Our job is to recreate foot traffic at Blue Back and to enhance the pedestrian and customer experience,” Brandes said. “We intend to do that very actively by bringing in more relevant tenants that the consumer is looking to shop at or be serviced by.”

Blue Back needs additional entertainment offerings, redesigned outdoor spaces more conducive to public gatherings (perhaps including lawn seating and fire pits), larger outdoor dining areas and a greater number of short-term parking spots to accommodate the pandemic-fueled boom in restaurant pickup orders, Brandes said.

Filling individual spaces with new tenants is one challenge.

In McNamara’s view, Blue Back’s tenant mix now vs. when it was built, as well as the ever-shifting competitive landscape, presents other challenges for Charter to tackle.

West Hartford Center is drawing more nightlife traffic, he said, while the nearby Westfarms mall, which has maintained a 95% occupancy rate during the pandemic, has increasingly become a top choice for fashion retail.

McNamara, who lives in town and was an early cheerleader of Blue Back, said Charter may want to focus on adding more tenants to its existing niche of design retailers.

“Then you’ve got a real theme there,” he said.

Whatever Charter ends up proposing, it will likely require local approvals. Town leaders are receptive.

Mayor Shari Cantor said Blue Back was first designed and approved with community gatherings in mind, and it has served that function well over the years. Still, she’s hopeful Charter can make it an even bigger draw.

“They view this as a signature project for them,” Cantor said of Charter. “We’re really looking forward to working with a partner that is very engaged and invested.”

While Starwood seems to think less of Blue Back’s value today, McNamara said Charter could be making a smart bet.

“Historically … whenever there’s been a downturn in retail, the guys who end up being the most successful are the ones who know the down times don’t last forever and who are able to buy properties right and reposition them,” he said. “The ones with vision and guts end up making out.”