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Apartment Rents Expected to Grow at Slower Pace

Wed, 08 Feb 2012 17:00:00 -0500

With a total return of nearly 40 percent in the last three years, the apartment sector is riding a prolonged streak of outperformance. Rent growth is slowing in the sector, but apartment fundamentals remain strong, according to industry analysts.

2011 was a “banner year” for the apartment sector, due to improved demand, low supply growth and cheap debt, according to Green Street Advisors. Green Street recently released its optimistic 2012 outlook for the apartment sector.

“Rent growth is slowing, but is expected to stay positive, after coming off of two really good years of growth in 2010 and 2011,” said Andrew McCulloch, managing director with Green Street.

Rent growth rates are expected to range from 3 percent to roughly 7 percent, according to McCulloch, who said there is currently not much difference between high-and low-barrier markets. Job growth does remain an issue in the sector, however. McCulloch said some tenants are beginning to push back against rent increases, especially those who have already seen their rent increase without similar growth in their incomes.

Rent growth over the next five years is expected to favor high-barrier markets, which are less exposed to new apartment demand, according to Green Street’s outlook.

Supply-demand dynamics do continue to work in the sector’s favor. However, Mark Obrinsky, chief economist with the National Multi Housing Council (NMHC), said the supply of new apartment housing is starting to increase.

“In the face of an unprecedented virtual shutdown of development, the apartment market continues its strong recovery, as developers play catch-up to the growing demand for rental housing,” Obrinsky said.

In NMHC’s quarterly apartment market survey, released in February, the council noted that new multifamily development activity continues to increase across the country. More than half of the survey respondents reported a “substantial” uptick in land acquisition, financing activity and building permit applications. McCulloch noted that a handful of U.S. markets are witnessing outsized supply growth relative to the rest of the country. They include cities like Seattle, where technology-driven job growth has played a role in the expansion, and states like Texas, which has benefited from the energy industry.

Buildings Saving Electricity With Smart Grid Technology

Tue, 07 Feb 2012 17:00:00 -0500

Commercial property owners are throwing around words like “smart” and “intelligent” liberally to describe their efforts to improve energy efficiency. They’re talking about their buildings, however, not themselves.

As energy efficiency enhancements for commercial property become more sophisticated, some building owners are starting to emphasize “smart grid” technology to help create “intelligent buildings.”

Smart grid refers to self-regulating electrical systems. The systems self-adjust based on feedback from the surrounding environment in which they’re operating.

“We've been talking about smart building for 10 years,” said Darlene Pope, president and CEO of Cor Advisors, an energy management and intelligent building systems integrator for commercial and corporate facilities, during a February webcast. “Now, we finally have an application that’s going to allow you to make money by implementing a lot of these technologies.”

The benefits of smart grid technology include reliability, increased power grid efficiency and cost effectiveness, according to Greg O’Brien, a vice president with commercial real estate advisory firm Grubb & Ellis Company who also participated in the webcast.

By connecting a so-called intelligent building to smart grid technology, the building can adjust its energy needs to meet fluctuating demand. Intelligent buildings are those with networked systems combining features such as security, lighting, and heating and air conditioning on a single platform. The aim of an intelligent building is to be fully automated and operating at maximum efficiency.

O’Brien said smart grids are in the early stages of being implemented in buildings, but they’re generating enthusiasm. He said building owners can see a payback for their investment in smart grid technology in as little as two years.

“A two-year payback is something that gets their attention,” he added.

However, Pope said many building aren’t equipped to integrate with smart grid technology. Additionally, building operators and owners often lack the awareness and education to bridge the gap between the building and the grid.

“In order to make the smart grid successful and take advantage of it, the value proposition needs to clearly be shown to building owners and operators,” Pope said.

Retail REITs Help Entrepreneurs Get Their Start

Mon, 06 Feb 2012 14:30:00 -0500

For many would-be entrepreneurs, just knowing where to start can pose an enormous challenge to striking out on their own.

Some retail REITs are now rolling out programs intended to help these potential tenants start off on the right foot. Since the beginning of 2012, DDR Corp. (NYSE: DDR) and Kimco Realty Corp. (NYSE: KIM) have implemented two such initiatives.

These retail REITs are taking a creative approach to luring local business owners and franchises to fill smaller, vacant spaces in their shopping centers. While DDR’s new program helps fledgling small business owners incubate new concepts, Kimco’s program focuses on streamlining the process for business owners looking for franchise opportunities.

Set Up Shop in this Space

DDR officially launched its hands-on Set Up Shop program on Feb. 2. The effort is geared towards small-shop leasing.

The first few months of a new business venture are critical to long-term success, according to Paul Freddo, DDR’s senior executive vice president of leasing and development. Set Up Shop gives participants access to a team of experts that will work closely with them to help ensure their ventures get off to a good start.

Freddo says the program creates a win-win situation for both the company and the business owner. DDR can attract tenants to some of its smaller spaces that are usually more challenging to lease. In turn, the company is offering free rent to participants during the first six months that they are in the Set Up Shop program.

“It’s really about the flexibility, the shorter-term deal and free rent,” Freddo said. “The win for us is that it reduces expenses at the asset level.”

DDR has partnered with SCORE, a national nonprofit association for entrepreneurs, to help get the program off the ground. The association will serve as a resource for Set Up Shop tenants, and its volunteers will offer free business counseling.

The program has initially launched in specific locations within 24 Atlanta-area shopping centers. Freddo says there’s no limit on the type of small business that can be considered for the program, including general retail or service-oriented businesses such as investment counseling or tax services.

Fast-Tracking Franchises

Kimco, on the other hand, went the technological route. The New York-based REIT introduced its new FastTrack franchise program in January. FastTrack offers a way for entrepreneurs, franchisees and franchisors to find new opportunities within Kimco properties.

The company has tools on its website that allow potential business owners to select a specific franchise and find pre-approved sites within Kimco’s portfolio to open their business. They can also search by location to see which franchises have pre-approved spaces within the center.

Brett Cooper, Kimco’s Northeast region leasing associate and developer of the FastTrack program, says the company is also putting window signage in vacant spaces within their centers to let people know that that those spaces are pre-approved for specific franchises. Ultimately, the goal is to attract smaller, local businesses.

“The smaller spaces are the toughest ones to lease,” he says. “It’s where the mom and pop shops are that have been vacant for us. This is a way for us to ramp up leasing in the sub-5,000-square-foot spaces.”

Retailers such as Pearle Vision, Cheeburger Cheeburger, the UPS Store and other chain stores are among the 18 national retailers listed so far. Cooper is working on adding another group of 10 chain retailers to that list by the end of the month.

FastTrack is currently available in 46 of Kimco’s shopping centers in the Mid-Atlantic region. Cooper says the goal is to make the program available throughout the company’s portfolio within the next six to 12 months.

Hotels Show Strong Global Growth

Wed, 01 Feb 2012 16:30:00 -0500

Hotel fundamentals are improving in the United States, but industry analysts say the real growth in the industry is happening in international markets.

The growth in the lodging industry has been particularly pronounced in developing economies, according to observers. Large hotel corporations, including Hilton and Hyatt, are entering markets like China and India and setting to work building new properties. Michael Fishibin, Ernest & Young’s leader of global hospitality services, said the Brazilian hotel market could grow significantly in the coming decade with the FIFA Soccer World Cup and Summer Olympics, coming in 2014 and 2016.

“There’s going to be some limited development in the U.S., but overseas, they are going full bore,” said Joseph McInerney, CEO of American Hotels and Lodging Association (AHLA). “All of the major chains are developing internationally where there are a lot of opportunities for them.”

Meanwhile, Jones Lang LasSalle Hotels is forecasting that international hotel transaction volume will hold steady in 2012. In a report on the lodging market, Jones Lang LaSalle’s analysts said they’re expecting worldwide transaction levels to at least match 2011 levels, reaching $30 billion again in 2012. That represents a 13 percent increase over 2010 volume.

REITs led the way in terms of investments in the first half of 2011 when global hotel investment volume surged, according to the Jones Lang LaSalle report. However, the analysts attributed the slowed momentum in the second half of the year to the economic uncertainty in both the U.S. and abroad.

“So far, the dislocation in the financial markets has not impacted underlying trading fundamentals,” said Arthur de Haast, chairman of Jones Lang LaSalle. “This has reassured investors to a certain degree and has underscored the attractiveness of high-quality, income-producing hotel real estate as an asset class.”

U.S. Trends

The construction of new hotels in the U.S. has historically grown at an average of approximately 2 percent per year, but Fishibin said the recent growth rate has been less than 1 percent per year, and that is expected to continue. Domestically, the level of demand doesn’t warrant significant growth at this point, according to McInerney.

“We will see some growth this year, and the average room rate will go up,” said McInerney, adding that the major markets in the U.S., such as New York, Chicago and Boston, will see more demand than the secondary markets. McInerny pointed out that the U.S. industry is starting to see smaller boutique properties being developed to meet the preferences of a new generation of travelers.

Cantor Fitzgerald Launches REIT Coverage

Tue, 31 Jan 2012 16:30:00 -0500

Global financial services firm Cantor Fitzgerald & Co. officially launched coverage of the U.S. REIT sector on Jan. 31.

The members of Cantor’s REIT research team all came to the firm from FBR Capital Markets & Co. David Toti and Sri Nagaragan will serve as managing directors of the group. They will be joined on the REIT team by Evan Smith and Gaurav Mehta.

Cantor has always had its eye on the REIT sector, according to Natasha Boyden, head of U.S. equity research at Cantor.

“We have always had a deep interest in the REIT sector,” Boyden said during an interview with REIT.com. “Just adding David and Sri broadened the scope of the firm’s interest in the sector and gives up a depth and expertise we didn’t have before, so we jumped at the chance.”

David Toti said that more investors appear to be interested in REITs today than they were 10 years ago.

“The sector has been outperforming, and that always draws a lot of attention from investors,” Toti said. “Also, the perception of institutional quality has been raised by better disclosures, and the dividend yield stocks in today’s world are attractive.”

2012 Outlook

Toti said the firm has a positive view on REITs. He said a preliminary analysis suggested that in 2012, the office sector will outperform the other real estate sectors. Meanwhile, he said he’s anticipating modest gains in both the apartment and self storage sectors.

Toti said he anticipates that REITs will modestly outperform the broader market this year. However, he said interest rate shocks or any major changes in the economy could pose challenges for the industry.

“What we see for REITs today is similar to the Goldilocks economy, not too hot and not too cold,” Toti said. “If the economy picks up, our view is that the S&P [500] will become more attractive relative to REITs. But in a recession, all will under perform.”

Sri Nagaragan speculated that REITs would have the most opportunities to acquire favorably priced properties in the second half of the year.

“We think 2012 will be a long-awaited year of value-added acquisitions,” he said. “REITs have had plenty of dry powder. Stable REITs will venture into value-added acquisitions in their own backyards.”

EQR, Toll Brothers Enter Into Joint Venture

Mon, 30 Jan 2012 11:00:00 -0500

Apartment REIT Equity Residential (NYSE: EQR) plans to break ground in the first half of the year on a joint venture project in New York with luxury-home builder Toll Brothers Inc.

The 40-story tower on Park Avenue is expected to be completed in 2015. The lower half of the building will include a mixture of retail spaces and approximately 265 luxury rental apartments run by Equity Residential. Toll Brothers will be selling the top half of the building as condominiums.

A combination of rental apartments and condominiums for sale in the same building can have added benefits, according to Mark Tennison, executive vice president of development for Equity Residential. The companies will share acquisition, construction and operating costs on the project.

“In a market like New York City, where land prices remain expensive, it is a good way to spread risk,” Tennison said.

Equity Residential remains bullish on the New York apartment market, after recently completing a 111-unit development there.

“New York continues to be a very good market with high occupancies and little new supply,” Tennison said.

The new 400,000-square-foot development site is located on the corner of Park Avenue South and 28th Street in Manhattan. While the two will share the same building and several amenities, the apartments and condominiums will have separate lobbies and addresses. Tennison said that, once completed, the company’s new Park Avenue building will feature a mixture of floor plans, including studios as well as one-, two- and three-bedroom rental units.

“The apartment units will have high-end finishes, and the property will have a fantastic amenity package including a pool, large fitness center and space for entertaining,” Tennison said.

The new project with Toll Brothers mirrors Equity Residential’s joint venture with K. Hovanian Homes, 70 Greene in Jersey City, N.J., which opened in 2009. In both cases, Equity Residential has not taken a financial interest in the asset’s condominiums, and its partners have not taken stakes in the apartments.

Good Signs for the Office Sector

Thu, 26 Jan 2012 22:30:00 -0500

The office sector is showing positive signs of recovery as corporations with assets in leading cities enjoyed solid operating gains in 2011, according to industry analysts who participated in a Jan. 25 panel discussion on the sector.

“It was definitely a good year for the 24-hour cities who were taking a disproportionate share of the leasing activity,” explained Andrew Florance, president and CEO of commercial real estate information company CoStar Group, which organized the panel for a webcast.

The office sector in larger cities such as Dallas, Seattle, Boston and San Francisco experienced good absorption, according to the participants. “In the top 20 largest office markets, technology and energy are dominating the growth markets in terms of net absorption,” Florence said.

However, the disparity between the classes of markets could be seen when contrasting a city such as New York, which had an office vacancy rate of 7.4 percent, versus Phoenix, where the vacancy rate was 20.7 percent.

“It was a softer year in a tertiary city and great year in a leading city,” Florance said. “It’s the haves versus the have-nots.”

Overall net absorption doubled in 2011, according to Walter Page, director of research at Property and Portfolio Research (PPR), who said he expects net absorption to be strong once again in the first half of 2012.

“People are leasing space,” he said. “Small tenants are back, and that’s the lifeblood of the office sector.”

Page noted that the growth of smaller tenants could result in larger office spaces remaining vacant for longer stretches of time. He also suggested landlords might find more success splitting up such spaces to better fit customers’ needs.

In terms of new construction, Page said the office market today is highly driven by build-to-suit investments, as opposed to speculative, multi-tenant projects.

“The lack of construction will drive rent growth as you have increased demand,” he said. “Rents are going to be a volatile trend. Concession activity will burn off first, and concession activity in terms of free rent seems to be diminishing.”

Page said he expects rent growth to ramp up in 2012, but a larger increase will occur at some point between 2013 and 2015.

Jay Spivey, senior director of research and analytics at Costar, said office sales are starting to recover, too.

“It’s not record-breaking, but it’s good,” he said. “The fourth quarter was pretty steady and there were increases throughout the year. We are on par with the fourth quarter of 2010. Only a few markets are seeing a decrease in volume, and that’s encouraging.”

Policy Issues Facing Commercial Real Estate

Thu, 26 Jan 2012 17:00:00 -0500

Major policy issues facing commercial real estate in 2012 range from reforming foreign investment regulations to taxation of Internet commerce, according to industry analysts.

In an interview with REIT.com, John Rayis, partner with Skadden, Arps, Slate, Meagher & Flom LLP, said proposed changes to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) will most likely dominate the radar screen of real estate corporations.

FIRPTA taxes non-U.S. residents on sales of commercial real estate property in the United States. Under FIRPTA, the buyer is required to withhold 10 percent of the gross sales prices if the seller is from another country. As a result, the FIRPTA rules are discouraging non-U.S.investors from buying property in the country, according to Rayis. He noted that non-U.S. residents can sell stock in any other asset class besides real estate and not be subject to tax in the U.S.

"FIRPTA reform is going to be an enormous story," Rayis said. "I think it's critically important for the country to pass the reform. There are hundreds of billions (of dollars) in pent-up demand to invest in United States" commercial real estate.

Rayis added that FIRPTA was created in 1980 and was designed to discourage investment in U.S. commercial property from outside the country. "It has worked better than anyone can imagine to discourage investment in the U.S.," he quipped.

Tony Edwards, executive vice president and general counsel at NAREIT, said that while tax reform could become a significant issue potentially impacting all businesses following the 2012 elections, he agrees that FIRPTA will be a big story in the coming year.

"FIRPTA affects the entire commercial real estate industry," Edwards said. "What FIRPTA reform would accomplish would be to treat the sale of stock in real estate companies on the same basis as the sale of stock of companies in other industries."

REIT tax regulatory guidance will be another big issue this year, according to Rayis.

He noted that as the REIT industry matures, he anticipates that more non-traditional real estate assets types will enter the REIT space, as has been the case with timber, data-center and cell-tower companies.

"We expect to see REITs pursuing new types of investments and potential income streams in the coming year, with ongoing dialogue with the IRS as to the qualification of various mortgage-type investments under the REIT rules," Rayis said.

Both Rayis and Edwards also plan to keep an eye on developments in the mortgage REIT arena. While mortgage REITs are generally excluded from regulation as "investment companies" by the Investment Act of 1940, the Securities and Exchange Commission (SEC) has recently asked whether its long-standing interpretation of the 1940 Act's exclusion of real estate mortgages and interests in real estate should be changed or, at least, codified in public guidance.

Analysts have said that restricting the exemption would have serious implications for mortgage REITs in terms of leverage, legal liability and their ability to raise capital. Legislators and other stakeholders have cautioned the SEC against taking any action that would restrict the ability of mortgage REITs to continue to raise capital that will be essential for GSE reform and other purposes.

Even so, Rayis said he expects the sector to grow in 2012.

"With interest rates so low, I think that area is just tremendously promising," he said.

Edwards pointed out that other policy issues facing REITs and other real estate businesses include the collection of sales taxes. Currently, Internet and catalogue sellers that don't have a physical location in a state don't have to collect sales tax, though state law assesses a sale and use tax on the sale. Legislation known as the Marketplace Fairness Act would change that policy.

According to proponents of the bill such as NAREIT, online sellers have an advantage over brick-and-mortar retail shop owners that must collect state and local sales taxes on their sales.

In terms of regulatory issues, Edwards said the Dodd-Frank Wall Street Reform and Consumer Protection Act has a host of implications for NAREIT's member companies. Among them, NAREIT is urging regulators to ensure that end users of derivatives such as REITs do not have to clear their trades over clearinghouses or otherwise post additional collateral, driving up their cost of capital for business transactions.

In addition, NAREIT is hoping that proposed rules would be changed when finalized so that REITs would not be excluded from using a test intended to make it easier to securitize mortgages that meet strict underwriting standards.

REITs Continue Recovery in Slow Economy

Tue, 24 Jan 2012 17:00:00 -0500

Although the economic environment at the start of 2012 closely resembles the beginning of 2011, John Perry, analyst with Deutsche bank, says that commercial real estate is continuing its recovery despite less than enthusiastic economic growth.

Interest rates remain low, and REIT valuations are largely unchanged from a year ago, Perry pointed out in an interview with REIT.com.

“We think that the muddle along, low growth, low interest rate economic environment will continue,” he said, adding that he expects REITs to do well in the current economy.

Perry pointed out that one notable difference in this year and last year during the same time is the European debt crisis. However, he added that strategists at Deutsche Bank expect a resolution to the crisis without systemic default.

“Absent an external macro shock, we expect U.S. commercial real estate fundamentals to further strengthen in 2012, which combined with stable multiples/cap rates and an average 3.5 percent dividend yield for the group, should drive 8 to 12 percent total return for REIT shares,” Perry said.

When it comes to sector performance, Perry said a favorite property type remains class-A malls.

“Despite what looks like a lackluster new store opening environment, the limited new supply this year and in the next few years, combined with an ongoing flight to quality amongst the retailers, bodes well for the sector,” he said.

Although major chain store closing announcements including Borders, the Gap and Sears may impact some retailers, Perry said the impact felt on some of the best and most productive retail centers will be very limited.

With virtually no new construction, a new supply of commercial real estate product will continue to be at low levels, with the exception of the apartment sector, according to Perry.

“We are going to continue to see new developments in apartments, because it’s justified by the demand,” he says.

Jobs are the primary economic indicator of the industry’s recovery, he said. He added that so far, a modest amount of jobs created, combined with a limited new supply has helped to push fundamentals in the right direction. However, he added that economists are not expecting much more of an improvement when it comes to the job market in 2012.

“Our economists expect the unemployment rate to tick down to about 8.2 percent,” he said. Currently, the unemployment rate is 8.5 percent.

Overall, Perry said REITs are still on solid footing, despite the soft outlook.

“I think there’s plenty of reason to remain optimistic on the REIT space,” Perry said. “Fundamentals continue to improve, balance sheets are good for the most part and dividends continue to rise.”

Real Estate Professionals Positive on Hiring Trends

Thu, 19 Jan 2012 10:30:00 -0500

Despite uncertainty in the economy, job growth in the commercial real estate real estate industry is expected to hold steady or possibly increase in 2012, according to an annual survey that offers insights into hiring trends.

The survey, which was conducted by SelectLeaders, a real estate jobs website, revealed that real estate professional are overwhelmingly positive about the possibility of new hires.

“In almost every sector in real estate, there were people talking about seeing an uptick in hiring,” said Susan Phillips, CEO of SelectLeaders.

Among the more than 900 respondents to the survey, 32 percent indicated that they believe hiring will increase this year, while 47 percent said they expect it will remain the same as it was in 2011.

Melissa Coley, vice president for investor relations with Brookfield Office Properties (NYSE: BOP), said the economic conditions have made the company “a bit more cautious and conservative” when it comes to making new hires. At the same time, she said she doesn’t anticipate a decrease in hiring.

“Brookfield has been performing well, and with the economy slowly recovering, we will most likely stay flat in terms of hiring, including some additions to staff and replacements,” Coley said.

However, although hiring upticks were reported from businesses, Phillips said comments from the respondents revealed that people are concerned and frustrated with the economy.

“Their responses showed that people were very frustrated with the government and the economy,” Phillips said. Comments offered by respondents took aim at the political situation in Washington and the banking sector as contributing to the overall uneasiness about the broader economic picture.

Phillips also noted that respondents commented that companies are expected to continue to hire and add lower-level personnel to their staffs. According to the survey, 37 percent reported that senior level positions in their companies have not been filled, while 27 percent said senior level openings were being filled by employees with less experience.

Phillips said she has even noticed a difference on her company’s real estate job board listing open positions.

“In October 2008 when Lehman Bros. failed, we went from having 1,000 jobs to 30 jobs posted on the site,” she said. “It has since steadily grown and has come back one sector at a time.”

CRE Supply to Remain Low in 2012

Fri, 13 Jan 2012 15:30:00 -0500

The outlook for 2012 commercial real estate is positive despite the slow recovery, as analysts say that fundamentals are moving in the right direction in all property sectors.

“Commercial real estate fundamentals are improving, and we’re in the second or third year of what we believe is a multi-year recovery,” noted RJ Milligan, analyst with Raymond James in an interview with REIT.com.

Milligan said nothing new is being built. At the same time, he said that as a result, a steady demand for real estate in some sectors will allow property owners to charge higher rents.

“There is really very little new supply across the majority of property sectors, so that will help REITs do well,” Milligan said.

The growth in supply is starting to pick up in the apartment and data center sectors, but Milligan said expects there will be very little new supply added overall in 2012.

Peter Rothemund, analyst with Green Street Advisors, said the lack of supply in commercial real estate may be a silver lining to the recovery offering a bit of good news during a slow time. He added that the lack of new supply makes up for slow demand growth

Supply growth is currently at its lowest point in more than a generation, according to Green Street’s recent Commercial Property Outlook report.

“I don’t think there will be much supply coming on line for 2012,” Rothemund said. “Things won’t get built if there’s not a healthy demand for them.”

Overall, analysts don’t appear to expect an eventful 2012 in the commercial real estate market.

“It just kind of feels like we’re plodding along. There’s nothing to get excited about,” Rothemond said.

Rothemund said that gateway markets will continue to enjoy the strongest demand this year. Milligan added that the disparity between the asset classes will also continue, with the class-A assets commanding higher rents, leading to better rent growth.

“But at some point, the B and C property types are going to have their day,” Milligan said. “We think we’re going to start to see some of that if the economy continues to work, but it is very sector specific.”.

Milligan said he’s projecting total returns for REITs between 8 percent and 12 percent, driven by 8 percent FFO growth and 4 percent dividend yields. He added that multiples should be unchanged or modestly contract in 2012, particularly for the large cap REITs.

“It’s our belief that this is the third major REIT up cycle in the modern REIT era and we think that the’ typically lasted seven year and we see this one is gong to last seven years if not longer, given this slow economic growth we’re seeing.” Milligan said.

Healthy M&A Volume Expected in 2012

Thu, 12 Jan 2012 10:30:00 -0500

Although REIT deal activity slowed as the year ended, the range of deals done in 2011 was impressive, according to partners in the REIT M&A department at the law firm of Watchtell, Lipton, Rosen & Katz (WLRK).

Approximately $70 billion in assets changed hands in REIT deals in 2011 and ranged from large-scale public-to-public mergers to private-to-public acquisitions. The firm pointed out that while the economic uncertainty has created some hesitancy in many boardrooms, it anticipates that the conditions that made for impressive deal volume during the first half of 2011 will drive a healthy volume of deals in 2012.

Robin Panovka and Adam Emmerich head the REIT M&A team at WLRK and offered REIT.com their insights into the deal market for 2012.

REIT.com: Do you expect overall deal activity to continue into this year and possibly surpass 2011?

Robin Panovka: We certainly expect deal activity to continue—the drivers remain strong—but it’s hard to predict the volume, given the “lumpiness” of large deals and the uncertainties that slowed things down towards the end of last year. The balance sheets of most of the larger REITs remain strong, dry powder is still plentiful and opportunities continue to arise, especially given the low supply of new development product, strong investor appetite and the distressed pools possibly coming on line as the first big wave of pre-financial crisis 2007 debt matures in 2012.

REIT.com: Why do you think that deal activity may have slowed down toward the end of 2011, and will that impact the first half of 2012?

Adam Emmerich: The uncertainty caused by the European crisis and questions about future economic conditions created a wait-and-see attitude in many boardrooms. But underlying economic activity and results, particularly for the larger and better-positioned U.S. REITs, are quite strong.

Our sense is that things are warming up and that the conditions that generated impressive deal volume in the first half of 2011 will again drive a healthy volume of deals in 2012. Many boards and CEOs who hit “pause” in the last few months have their fingers hovering over the “play” button, ready for action when the time is right on the lineup of deals that have been percolating for some time.

REIT.com: Do you expect deal volume to be higher in some sectors than others? If so, which ones and why?

Panovka: It’s too soon to tell. We’re seeing things warm up in different sectors, often for different reasons.

REIT.com: If you could pick just three, what would be your top issues for REITs be this year?

Panovka: One, given the volatility in the market, we expect to see a continuation of the trend towards using stock as acquisition currency rather than cash, as a way to eliminate financing risk and help to address the equity-raising risks posed by volatile stock prices. We also expect buyers and sellers to continue to explore collars, caps and similar mechanisms where stock is used as currency as a compromise allowing buyers to sidestep bank financing while providing sellers some protection against unexpected levels of market volatility.

Two, the path for gaining control by buying strategic debt positions continues to show promise. We expect to see more deals involving the distressed pools that are likely coming on line as the first big wave of pre-financial crisis 2007 debt matures in 2012. Fulcrum debt positions in several of the loan pools that mature in 2012 are already in the hands of opportunistic players, who are positioned to lead recapitalizations if and when refinancing options fail to materialize. Moving pools of private assets—distressed or otherwise—into REIT hands also provides liquidity and transparency, which are fundamental to the strength shown by the REIT sector since the financial crisis.

Emmerich: Three, the courts continue to reject the “one size fits all” sale process as a fiduciary requirement, even while the scrutiny to which boardroom deal decisions are subjected has remained thoroughgoing and intense, with several notable knuckle rappings for controlling shareholders, target boards and bankers in 2011. We therefore expect continued focus on how best to structure major transactions to ensure that they are respected by the courts and avoid excessive exposure to the all too common strike suits. Careful, sensible decisions will be respected by the courts, but they must be based on an appropriate record and well documented. Deal protection measures and fiduciary out provisions must equally be specifically tailored for the particular circumstance of each company and transaction.

Investors High on Core Office Market

Fri, 06 Jan 2012 16:00:00 -0500

Investors are becoming more confident in the office sector, according to a PwC survey of real estate investors from the fourth quarter of 2011.

Mitch Roschelle, partner with PwC and leader of the firm’s U.S. real estate advisory practice, said expectations of strong tenant retention in 2012 have investors feeling bullish on office companies.

“Investor enthusiasm is on the uptick in the office sector because of improved fundamentals,” Roschelle said.

He added that surveyed investors expect that tenants will stay put and rents will increase. Most companies are making due with smaller work forces and asking for more productivity from their remaining workers, according to Roschelle.

“The stress and interruption of an office move is not something most companies want to consider, thus the motivation to stay put,” Roschelle said. “As tenants stay, landlords have more ability to raise rents.”

Core markets, such as New York and Los Angeles, are paving the way for rent growth in 2012, according to Roschelle. He said such markets attract investors because they’ve historically had a better employment base.

However, when it comes to secondary markets, Roschelle said investor interest often depends on the local economy.

“Secondary markets that are concentrated on the tech, energy and education sectors, such as Austin, Raleigh-Durham and Charlotte, have a diverse enough employment base where investors are optimistic for job growth,” he said.

Otherwise, buying office assets beyond the core markets remains challenging, according to Roschelle. Investors needing a deep knowledge of the local market, and lenders tend to use more conservative underwriting standards, he said.

The sector facing the strongest headwinds in 2012 is retail, according to the report. Roschelle said that according to the PwC’s projections, the retail sector will be facing a downturn in 2012 that will continue into 2013. A stalled economy with reduced consumer spending and diminished demand for retail space continues to affect the sector, he said.

2011 REIT Returns Increase 4 Times More than S&P 500

Wed, 04 Jan 2012 14:00:00 -0500

The total returns of listed U.S. equity REITs were approximately four times those of the broader stock market in 2011, the National Association of Real Estate Investment Trusts (NAREIT) reported today. NAREIT said that the total return of the FTSE NAREIT All Equity REITs Index was up 8.28 percent for the year and the FTSE NAREIT All REITs Index, which includes both equity and mortgage REITs, was up 7.28 percent, compared with a 2.11 percent gain for the S&P 500.

The more than 8 percent gain for equity REITs in 2011 came on top of a 27.95 percent gain in 2010 and a 27.99 percent increase in 2009 – years in which the S&P 500 gained 15.06 percent and 26.46 percent, respectively. Equity REITs also outperformed the S&P 500 for the past 1-, 3-, 10-, 15-, 20-, 25-, 30-, and 35-year periods, according to NAREIT.

Dividends Boost REIT Performance Advantage

Much of REITs’ performance advantage has come from the stocks’ dividend payouts, since almost all of a REIT’s taxable income is paid to shareholders as dividends. The FTSE NAREIT All Equity REITs Index’s 8.28 percent total return in 2011 included a share price return of 4.32 percent, and the FTSE NAREIT All REITs Index’s 7.28 percent total return included a share-price return of 2.37 percent. The dividend yield of the FTSE NAREIT All Equity REITs Index at December 30, 2011, was 3.82 percent and the dividend yield of the FTSE NAREIT All REITs Index was 4.83 percent, compared to 2.22 percent for the S&P 500.

“The strong, continuing income stream from REITs is an important component of theappeal of REIT shares for investors,” said NAREIT President and CEO Steven A. Wechsler. “REIT dividends boost an investment portfolio’s performance in good times and help insulate it from downside shocks in turbulent market conditions,” he said.

REITs Raise Record Amount of Capital

REITs raised a record amount of capital in the public markets in 2011, including a record amount of equity, positioning the industry to enter 2012 with the financial flexibility that comes from strong balance sheets.

REITs raised $51.3 billion in public equity and debt in 2011 – more than the $49 billion raised in the previous record year of 2006. Additionally, in spite of 2011’s volatile stock market, $37.5 billion of the capital raised in the year was in public equity, compared with $22 billion in 2006 and $32.7 billion in 1997, the prior record year for REIT equity offerings.

REITs have used the equity they have raised to effectively manage their leverage. At September 30, 2011, the listed U.S. REIT industry’s ratio of debt divided by total market capitalization stood at 41.6 percent, approximately its historical average, in spite of the market downturns of August and September 2011.

“Continuing access to the capital markets and disciplined management have helped create a REIT industry with its financial house in order,” Wechsler said. “REITs are well prepared for both the challenges and opportunities that may arise in 2012. They are positioned to be strategic acquirers of properties from less well-capitalized private real estate owners, as they have been over the past two years.”

Some REIT Sectors Deliver Double-Digit Total Returns

A number of REIT market sectors delivered double-digit gains in 2011. The Self-Storage sector led the overall REIT industry with a total return of 35.22 percent for the year. The Apartment sector also delivered strong performance with a 15.10 percent gain, fueled importantly by continuing uncertainty in the single-family housing market. The Health Care sector was up 13.63 percent, while the Retail sector was up 12.20 percent, driven by the performance of the Regional Malls segment, which was up 22.00 percent.

The Timber REIT sector gained 7.65 percent for the year, and the Diversified sector was up 2.82 percent.

Lagging sectors of the REIT market included Lodging/Resorts, down 14.31 percent; Industrial, down 5.16 percent; Mortgage REITs, down 2.42 percent; and Office, down 0.76 percent.

Americas Outperform Other Global Listed Property Markets

The Americas was the only segment of the global listed property market to deliver positive returns in 2011. On a dollar basis, the Americas sector of the FTSE EPRA/NAREIT Global Real Estate Index delivered a 3.99 percent total return for 2011, compared with negative total returns of 13.38 percent for the Europe sector; 18.20 percent for the Middle East/Africa sector and 19.74 percent for the Asia/Pacific sector.

For a link to the full report visit http://www.reit.com/portals/0/PDF/NAREIT-2011-REIT-Market-Report.pdf.

W. P. Carey Founder Dies

Tue, 03 Jan 2012 16:00:00 -0500

Wm. “Bill” Polk Carey, founder and chairman of investment management company W. P. Carey & Co. LLC, died in West Palm Beach, Fla. on Jan. 2. He was 81.

The entrepreneur formed W. P. Carey in 1973, primarily to structure single-asset private investments. Under Carey’s leadership, the firm became a global leader in the commercial real estate industry and currently manages close to $12 billion in assets.

Carey was also a longtime advocate of the REIT approach to real estate investment.

“Bill saw early on the benefits of using the REIT structure to match the investment goals of individual investors seeking stable, inflation-protected dividend yields with the long term financing needs of corporate owners of real estate,” said Trevor Bond, CEO of W.P. Carey.

Carey is credited as one of the key figures in the growth of the sale-leaseback investment strategy for commercial real estate.

“While he did not invent the sale-leaseback as a financing vehicle, it’s fair to say that he did as much as any single person to make it a commonly used tool in the arsenal of CFOs all over the world,” Bond said.

Recently, W. P. Carey made headlines in 2009 when it purchased 21 floors of the New York Times Building in Manhattan for $225 million under a sale-leaseback arrangement. The Times’ publisher agreed to lease space in the building for up to 15 years.

Carey supported the efforts of NAREIT throughout the decades.

“He was proud to be an early and continual supporter of NAREIT and felt that its work was essential in both educating and protecting investors, particularly those whom he considered part of the W. P. Carey family,” Bond said.

In addition to being a businessman Carey was also a philanthropist, having established the W. P. Carey Foundation in 1988. The foundation supports educational institutions through endowments to universities, including Arizona State University, Johns Hopkins University and the University of Maryland.

The foundation will be the primary beneficiary of shares of common stock held by Carey.

“Bill Carey was determined that the charitable work he pursued throughout his life should continue long after his death,” stated his brother, Francis Carey, and president of the W.P. Carey Foundation.

EDR in Talks to Take Charge of University's Student Housing

Wed, 21 Dec 2011 16:00:00 -0500

Education Realty Trust (NYSE: EDR) is in talks to become the first REIT to be put in charge of the entirety of a major university’s student housing portfolio.

The student housing REIT announced on Dec. 14 that it has been selected by the University of Kentucky to negotiate a deal to build and manage more than 9,000 residence hall beds over the course of the next seven to 10 years.

Once a final agreement is reached, it would mark the first time that a major university has outsourced its entire student housing program to a separate company, according to Tom Trubiana, executive vice president of Education Realty.

The university decided to upgrade its housing stock as part of “The Kentucky Promise,” an initiative to enhance the core of the campus.

Budget constraints have left universities slow to replace student housing, according to Randy Churchey, president and CEO of Education Realty. Trubiana said more higher education institutions may start looking to private companies to provide student housing.

“With today’s economy, every state is struggling to find funding appropriations, and universities are looking to alternatives,” Trubiana said.

Education Realty is proposing to use its “ONE Plan” to finance the deal. Under the terms of the ONE Plan, Education Realty takes on 100 percent of the equity investment and debt responsibility for a project. Once completed, Education Realty takes ownership of the property or a leasehold interest in the property for a designated period of time.

The project would be carried out in phases, with the first entailing Education Realty assuming management of the university’s 6,000-bed housing stock in July 2012. Additionally, this phase would include the development, construction and ownership of a 600-bed housing community on campus for honors students to be completed by August 2013.

After the first phase is completed, Education Realty and the university would have the option to enter into a new agreement, which would include the demolition of older student housing buildings and the construction of new living facilities on campus.

One of the project’s goals would be to ensure that the Lexington region receives financial benefits, according to Trubiana. That would include using local construction companies and resources to build the new facilities.

Analyzing Building Data for Efficiency

Mon, 19 Dec 2011 14:00:00 -0500

While building owners have a wealth of information available to them documenting everything from temperature to utility rates, industry experts on a recent panel contend many are confused about the best way to utilize that data to maximize operating efficiency.

The market has become flooded with software solutions and dashboards that provide real-time monitoring of building operations, according to Darlene Pope, president and CEO of CoR Advisors, a consulting firm that helps buildings integrate smart building solutions. Information is critical to maximizing efficiency, Pope said, but she added that more data won’t make a difference if not properly used.

“You can buy all the software on the planet, but if you don’t change your behavior, it’s not going to help you effectively reduce consumption in your building,” Pope said. “Just because you buy a scale, it doesn’t help you loose weight. You have to change your behavior.”

Jon Towslee, senior vice president with EFT Energy, a supplier of energy management solutions, said during a Dec. 9 webcast panel on analyzing building operations that building owners have been encouraged over the years to gather as much data as they can from as many places as they can.

However, he suggests that building owners first decide what they really want to accomplish with the new information, whether it’s simply increasing comfort in the building or trying to reduce energy spending. Towslee also said it’s important to set goals and publish them where stakeholders, employees and customers can see what the company is trying to accomplish.

“You have to have goals,” Towslee said. “Then, you can understand what you want to accomplish. It starts with analyzing the data, but it’s simply not enough to just look at an energy chart anymore. You have to put it in context.”

In terms of improving efficiency, Towslee advised property owners to focus on cutting waste first before attacking energy usage.

When it comes to analyzing the data during each step toward becoming more energy efficient, Towslee said there needs to be better connection between the information.

“Most data to most of our buildings are in islands, we need tighter correlations so we can understand what’s driving that data and how they interact with each other,” he said.

Derek Johnson, director of East Coast operations for Building IQ, an energy management software company, said automation software can help optimize performance and savings.

Israel’s Growing Commercial Real Estate Market

Thu, 15 Dec 2011 16:33:00 -0500

The Israeli commercial real estate investment market is relatively young, and the development of modern properties has picked up since the late 1990s. The total fair value of properties managed by listed companies is approximately $20 billion (about half of it in retail), with a gross leasable area (GLA) of 9 million square meters.

We estimate that the listed market is 20 percent to 30 percent of the total income-producing sector in terms of GLA, and more than that in terms of fair value. The listed part of Israel’s market has been undergoing a process of rapid development in recent years. Modern properties at high standards are being developed, and more and more properties come into the listed market through acquisition by public companies, as well as through securitization.

Israeli real estate companies traditionally mix their operating activities between development and rental of income-producing properties. The formation of REITs and quasi-REITs—companies specializing in income-producing property—in Israel gained momentum with the establishment of the REIT regulation in 2006. To date, there are only 2 REITs in Israel, and the only traded real estate index in Israel, Real Estate 15, mixes developers with companies managing income-producing properties and bundles together activities in the local Israeli market and global markets.

B-BRE has constructed an index following the performance of the local income-producing sector (the B-BRE index). Therefore, it is the closest proxy to an Israeli REIT index. Chart 1 shows that the Israeli listed income-producing market performed similar to the U.S. REIT sector through January 2011, and its volatility is significantly lower than that of the Real Estate 15 index.

If we look at the distribution of the listed companies according to the fair value of the properties they own, we can see that the retail sector is quite concentrated. Chart 2 shows that the two biggest companies are more than 50 percent of the market in terms of fair value. The other companies are significantly smaller. In contrast, the office market is less concentrated, as seen in chart 3, and six companies control about 60 percent of the market in terms of fair value:

Occupancy in both sectors has been stable and very high (around 95 percent) for several years, including the during years of the financial crisis.

The Israeli Market in a Global Context

Chart 4 reflects the resilience of the Israeli real estate market during the crisis of 2008 and 2009.

The average cap rates for the office sector in Israel are around 7.5 percent to 8.0 percent, very similar to those of the office sector in the U.S. Looking at the spreads in the credit insurance market, this seems to be an anomaly. Since the current cap rates in the U.S. are well within the range of the cap rates in the last decade, we do not expect this gap to close through a decline in US cap rates.

The Israeli market is small, and capital flows in real estate are primarily outward. Therefore, we would expect the cap rates in Israel to rise, especially if we take into consideration the higher cost of capital in Israel.

*B-BRE was founded by Nirit Bregman and Daniel Baraz as a real estate research and consulting firm focusing on the Israeli commercial real estate market. B-BRE’s flagship project is the creation of a commercial real estate database for Israel, which we are pursuing in partnership with the Forum Group. B-BRE provides IR consulting to REIT1, the first Israeli REIT, and will host a road show of Simon Property Group among Israeli institutional investors in 2012. B-BRE is also Real Capital Analytics’ data partner in Israel. Nirit, who is a C.P.A. and holds a master of laws degree (LL.M.), has served for many years in senior positions in leading Israeli capital markets firms. Daniel has a Ph.D. in History and an M.B.A., and was until recently the director of the Fishman Real Estate Center at the Hebrew University of Jerusalem.

Top 10 Most (and Least) Expensive U.S. Commercial Real Estate Markets

Wed, 14 Dec 2011 14:30:00 -0500

With economic challenges in the commercial real estate market, few U.S. markets experienced significant rent increases in 2010 from the previous year, according to new data released in December based on the Building Owners and Managers Association’s (BOMA) 2011 Exchange Report.

“Rents are still compressed from the 2007 highs, but it looks like in most markets, the bottom has hit and it’s stable now,” said Lorie Damon, BOMA’s vice president of education and research. “There has been modest rent growth in some of the better-performing markets, which tend to be on the coast.”

At $48.27 per square foot, New York tops the list of the most expensive commercial real estate markets, Shreveport, La. ranks is the least expensive at $10.47 per square foot.

Washington, D.C. followed in second place for most expensive at $42.63 per square foot. Five California cities ranked among the 10 most expensive markets. New York and San Francisco were the only markets in the group of most expensive cities to show an increase in rental income from the previous year.

BOMA noted the data suggest that prices remain favorable for tenants seeking to pursue new leases or renegotiate existing ones. Damon said building owners appear confident that rents will remain stable.

“They may not grow, but they will remain stable and at least won’t continue downward,” Damon said.

In terms of least expensive markets, Nashville, Tenn., followed behind Shreveport at $13.31 per square foot. Of the least expensive markets, both Dayton, Ohio, and Omaha, Neb., recorded 10 percent increases from the previous year.

The data are based on BOMA’s 2011 Experience Exchange Report. The annual report offers an analysis of BOMA’s data regarding operating income and expenses in more than 65,000 commercial buildings in close to 300 markets. The rental rates in each market reflect total income divided by total rentable square feet for that market.

SL Green Buys Up Block Around Grand Central

Fri, 09 Dec 2011 15:00:00 -0500

Looking to take advantage of one of the city’s most bustling transportation hubs,SL Green Realty Corp. (NYSE: SLG) now owns the entire block of buildings situated across from New York’s Grand Central Station.

On Dec. 5, SL Green announced the acquisition of an 18-story office building at 51 East 42nd Street, the lone property on the block that it had yet to acquire. The Manhattan office REIT has had its eye on the building for years, according to Isaac Zion, SL Green’s co-chief investment officer.

“We owned all of the other buildings on the block and this was the last,” Zion said. “It’s been something we’ve been working on for years, and we were finally able to figure it out together and get it done.”

With this transaction, the company owns all of the buildings on the block bounded by Madison and Vanderbilt Avenues between East 42nd and East 43rd streets. As Manhattan’s largest office landlord, SL Green owned interests in 58 Manhattan properties totaling more than 35.3 million square feet as of September 2011. The newly acquired building is approximately 142,000 square feet and is currently 94 percent occupied.

Despite speculation that the company will build a new office tower on the site, Zion said nothing is planned at the moment.

“The building is well-occupied with tenants and going into new development in the city is complicated, difficult, time-consuming and expensive,” he said. “But when you have the best location in the city, it makes the prospect very intriguing.”

Zion said the company’s properties in New York are at an occupancy level of 96 percent. He added that office fundamentals in Manhattan, including the area around Grand Central Station, are strong and that he anticipates that the positive fundamentals in the area will continue into 2012.

“We are a big believer in the Grand Central Terminal market,” Zion said. “We’ve got the best transportation access in the city and all of our properties are well-leased.”

Private Equity Fundraising to Face Challenges in 2012

Wed, 07 Dec 2011 14:00:00 -0500

Fundraising will remain challenging going into 2012 for private equity real estate fund managers, according to an analysis from Preqin, an alternative asset research firm. While there are a record number of funds in the market, fewer investors are willing to make new commitments.

There are currently 454 funds in the market seeking a combined $159 billion,up from 403 in December 2010 seeking $138 billion. However, Preqin’s research shows that the number of investors planning to invest in private equity real estate funds in the next 12 months has declined from 45 percent in February 2011 to 35 percent in Dec. 2011.

The years since the global economic downturn have been challenging for the private equity real estate industry, and the performances of many funds have been dramatically affected, according to Andrew Moylan, manager of real estate data for Preqin. Uncertainty in the current economy has led to increased investor caution, he said. Moylan added that fund managers will need to prove to investors that they have performed in both good and bad markets.

“Fund managers will need to have an excellent marketing strategy if they are to succeed in this extremely competitive fundraising market,” Moylan said.

Additionally, the data suggest that managers raising capital for their first funds will face problems. Preqin reported that 26 percent of investors said they would invest with newcomers, down from 2010, when 35 percent indicated they would invest with new managers.

Moylan noted that a number of investors are holding off on making firm investment decisions.

“Although there are investors planning to make commitments, and a significant proportion of these investors are planning to invest more than they did last year, many are delaying their commitments due to uncertainty,” Moylan said.

Plenty of Dry Powder

Dry powder may offer a ray of hope to fund managers. There is about $158 billion in cash reserves currently available to real estate fund managers, according to Preqin.

Moylan said the high level of dry powder capital available to fund managers worldwide places them in a good position them to take advantage of investment opprotunities in global real estate markets. (No, sounds like he means not capital that they already have but capital that the fund managers could have access too)

“Successful investments made over the next 12 months could help to turn around the fortune of the struggling asset class,” Moylan said.

More than half of the dry powder available, $87 billion, is held by funds focused on North American real estate. There is $38 billion held by Europe-focused funds and $33 billion by funds primarily focused on investment in Asia and the rest of the world.

Equity Residential Announces Bid for Archstone

Tue, 06 Dec 2011 14:00:00 -0500

Equity Residential (NYSE: EQR) announced Dec. 2 that it is seeking a stake in Archstone, a privately held apartment property company. If the deal goes through, Equity Residential anticipates acquiring a partial stake in Archstone toward the end of the first quarter of 2012.

However, details of Equity Residential’s bid have industry analysts speculating that the bidding process may take longer than anticipated. Equity Residential, the largest publicly traded multifamily property owner in the United States, is seeking to acquire a 26.5 percent ownership interest in Archstone for $1.325 billion.

That 26.5 percent stake represents half of the total interests Barclays Plc and Bank of America Corp. hold in Archstone. Archstone’s third owner, Lehman Brothers Holdings Inc., currently holds 47 percent of the company. Under the terms of Archstone’s ownership, Lehman has a right of first refusal on offers to sell an equity stake in the company. Additionally, all major decisions have to be approved unanimously by Lehman, Barclays and BofA.

Barry Vinocur, publisher of REIT Zone Publications, said that with this deal, Sam Zell, founder and chairman of Equity Residential, “has created a situation where he’s put Lehman back on its heels.”

On Dec. 5, Lehman filed documents with the U.S. Securities and Exchange Commission (SEC) arguing that Equity Residential’s offer is too low. Lehman is also contending that Barclays and BofA did not provide it with required negotiation information.

Analysts said Equity Residential is seeking to acquire Archstone in stages, anticipating that Lehman would be unable to exercise its right to match the offer. However, if Lehman does match the bid, Equity Residential has the option to make an offer on the remaining 26.5 percent stake owned by Barclays and BofA.

Vinocur noted that Equity Residential gets the same decision making power with a 26.5 percent stake in Archstone as it would if it bought out Barclays and BofA entirely.

“There are miles to go before you sleep, but there’s still potential for a lot of different things,” Vinocur said. “This is a very tactical move by Sam Zell; he’s a master of these kinds of things.”

Andrew McCullough, senior analyst at Green Street Advisors, described Equity Residential as “thoughtful, creative and prudent” in its opening bid. He said Equity Residential’s goal is to get a “seat at the table” in bidding for Archstone.

“Equity wants to buy that seat at a reasonable price, and let the process play out,” he said. “The EQR bid may simply represent an opening salvo in what could be a long bidding process—potentially continuing until the middle of 2012.”

Archstone has close to 50,000 wholly owned apartment units in its portfolio and approximately 1,300 units currently under construction. David Neithercut, president and CEO of Equity Residential, said Archstone’s portfolio would fit in well with that of his company.

“The Archstone and Equity Residential portfolios are highly complementary with concentrations in the same markets and assets of similar quality,” Neithercut said.

REIT analyst Ross Nussbaum of UBS said combining the companies could produce long-term benefits for all involved, “particularly the potential to create a brand name presence in several major cities as well as some level of expense synergies.”

Book Highlights Keys to Investing in Global REITs

Fri, 02 Dec 2011 11:30:00 -0500

Author and investor Richard Stooker recently published a book focusing exclusively on investing in international REITs. Titled “REITs Around the World,” Stooker researched real estate investing in close to 40 countries. Stooker writes about investing and is also author of “Income Investing Secrets,” in which he dedicated a chapter to REITs. In an interview with REIT.com, Stooker said while 2012 may have its challenges, foreign REITs have a good future in the long run.

REIT.com: Are more investors are beginning to embrace international REITs?

Richard Stooker: I can't really claim to have any hard numbers, but I believe that’s true, if only because right now the prospects look so bad in the overall economy in the United States. It’s hard for investors to know what’s going, on and I’m sure many investors are looking to diversify.

REIT.com: With more countries adopting REIT structures, which countries seem to be the most advanced in terms of their REIT markets?

Stooker: Canada and Australia are two of the most mature countries when it comes to REITs outside of the U.S. They followed the lead of the U.S. and have done a lot with it.

However, other countries are catching up. The United Kingdom started late, only about four years ago. There are also REITs in France, the Netherlands, and across Asia. So there are counties that are fairly sophisticated and ambitious and willing to do what it takes to adopt a REIT structure.

REIT.com: What are a couple of the benefits to investing in global REITs?

Stooker: Investing in foreign REITs not only diversifies by geography and currency, but by type of business. They’re not all the usual shopping malls, apartment complexes and office buildings.

Just like niche focuses among U.S. REITs, an investor can profit from wine vineyards through an Australian REIT. Also, there is a REIT in Malaysia that invests in palm oil plantations and one in Bulgaria that owns a health and wellness resort.

REIT.com: What advice would you give investors who are looking to invest internationally?

Stooker: I don’t believe that people should be buying individual stocks in other countries; even in the U.S., it's risky. No matter how good a stock looks now, it can have problems down the line, and that’s only exacerbated by going outside of the U.S. Investors should focus on exchange traded funds when investing internationally. It’s better for investors to buy a basket of good stocks, as opposed to individual stocks.

RETI.com: Do you foresee international REIT expansion slowing down or accelerating in 2012?

Stooker: I think in the long run REITs are going to expand in more countries and have a great future all over the world. The one thing I like about REITs is that people need to live somewhere and they still have to shop.

It will take some time as there are less developed countries that are going to have to get a handle on the REIT structure. For example, where I live, in the Philippines, they’ve passed a REIT law but it hasn’t been implemented; eventually it will progress.

Retail Sites See Record-Breaking Shopping Weekend

Tue, 29 Nov 2011 14:00:00 -0500

Shoppers lured by midnight openings and deep discount promotions filled malls and shopping centers on “Black Friday” and throughout the long Thanksgiving weekend.

Consumers took advantage of many of this year’s extended shopping hours on Thanksgiving day. The National Retail Federation (NRF) reported that the number of people shopping after Thanksgiving Day dinner rose from 22.2 million in 2010 to 28.7 million this year.

Although stores and malls opened earlier than ever on Nov. 24 to kick off this year’s holiday shopping season, Karen MacDonald, director of communications for Taubman Centers (NYSE: TCO), said traffic remained strong through closing. Taubman interviewed a number of representatives from its mall store tenants in different categories to get a better sense of Black Friday sales and traffic.

“Traffic tended to come in three waves, midnight or earlier, around 10 a.m. and again in the early afternoon,” MacDonald said.

She said two of the company’s shopping centers opened at 9 p.m. on Thanksgiving day, while the others opened between 4 a.m. and 8 a.m. A Macy’s department store at one of Taubman’s sites in Concord, Calif., had more than 4,000 people in line for a midnight opening, even though the shopping center itself didn’t officially open until 5 a.m.

Barb Faucette, vice president of mall marketing with CBL & Associates Properties Inc. (NYSE: CBL), said the company was “extremely pleased” with the Black Friday weekend traffic and the level of sales experienced throughout its portfolio.

“We are optimistic that sales for the balance of the season will be strong and that CBL will continue its trend of monthly sales increases,” she said.

Consumers spent a record-breaking $52 billion over the weekend, according to NRF, which reported that 226 million shopper visited stores and websites. On a weekly basis, data from the International Council of Shopping Centers (ICSC) and Goldman Sachs showed retail sales rose by 1.7 percent for the week ending Nov. 26.

“Stuffed to the brim for their holiday meals and eager to shop, more consumers than ever turned out for retailers’ Black Friday promotions, a promising sign for the economic recovery,” Mathew Shay, NRF’s CEO, said.

Bill Martin, founder of ShopperTrak, which measures mall and store traffic, said this year’s 6.6 percent sales increase was the largest year over year gain for Black Friday since the 8.3 percent increase from 2006 to 2007.

He said it remains to be seen whether consumers will sustain this behavior through the holiday shopping season. Nevertheless, he added that despite the sluggish economy, shoppers proved they are looking for value and ready to buy if given a good customer experience.

In terms of must-haves, MacDonald said its malls reported solid business in all categories.

“It didn’t appear that there were any particularly hot items shoppers were looking for, as in the past, but rather hot categories overall,” she said. “Apparel and electronics were the strongest categories of the day.”

Multifamily Momentum Expected to Carry Over Into 2012

Tue, 22 Nov 2011 16:00:00 -0500

Occupancy and leasing gains made by multifamily REITs in 2011 are expected to continue into 2012, according to industry analysts.

More consumers prefer the apartment lifestyle over buying a home, according to Haendel St. Juste, analyst with KBW. He said that a key issue for REITs next year will be not only where their assets are located, but the types of tenant they have.

“Those REITs that have the high-quality assets are getting an increasing amount of renters by choice, people who want to remain more mobile,” he said. “This is the higher-end consumer with a better education and a better income.”

With the prime demographic for multifamily renters being between the ages of 20 and 34 years old, as the “echo boomer” generation continues to grow, St. Juste said landlords will continue to have pricing power and continue to push rents higher. He added that this demographic is less affected by the jobs downturn if they have a bachelor’s degree.

However, he said while rental pricing gains will continue to be made, the multifamily sector’s momentum may slow.

“We are certain that multifamily REITs are starting to get tested as to the extent of their pricing power,” he said.

Jason Lail, senior industry analyst with SNL Financial, noted that some analysts are currently projecting that lower-end apartment units have peaked in regards to rent growth. “There could be a growing disparity in the near term between rent growth for high-end and low-end apartment units,” Lail said.

In terms of performance fundamentals, Lail said multifamily REITs have consistently outperformed the broader REIT market in 2011 when it comes to growing their same store net operating income (SSNOI). At the end of the second quarter, multifamily REITs posted SSNOI growth more than 2 percent higher than all equity REIT growth in the same period, Lail noted.

Data from SNL also illustrate that multifamily REITs have consistently reduced leverage since 2008, dropping debt as a percent of their total capitalization from 56.4 percent at the end of 2008 to 35.16 percent at the end of the second quarter of 2011.

St. Juste said the lack of supply of new apartment developments has also helped the multifamily sector. With no new developments in the pipeline, renters are flocking to the same apartment buildings, creating a classic supply-demand scenario. St. Juste predicted that there will be no new supply until the second half of 2013.

Lessons Learned in Modern REIT Era

Thu, 17 Nov 2011 10:50:00 -0500

REIT executives discussed changes and lessons learned in the 20 years of the Modern REIT Era during a Nov. 16 panel discussion at REITWorld 2011: NAREITs Annual Convention: For All Things REIT.

“There have been more things that have worked than not,” said Mike Kirby, chairman of Green Street Advisors Inc., who moderated the session. A theme of the discussion: REITs have become what Kirby, a longtime advocate of the REIT approach to real estate investment, called “quality snobs.”

“There has been a steady change,” Kirby said. “Clearly most companies are now quality snobs. They need to own quality assets in gateway markets.”

Tenants and lenders are now both gravitating towards quality assets, according to Keith Pauley, managing director and CIO with LaSalle Investment Management Securities.

“There are better financing opportunities available for high-quality properties,” he said.

“They are not available for lower-quality assets.”

Robert Taubman, chairman, president and CEO of Taubman Centers Inc. (NYSE: TCO), said higher-quality assets have more income streams. “You know that when you want to find liquidity you are going to find it,” he said.

Pauley said getting more investors to embrace REITs has been a challenge. While REITs have made inroads with institutional investors such as pension funds, progress has slowed in that arena, according to Pauley.

“I think we have taken a few steps back, partly because of the nature of the market environment, changes in the industry and REITs adopting a more leveraged risk profile,” said Pauley, adding that there’s too much focus on short-term volatility and not enough on long-term risk and returns. However, the emphasis on quality should ultimately benefit REITs, in his view.

“If we have the best assets, over time investors will gravitate towards REITs,” said Pauley.

Hamid Moghadam, chairman and CEO of Prologis Inc. (NYSE: PLD), said REITs have become innovators in different areas such as life science centers, which has provided them with a competitive advantage. However, he said companies can run into problems when they become too far removed from their core competencies.

“A lot of that risk taking hasn’t worked out, and I think that’s where companies have gotten into trouble,” he said.

Moghadam also said he thinks REITs need to keep conservative balance sheets.

“We are living in a dangerous neighborhood and more dangerous world than I remember, and we will just start carrying more dry powder around,” he said.

REITs Honored for Sustainability Practices

Wed, 16 Nov 2011 18:30:00 -0500

NAREIT honored the winners of its annual Leader in the Light Awards competition on Nov. 16. The awards, which are done in conjunction with the U.S. Environmental Protection Agency’s ENERGY STAR program, recognize NAREIT member companies that have demonstrated superior and sustained energy use practices.

Awards are presented in both Large Cap and Small to Mid Cap categories.

Vornado Realty Trust (NYSE VNO) took the Gold Award, the top honor, in the Large Cap category.

Sukanya Paciorek, vice president of corporate sustainability for Vornado, told REIT.com that the company is committed to energy efficiency and sustainability as part of its core business. She said that commitment also gives Vornado a competitive advantage in the markets that the company operates in.

The Silver Award was presented to Simon Property Group (NYSE: SPG). George Caraghiaur, senior vice president of energy and procurement, noted that it was Simon’s seventh such selection.

“We are very proud and pleased that our employees’ accomplishments in energy efficiency and dedication to sustainability improvements continue to be recognized,” Caraghiaur said.

The Bronze Award in the Large Cap category was presented to Prologis (NYSE: PLD), the Honorable Mention Award in the Large Cap category was presented to Macerich (NYSE: MAC), and the Innovator Award went to HCP (NYSE: HCP ).

Liberty Property Trust (NYSE: LRY) won the Gold Award in the Small Cap category.

"Our teams all across the country have worked very hard to ensure sustainable practices are woven into every aspect of our business, and to be recognized by our industry for these efforts is truly an honor," said Marla Thalheimer, sustainability manager with Liberty.

The Silver Award went to Brandywine Realty Trust (NYSE: BDN), and the Bronze Award was won by Wells Real Estate Funds. The Honorable Mention Award was presented to Thomas Properties Group (NASDAQ: TPGE), and the Innovator Award went to Cousins Properties (NYSE: CUZ).

The Leader in the Light Awards also include Newcomer of the Year, which goes to the highest-ranking first-time applicant, and a Long Term Achievement Award for dedication to sustainability improvements over multiple application years.

The Newcomer of the Year Award was won by Extra Space Storage (NYSE: EXR), and the Long Term Achievement Award was presented to Simon Property Group.

“REITs today are leaders in sustainability because they understand it isn’t just good public relations – it’s good business,” said NAREIT Executive Vice President for Finance and Operations Sheldon Groner. “REITs recognize sustainability produces hard dollars-and-cents savings that are important in today’s economic environment.”

Additionally, Groner said sustainability provides a competitive advantage in the marketplace, because tenants gravitate to buildings that offer sustainable technology.

“For public companies, sustainability is an important issue for shareholders who have an expectation that the companies they invest in will manage their operations in an environmentally responsible manner,” he said.

The 2011 Leader in the Light Award judges were Michael Opitz, vice president, LEED, U.S. Green Building Council; David Stanford, president and CEO, Real Foundations; Mark Vorreuter, adjunct lecturer, Cornell University Program in Real Estate; and Maria Tikoff Vargas, director, Department of Energy Better Buildings Challenge.

More Choosing Apartment Lifestyle

Wed, 16 Nov 2011 18:28:00 -0500

The residential sector of the REIT market is going strong as homeownership rates continue to fall, according to industry leaders participating in a Nov. 16 panel discussion at REITWorld 2011: NAREITs Annual Convention For All Things REIT.

“Housing is a lifestyle choice, and everyone doesn’t want to buy a house,” said Richard Campo, chairman and CEO of Camden Property Trust (NYSE: CPT). “Homeownership rates will continue to fall .”

Richard Anderson, analyst with BMO Capital Markets, moderated the panel.

Michael Schall, president and CEO of Essex Property Trust (NYSE: ESS) said he still believes homeownership is the American dream.

“All things being equal, people will want to buy a home,” he said. “Apartment rents have gone up and homes for sale value have come down, but those adjustments happened over time,” he said.

Even so, Schall and the panelists seemed to agree that renting has become a more popular personal option for today’s generation of renters. Campo said a growing number of renters are willing to pay a premium to live in an apartment that is closer to an urban area, as opposed to a house in the suburbs.

Tom Toomey, president and CEO of UDR Inc. (NYSE: UDR), said apartment REITs may be able to find a way to grow by capitalizing on the private sector, adding that 85 percent of the multifamily space remains privately held.

David Neithercut, Equity Residential’s (NYSE: EQR) president and CEO, said that despite concerns about unemployment, the sector is still prospering.

“Occupancy and leases are very strong,” Neithercut said. “I don’t see any reason why in the next several years we won’t see strong revenue growth in our space. We are in a very good spot today.”

He added that financial independence is the new American dream. While there are people in apartments who want to own a home eventually, they want to do it later in their lives, according to Neithercut.

“The train wreck of single-family housing has given our residents time to think differently, and they will get in the housing market when they are ready,” he said.

Sustainability a Priority in CRE

Wed, 16 Nov 2011 17:00:00 -0500

Panelists participating in a Nov. 16 panel discussion on sustainability at REITWorld 2011: NAREITs Annual Convention: For All Things REIT encouraged REITs and the commercial real estate industry incorporate sustainability into the overall culture of their companies.

“Sustainability is a part of everything we do,” said Walter Rakowich, CEO of Prologis Inc. (NYSE: PLD) and one of the panelists. “It’s a mindset. There is no on or off switch.”

“There’s no way that our global problems will be solved without this industry being a part of it,” said Gary Pivo, professor of urban planning and natural resources at the University of Arizona. “We have some serious challenges in front of us.”

Dave Stanford, executive director of Real Foundations, moderated the four-person panel, where participants touted the benefits of being green in the commercial real estate sector.

Mary Hogan-Preusse, managing director and co-head-American Real Estate, APG Asset Management US Inc., said that because real estate is one of the main users of environmental resources, the industry should pay attention to its environmental impact.

“It’s the right thing to do,” she said. “Listed and non-listed companies have to demonstrate some form of sustainability before we invest in them. We want to see that you are starting that conversation.”

Rakowich said that Prologis made a decision five years ago that everything it does will be certifiable or have the ability to be certifiable under LEED standards for sustainable building. He added that to make an industrial building sustainable, it costs approximately 3 percent more than the company would have had to spend otherwise.

Kevin Kampschroer, federal director with the U.S. General Services Administration said sustainability has resulted in significant cost savings. He and Rakowich both agreed that for tenants, lighting is the top consumption issue. Kampschroer said he is focused on reducing that cost.

Rising, Bigman Receive NAREIT Awards

Tue, 15 Nov 2011 20:07:00 -0500

Nelson Rising, chairman of Rising Realty Partners, and Ted Bigman, managing director and global head of real estate at Morgan Stanley Investment Management, received the 2011 NAREIT Industry Leadership and NAREIT Industry Achievement Awards, respectively, during REITWorld 2011: NAREIT's Annual Convention for All Things REIT in Dallas.

Rising was awarded with the annual NAREIT Industry Leadership Award given to REIT executives for "significant and lasting contributions to the growth and betterment of the industry," according to NAREIT.

“At Maguire Thomas Partners, Nelson Rising oversaw landmark projects in the Los Angeles area, including the Library Square development, which resulted in the restoration of the historic Central Library and included the West’s tallest building, the 73-story Library Tower,” noted Donald Wood, president and CEO of Federal Realty Investment Trust (NYSE: FRT) and 2012 NAREIT Chair, who presented the award to Rising.

The award is presented in memory of Edward H. Linde, the late CEO of Boston Properties (NYSE: BXP).

“To have an award that bears his name has a special significance," Rising said. Rising became CEO of Catellus Development Corporation in 1994, a company that was created from the former Southern Pacific Railroad. He managed its evolution from a railroad land company to a REIT. Catellus’ hallmark was the development of “brown fields” projects that included Mission Bay in San Francisco – the city’s largest mixed-use development. He also oversaw Catellus’ merger with Prologis (NYSE: PLD) in 2005 and has served as chairman of The Real Estate Roundtable and as part of NAREIT’s executive committee.

Bigman received the annual NAREIT Industry Achievement Award presented to "professionals serving the REIT industry whose acumen and integrity have helped heighten awareness and understanding of the value of REITs and publicly traded real estate." The award was presented in memory of E. Lawrence Miller, the former CEO of one of the industry’s first REITs, Bradley Real Estate Trust, and a past NAREIT Chair.

NAREIT recognized Bigman for his approach to securities research on listed real estate companies, which has been influential in making REITs a standard component of institutional real estate portfolios.

“Over the years, Ted Bigman’s work has been important in demonstrating to large institutional investors the real value of including REITs in their real estate portfolios," said Bryce Blair, chairman and CEO of AvalonBay Communities Inc. (NYSE: AVB) and 2011 NAREIT Chair, in presenting the award to Bigman. "His strong advocacy for REITs has helped increase institutional allocations to listed real estate.”

Blair noted Bigman also has been an active contributor to NAREIT’s programs as a member of its Real Estate Investment Advisory Council (REIAC) and on advisory bodies for the FTSE NAREIT U.S. Real Estate Index Series and the FTSE EPRA/NAREIT Global Real Estate Index Series.

"I do think that we have made a real contribution to history," said Bigman, adding that significant inroads have been made in explaining REITs in the United States and globally.

"It's been exciting to work in the industry for 20 years,” he said.

Consumer Spending in Retail Strong

Tue, 15 Nov 2011 19:37:00 -0500

Consumer spending has been strong despite challenges in the economy,according to retail REIT executives during a Nov. 15 session at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas.

From back to school spending to positive holiday spending forecasts, David Henry, president and CEO of Kimco Realty Corp. (NYSE: KIM), said consumers are still spending and sales are holding up well despite what appears to be a general softening in the economy. Sandeep Mathrani, CEO of General Growth Properties Inc. (NYSE: GGP), echoed similar concerns.

“Even in the month of October, retails sales have been up compared to 2010,” said Mathrani, who added that the unemployment rate among GGP’s consumers is usually 4.2 percent, which is lower than the national average.

“They are educated consumers with bachelor degrees,” Mathrani said. “When you start dissecting who that shopper is, luxury has continued to sell and mall sales have grown because this market is educated.”

However, the panelists agreed that performance in the retail sector appears to be similar to a “barbell.” In other words, the high-end retailers and discounters are doing well, while the middle groups are searching for the right business model in today’s environment.

“Saks and Nordstrom’s are doing fine, and discounters are doing fine, but the middle is searching for the right place to be,” Henry said.

Steven Tanger, president and CEO of Tanger Factory Outlet Centers Inc. (NYSE: SKT) said consumers like bargains in these kinds of markets, but they also gravitate to brand names.

“We’ve been very fortunate that our consumers, on a macro basis, have seemed to fix their own balance sheet over the last three or four years,” Tanger said. “Outlets are the place where they like to go."

When it comes to the threat of internet sales, Henry said that while it is a concern among mall owners, he added that the shopping center industry is alive and well.

“We have an entire segment of tenants that aren’t impacted by internet sales, such as Home Depot and restaurants,” Henry said. “In fact, people are going out to eat more.”

Henry and the other panelists agreed that it may not be long until online retailers like Amazon have stores, similar to those run by Apple, to display their products.

Mathrani said he believes there’s room for both online and mall retail.

“We’ll figure out how to make it work together,” he said.

Jeffrey Donnelly of Wells Fargo Securities, LLC, moderated the panel.

Technology Changing Demand for Office Space

Tue, 15 Nov 2011 19:30:00 -0500

Office REIT executives participating in a Nov. 15 panel discussion at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT agreed that as technology has evolved, the workplace needs of their customers have changed as well. The changes are posing some challenges for companies in the sector, the panelists said.

“We think there is a significant impact of technology on office space, and it manifests itself in a variety of ways,” said William Hankowsky, chairman, president and CEO of Liberty Property Trust (NYSE: LRY).

He said companies are also looking for smaller work spaces as a result of technological advances. For example, Hankowsky said his company maintained properties were once call centers for Federal Express. By the time the leases on the facilities had come up for renewal, the Federal Express employees manning the call centers were all working from home

“Functional obsolescence for office space will become something we talk about in a way that we’ve never talked about before,” Hankowsky said.

Roger Waesche, president of Corporate Office Properties Trust (NYSE: CPT), said his company is witnessing the impact of the trend towards telecommuting as well. For instance, one of its tenants, a defense agency, is allowing employees to work from home one day a week. Another tenant, consulting agency Booz Allen Hamilton, only requires leases for roughly 60 percent of the space that it previously occupied three years ago, according to Waesche.

However, while telecommuting appears to be taking away a chunk of office space, in some industries, it has its limits. For example, Waesche said the sensitivity of government work necessitates that it be done in a secure environment. Joel Marcus, chairman, president and CEO of Alexandria Real Estate Equities Inc. (NYSE: ARE), pointed out that work in the science industry is often collaborative, and experiments can’t be done at home.

Still, Marcus said using space wisely has become a priority among most employers.

“Over time, everybody is space–conscience, in the sense they want to have more efficient space with the most amenity-oriented packages,” he said. “We are also seeing a movement toward better amenities.”

Richard Clark, president and CEO of Brookfield Office Properties Inc. (NYSE: BPO), said another way technology is affecting the need for office space is that the younger generation of employees is taking advantage of technology and doing more things on their own, as opposed to hiring assistants.

REITs Ready If Recession Hits

Thu, 10 Nov 2011 18:00:00 -0500

Investment grade-rated REITs in the United States are well-prepared to weather a possible recession, according to an analysis by Moody’s Investors Service.

In October, Moody’s Analytics projected the probability of a recession within the next six months to be 45 percent, up from its June 2011 estimate of 26 percent. Karen Nickerson, vice president and senior credit officer with Moody’s, said that with the European debt crisis escalating, she doesn’t expect the recession risk percentage to get better anytime soon. However, she also said REITs are currently in a better position to withstand another recession than they were in 2008, prior to the Lehman Brothers collapse.

Data from Moody’s show the level of effective leverage at the end of the second quarter of 2011 was approximately 44 percent. In the second quarter of 2008, it was 51 percent.

“We are comfortable with this level of leverage,” she said in an interview with REIT.com. “We don’t expect leverage to come much lower than this.”

The Moody’s report explained that REITs are in a better position to cover their debt maturities over then next 18 months. Nickerson said REITs also have large unencumbered asset pools that provided an avenue to raise cash during the crisis.

In the last recession, Nickerson said liquidity and balance sheet strength were the keys to survival. Moderate use of leverage also benefited REITs during the downturn, according to Nickerson.

In terms of commercial real estate fundamentals, Nickerson characterized Moody’s general view of the REIT industry as stable. She added that the outlook for the multifamily sector is particularly positive. On the other hand, high unemployment continues to present problems for the office sector, according to Nickerson.

Nickerson also noted in the report that most property sectors have either reached or are approaching troughs in their rental rates. Therefore, she said, REITs have more cushion should the U.S. slip into another recession.

Wells Fargo Establishing REIT Finance Group

Tue, 08 Nov 2011 15:30:00 -0500

Wells Fargo & Company is planning to announce the establishment of a separate finance group to serve the REIT industry.

Wells Fargo’s REIT finance group will work with publicly traded REITs in the commercial real estate industry. The Wells Fargo group will offer corporate banking services, lines of credit, term loans and construction loans to REITs. Additionally, the group will work in conjunction with Wells Fargo Securities and Eastdil Secured, a Wells Fargo subsidiary, to continue providing real estate investment banking services.

Wells Fargo has been offering similar services since its merger with Wachovia three years ago. The goal of the new group was to bring all of the products and services Wells Fargo offers to public real estate companies under one umbrella. In an interview with REIT.com, managing director Rex Rudy, who formerly headed REIT syndicated finance at Wells Fargo Securities, said the nature of the REIT business made the new unit necessary.

“With the integration of our platform, Wells Fargo determined that these companies (REITs) really operate differently than private companies,” Rudy said. “We were able to get people in place and decided it makes sense to spend 24/7 with those clients.”

The group will have primary office locations in Charlotte, Chicago and Los Angeles. Rudy said most of the staff is in place today and expects the group to be completely up and running by the end of November.

Addressing the current state of the market, Rudy said REITs have held their ground during the recession.

“The REITs have held up amazingly well and clearly have an access to capital that most private clients don’t have today,” he said. “But, like everyone else, the economic environment has had an impact on all of these properties, so we are all hoping for a more robust economic recovery.”

When it comes to trends in bank lending and terms, Rudy said the terms continue to be fairly consistent but pricing has trended down dramatically.

“I think 2012 will be a good year for REITs,” said Rudy, adding that even if the economy doesn’t fully rebound or stumbles, REITs are well-positioned.

REIT Charting an Educational Course

Tue, 08 Nov 2011 09:00:00 -0500

With a portfolio made up of diverse, specialized assets, Entertainment Properties Trust (NYSE: EPR) is ramping up its focus on the growing opportunities in public charter schools.

After a successful 10-year run almost exclusively in cinemas, within the past few years the company has placed an emphasis on expanding into new territory and new concepts, such as snowboarding and ski parks. More recently, the company has delved into public charter schools.

Entertainment Properties Trust purchased its first charter school property four years ago and is currently one of the country’s largest institutional owners of public charter school properties. It has invested approximately $280 million in the schools so far and plans to continue to look for more opportunities.

As communities across the country seek new, creative ways to education children, David Brain, Entertainment Properties Trusts’ CEO, says public charter schools are on the cutting edge of local education. He notes that charter schools with low enrollment have started in church basements and dilapidated buildings, but have since matured and will be looking for new facilities. Entertainment Properties Trust closed on the purchase of six public charter school properties in the third quarter and plans to start three build-to-suit charter schools in the fourth quarter.

“It’s a unique concept that is growing very substantially,” Brain says. “There are over 5,000 public charter schools in place with approximately 500 new charter schools opening annually.”

Public charter schools are just one of the unique categories of properties in Entertainment Properties Trust’s portfolio. The Kansas City-based company was born 14 years ago out of an investment opportunity with AMC Theaters, at a time when AMC was known as the pioneer of the big box cinemas. Brain says the company invests in real estate that offers high-quality life experiences, such as the multiplex theaters.

“Indicative of specialized properties, we like to describe them as new generation, durable, long life industries,” said.

“Because we invest in non-traditional property, we have been a magnet for people with non-traditional ideas,” says Brain, who adds that the idea to invest in public charter schools came from his industry contacts.

While public charter schools are still relatively new to investors and the real estate sector, Brain says the company plans to continue to focus on educating investors on the opportunities in the U.S. charter school market. Looking at Entertainment Properties Trust as a whole, he emphasizes the similarities in each of the company’s areas of investment. They are all tied by the fact that they are places that consumers choose to patronize.

“We want to buy in a financially rewarding manner,” Brain says. “We are not flippers. We are long-time holders. We like to invest in industries where we think there is going to be some sustainable, competitive advantage. That’s been true in our cinema, ski park and school investing.”

Multifamily Demand Spurs New Development

Wed, 02 Nov 2011 16:30:00 -0400

As the demand for rental housing increases, so does the pace of multifamily construction activity in most markets, according to research from the National Multi Housing Council (NMHC), an apartment industry association.

Two-thirds of the respondents to the NMHC’s quarterly survey of its members, which was released Oct. 27, said they have noticed an increase in activity in their markets in terms of either the construction or the planning stages of new development. Specifically, 20 percent noted that developers are breaking ground on new projects at a “rapid clip.” Meanwhile, nearly half reported that pre-construction activity, such as acquiring land and lining up financing, has increased.

“Powerful demographic trends, changing attitudes about homeownership and tighter mortgage underwriting continue to drive a shift toward renting, which is fueling a ramp up in new construction,” said Mark Obrinsky, NMHC’s chief economist.

Eric Bolton, CEO and chairman of multifamily REIT MAA (NYSE: MAA), said that while apartment construction is increasing on a broader scale, REITs have been ahead of the curve on development.

“Listed REITs and some of the better-capitalized (private) companies were able to get out in front of this trend, and have projects that have already been under construction since earlier this year,” he said.

MAA currently has three multifamily projects underway in Nashville, Tenn.; Charlotte, N.C.; and Little Rock, Ark. Bolton said the company is currently pre-leasing the Nashville property, with delivery expected as early as December. The other two projects will begin leasing during the first quarter of 2012.

“We continue to see what we think is going to be a very strong demand for rental housing over the next several years,” Bolton said. “This is the result of the prime rental age of mid-20s to mid-30s continuing to grow, and that demographic staying in the rental market as opposed to buying a home.”

However, he added that more jobs are needed in order for that growth to continue. “In the Southeast, job growth is picking up, and we continue to see early signs that things are getting better,” Bolton said.

Obrinsky also said jobs would be a key to continuing the apartment sector’s momentum.

“As long as the economy continues to generate jobs, the apartment upswing should remain on track,” he said.

Another positive sign for the sector: More than half of the survey’s respondents, 54 percent, think that new development remains considerably below demand.

“It’s a good time to be an apartment REIT,” Bolton said. “Leasing fundamentals are better than we’ve seen in 30 years.”

Third Quarter Real Estate Property Values Take a Dip

Tue, 01 Nov 2011 16:00:00 -0400

Although third quarter returns from commercial real estate investment properties remained positive, they were down from the previous three-month period, according to data released by the National Council of Real Estate Investment Fiduciaries (NCREIF).

The NCREIF Property Index’s (NPI) total return for the third quarter of 2011 was 3.30 percent, including an income return of 1.46 percent and a 1.83 percent return on capital. This reflected a total return that was 64 basis points lower than last quarter.

Calvin Schnure, NAREIT’s vice president of research and industry information, said the data illustrates the divergence between near-term and long-term fundamentals in commercial real estate.

The near-term outlook isn’t strong, Schnure said. While commercial property prices have stopped falling and actually edged up slightly, he said they are still well below the highs witnessed in 2007 before the financial crisis hit.

“Prices did stabilize and have made up for their lows,” Schnure said. “However, we don’t expect prices to get back to their pricing peak until the economy is back on its feet and consumer spending is back.”

For the time being, low occupancy rates mean landlords have little pricing power, according to Schnure. As a result, they’ve been offering concessions on lease renewals.

Schnure said the longer-term outlook is more positive, which he attributed to the lack of new property development in the pipeline across most commercial real estate sectors. With new construction at its lowest point in a decade, filling up the supply of available space will require multiple years once demand ramps back up.

“Construction of office buildings is 58 percent below its pre-recession peak,” Schnure explained. “Retail is off 66 percent, and apartments are down an astounding 73 percent.”

The growing demand for multifamily housing is already benefiting the supply-constrained apartment sector. Apartments outperformed all other sectors in the third quarter, followed by the retail and industrial sectors.

NCREIF’s Open-end Diversified Core Equity Index (ODCE), a sub-index comprised only of those properties in the NPI owned by open-end funds, had similar third quarter results to the NPI. The ODCE total return before fees for the third quarter was 3.52 percent, compared to a second quarter return of 4.62 percent.

With the unemployment rate hovering above 9 percent and the economy continuing its slow recovery, Schnure cautioned against expecting an immediate rebound in property values. “But buildings are a long-term asset, and the medium- and long-tem view for commercial properties is decidedly better,” he said.

Slow Real Estate Recovery Projected for 2012

Fri, 28 Oct 2011 16:00:00 -0400

Aside from sporadic growth in commercial real estate markets in gateway locations, the industry will face a slow climb to recovery in 2012, according to industry analysts from PwC US and the Urban Land Institute (ULI).

Speaking during an Oct. 26 webcast, the analysts said economic challenges, including a lack of jobs, are weighing on real estate markets. Jonathan Miller, a consultant with PwC, said that while investors are excited about the multifamily sector, there’s less optimism about others. He added that demand for space is not robust and he doesn’t expect it to ramp up in the coming year.

“The next year is not going to be as strong as our industry would like. It’s going to be a situation where we’re facing a long grind,” Miller said. “The recovery and pace of market demand is not keeping up, and we think it’s going to be a lingering trend.”

Despite the availability of capital, the analysts said the lack of consumer spending is compromising recovery efforts.

“When there’s too much capital, there are always issues,” Miller said. “There are just a lot of headwinds facing the real estate market today.”

He added that while real estate may appeal to investors when compared to stocks and bonds, the recovery is still progressing slowly. Miller said most of the money has flown into what he calls the “wealth islands,” the country’s 24-hour gateway cities that include New York and San Francisco.

In a survey of close to 1,000 commercial real estate industry leaders, PwC and ULI found some optimism towards a select few markets that offer stronger fundamentals in terms of jobs and investment opportunities. Respondents named Washington, D.C., Austin, Texas, San Francisco, New York City and Boston as the top five markets to watch in 2012.

Mitche Roschelle, partner and U.S. real estate advisory practice leader with PwC, said industry leaders surveyed expect 2012 pricing to level off in top markets. He also noted the overall “buy” sentiment will likely diminish. He said investors are coming to terms with a “new normal” in which they may not be able to sell assets for more than they paid for them.

Valuations, Fundamentals Key in Current REIT Market

Wed, 26 Oct 2011 15:30:00 -0400

Stable fundamentals and attractive valuations have today’s commercial real estate market on firmer footing than it was during the financial crisis of 2008, said Jonathan Litt, managing principal of Land and Buildings Investment Management LLC.

In an interview with REIT.com, Litt said the financial crisis in Europe and volatility of the past two months are creating fear in the capital markets, but U.S. real estate stocks are holding strong. He explained that the current backdrop is different than it was three years ago, when real estate fundamentals were especially weak.

“I think the principle difference is valuations,” he said. “A repeat of fall 2008 is unlikely for REIT shares, but more likely to resemble the 2000-to-2002 period when real estate stocks outperformed.”

Litt noted that REITs’ underlying property valuations are attractive at 6.1 percent implied cap rate. That represents an increase of nearly 100 basis points from July and a level likely 50 basis points higher than private market pricing, he said.

Additionally, new construction is currently averaging 390 million square feet per year. In the decade prior to the global financial crisis new construction was increasing at a rate of 1 billion square feet per year, according to Litt. With limited supply added in the past four years and a continued growth in population, households and even slight improvement in the job picture, underlying supply and demand dynamics remain stable for most property sectors, according to Litt.

Balance sheets are also more favorable than they were heading into the Great Recession, he said. Real estate values going into the financial crisis had hit inflated levels on an absolute basis. That made public and private real estate companies more susceptible to a decline in values, according to Litt.

“I don’t think we’re going to have the kind of balance sheet stress in the industry we had before,” Litt said. “With real estate now trading cheaper than historical levels, 20 percent to 25 percent below peak, on these metrics, balance sheets are better-positioned to withstand the impact of a cyclical downturn.”

However, performance among the different sectors will vary, according to Litt. He listed apartments, factory outlets and data centers among the sectors that should generate the strongest returns in the near term.

REITs Well-Positioned for Continued Recovery

Tue, 25 Oct 2011 12:00:00 -0400

While 2011 returns have not been what REIT investors had hoped, REITs continue to outperform the major markets and remain well-positioned amid the economic uncertainty, according to a Deloitte report released Oct. 24 on the top 10 issues facing commercial real estate in 2012.

Bob O’Brien, vice chairman and real estate sector leader for Deloitte, said listed REITs as a whole are in relatively good shape, thanks to improving underlying property fundamentals, favorable market dynamics and access to capital.

In addition to REITs, the report discussed a number of key issues to watch in the coming year, including globalization, macroeconomic fundamentals, commercial real estate fundamentals, lending, commercial mortgage-backed securities, private equity, deal flow, the residential real estate market and the residential mortgage market.

The report noted that REITs have been successful in bolstering their portfolios by deploying available capital for opportunistic and strategic acquisitions.

“Improved access to capital drove significant transaction growth and REITs were able to acquire prime properties within major markets at favorable prices due to the overall market distress,” O’Brien said.

However, O’Brien explained that unlike pre-recession times, growth prospects for REITs today are now heavily dependent on mergers and acquisitions and driving increases in rents. This is mainly due to a lack of new construction activity in the pipeline.

In terms of the outlook for 2012, O’Brien said that in addition to growth through acquisitions, REITs are expected to continue to focus on property operations, leasing and property mangement to add value until a full-fledged economic recovery resumes.

While O’Brien said there is no certainty about the relative outperformance of REITs over competing asset classes, an improvement in the broader economy likely will be the key to their sustained growth.

“I think the most significant challenge that REITs face is shared by companies in other industries, the significant uncertainty in these economic times. The impact that it’s having on real estate and fundamentals are a concern,” he said.

Other issues, including overall fundamentals in the commercial real estate sector, show signs of improving, but at a varied pace. The drastic drop in development activity amid tight underwriting standards and contracted demand levels may reduce activity in commercial real estate, according to the report.

“The delay in the improvement of market fundamentals within the office, industrial and retail sector may continue to be an indicator of an era of reduced expectations and growth,” O’Brien said.

Delinquencies also remain a concern as debt incurred at the height of the market is now coming due. With $1.8 trillion in commercial real estate debt maturities by 2015, the slower recovery of non-prime properties and continued economic uncertainty remain challenges for the industry, according to the report.

When it comes to global commercial real estate, the report pointed out that it continues to gradually improve, despite growing concerns over sovereign debt and the pace of future economic expansion. O’Brien said the global industry has benefited from a partial rebound in manufacturing activity, increased business spending and higher capital flows into real estate.

Additionally, the report noted foreign investment in U.S. commercial real estate continues to rise and is a key component to recovery in the commercial real estate market. However, that growth may soon take a back seat if global economic challenges persist.

“Economic uncertainties, such as the sovereign debt crisis in Europe, may stall near-term foreign investment and slow recovery momentum with the transaction market during the latter half of 2011 into 2012,” O’Brien said.

Private Equity Real Estate Fundraising Tumbles in Q3

Tue, 18 Oct 2011 17:00:00 -0400

As the competition between private equity fund managers for capital remains stiff, an analysis from alternative asset research firm Preqin showed a drop of nearly 20 percent in fundraising from the second quarter of 2011 to the third.

The 17 private equity real estate funds that closed in 2011’s third quarter raised an aggregate of $11 billion, a 16 percent decline from the previous three-month period. Preqin did note, however, that it anticipates those figures to increase slightly once all of the data is in for the third quarter.

Andrew Moylan, manager of real estate data for Preqin, said he expects the fundraising total to grow by 10 percent to 20 percent as more information becomes available, suggesting that fundraising in the third quarter could end up close to the levels seen in the previous quarter.

“There were a number of significant interim closes in the quarter, which does indicate that there is momentum in the fundraising market,” Moylan. “The level of competition remains intense, however, with more than 430 funds currently in the market.”

While some firms did close funds at or above their targets in the third quarter, Molyan said many others have been forced to delay anticipated closings.

“Fund managers will have to work hard to stand out from the crowd in order to achieve fundraising success,” Moylan said. He added that many will still face long fundraising periods, with no guarantee of success.

The funds that are closing have done so more quickly in 2011. So far this year, the amount of time taken on average to close a fund has been 16.6 months. That represents a slight decrease from 2010, when the average time needed to close a fund was 17.1 months on the market.

However, Preqin’s data illustrated that private equity funds still take significantly longer to hit their fundraising targets now than five years ago. In 2006 and 2007, they needed an average of less than 10 months to complete fundraising.

Moylan added that institutional investor appetite for private equity real estate funds remains limited. Preqin’s study found that 35 percent of investors expect to make new fund commitments in the next 12 months, although 16 percent have not committed to whether or not they will be active in 2012. That doesn’t mean investors are fleeing real estate, though.

“In the medium and longer term, very few investors are abandoning the asset class,” Moylan said. He added that 69 percent are currently below their overall target allocations to real estate.

In terms of regions, the funds with a primary focus on North America raised the most capital during the third quarter, with six funds raising an aggregate of $5.5 billion. Nine European funds reached a final close and raised a total of $4.8 billion. Funds focused on Asia and the remaining regions of the world garnered less than $1 billion overall.

Data Center REITs Anticipate Growth

Fri, 14 Oct 2011 13:00:00 -0400

With internet traffic growing at record high speeds, the demand for data center REITs’ space is growing as well.

“One of the challenges has been keeping up with the increasing demand for product,” said Bill Stein, chief financial officer of Digital Realty Trust (NYSE: DLR), in an interview with REIT.com. “In certain markets, we are fully out and we’re working hard to produce enough products for that demand.”

Stein added that based on his experience, data centers appear to be relatively insensitive to downswings in the economic cycle: “The last time we had a recession in 2008 our business actually picked up.”

These high-tech storage companies, responsible for housing computer systems and the supporting infrastructure, are poised to take advantage of the growing needs of their customers. In addition to Digital Realty Trust, there are currently two other REITs that focus on data centers, CoreSite Realty Corp. (NYSE: COR ) and Dupont Fabros Technology Inc. (NYSE: DFT). While there are new entrants into the sector, Stein said there’s not much mortgage financing or private debt available.

Digital Realty recently expanded it’s offerings in Singapore and entered the Australian market this year with two new sites in Melbourne and Sydney. Global financial services and information technology services are the primary drivers of demand for data center space, as well as some internet hosting, according to Stein. Stein noted that the rise of “cloud computing” for both businesses and individuals is helping to drive demand in the sector as well.

Dupont Fabros is also expanding. The company announced last month the opening of two data centers: one in Ashburn, Va., a suburb of Washington, and the other in Santa Clara, Calif. The company’s California data center is one of the largest in Silicon Valley.

“We design and build our facilities with our tenant’s requirements in mind. Our data centers provide the optimal environment for cloud and other high-density server and storage applications being developed,” said Hossein Fateh, president and CEO of Dupont Fabros.

Stein said he anticipates that at some point, data centers will become a core asset category.

“They are so essential to the function of the corporate enterprise today, frankly more essential than an office building or warehouse,” he said. “It’s very hard to move your applications once they’re in the data center. I think these data centers will grow as an asset class.”

Investing in REITs Book Tackles New Topics

Wed, 12 Oct 2011 16:00:00 -0400

REIT historian and longtime investor, Ralph Block debuted the fourth edition of his book “Investing in REITs” this week. In an interview with REIT.com, Block said the updated version will appeal to the more sophisticated investor and offers insights into the developments and strategies that have taken place in the REIT industry over the past several years.

REIT.com: How would you say that the process of investing in REITs has changed the most in the last few years?

Ralph Block: Well, I think there are probably several things. One is that there’s more focus on REITs’ balance sheets and debt leverage, for obvious reasons. I think there’s also a lot more focus on REITs’ cost of capital and how they are going to invest that capital, because a lot of value was destroyed in the aftermath of the Great Recession as REITs had to raise equity at some pretty diluted prices.

I would also think that a lot of investors, individuals and even some professionals are using a lot more mutual funds and particularly ETFs, which make REIT investing easy. But the downside is I think there is a lot more correlation. Any particular down day for REITs and they’re all going to be down about the same percent. I think it also results in more volatility.

REIT.com: Do you think that investor’s perceptions of REITs are evolving. Are they gaining popularity as an investment choice?

Block: That’s a really good question. As I think about this and as I wrote the new edition of the book, I really felt there were some positives and negatives in terms of investor perception. I think the positives are that REITs have shown that they have much better access to capital, both equity and debt, and as a result could react favorably to the credit crunch that really affected so many private and even institutional commercial real estate investors.

Another positive perception is that I think there is more respect for REIT management teams. They swallowed a lot of bitter pills at the beginning of spring 2009, and they did what had to be done in terms of raising equity and cutting the dividends .

I think a third positive change in perception is that there’s simply been better disclosure, better corporate governance, and I think REIT management teams have been receptive to requests for information.

Probably the only negative change in investor perception that I can see is that I think there’s probably some annoyance, at least on the part of institutional investors, that REIT stock performance, at least in the short term, seems to be more highly correlated with other asset classes. So the concern there is that REITs are not as much of an asset diversifier as they had been in prior years.

I think the other negative is that REIT stocks have just simply become more volatile, which really frustrates me, because if you understand what REITs are all about and the stability of their cash flow and, in most cases, long-term leases, there’s no reason for them to be all that more volatile.

However, I think the positive perceptions are going to be outweighing the negative changes of perception. I think a lot of it depends on whether REIT stocks can become a little less volatile, because that tends to freak people out. Until people stop worrying about short-term, day-to-day valuation, it’s still going to be an issue. I think it’s something we have to watch, but not sure if REITs can do anything about it.

REIT.com: Are you targeting the same readers for this edition of the book as in your previous editions?

Block: No, I’m really not. I think there’s certainly going to be a lot of overlap. Over the years, what I’ve learned is that as each edition came out, it was less brand new and inexperienced investors that were reading the book.

The more experienced investors, even professional investors and a lot of non-REIT-dedicated investors are trying to understand REITs. Also as reorganization is becoming increasingly important in the large real estate industry, I think a lot of commercial real estate people are trying to understand REITs.

I think the book is a little more nuanced and sophisticated in terms of how the discussions of REITs within the equities markets and commercial real estate markets have evolved, so it might be a little more difficult for someone who doesn’t know anything about investing to pick it up and understand. I think it’ll be more meaningful for people who do have some understanding of commercial real estate and the equities markets.

REIT.com: What can readers expect in this fourth edition of the book that wasn’t in the previous version?

Block: One of the things that I spend a fair amount of time on is the lessons learned from the Great Recession and credit crunch. Debt and balance sheet issues are much more important for investors to look at, as well as how REITs are allocating their precious capital. So that’s something that goes throughout the entire book.

There’s also a new chapter in this edition on investing in REITs outside the U.S. It’s written by Ken Campbell and Steve Burton.

The other thing is that there’s just a lot more emphasis on the fact that commercial real estate and REIT stock performance is more cyclical. It used to be that cap rates didn’t change too much. You’d buy a property at an 8 percent cap rate, and it didn’t matter what the stock market did or what the bond markets were doing. They weren’t going to change much.

But what we’ve seen in the last five years is cap rates coming down to crazy low numbers, 5 percent and below, in late 2006, and up to 9 percent and 10 percent and now if you believe Green Street’s estimates, cap rates are way down again. It’s been a roller coaster ride, and I think investors need to be aware of that.

REIT.com: What would you say is the single most important piece of advice that you hope readers will take away from reading your book?

Block: If you look at the data that NAREIT puts out, REIT investing has been very rewarding over many long-term time periods. But, they can be very cyclical in the short term because of increasing cyclicality in the economies and commercial real estate values. I think the one thing I would say to readers of the book would be, unless you really want to try and time commercial real estate markets and equity markets, it’s best to invest in good quality REITs and hold onto them for many years.

Full CRE Recovery Not Expected In Near Future

Tue, 11 Oct 2011 16:00:00 -0400

A full recovery in the commercial real estate sector could be years away, according to a survey of industry executives released earlier this month by KPMG LLP.

Although 64 percent of the commercial real estate executives who responded said their company’s current revenue is higher than last year and 75 percent anticipate increased revenues in 2011, most don’t see a recovery in the immediate forecast. Fifty-seven percent of the respondents said they don’t expect a full recovery until the end of 2013 or later, according to the KPMG study.

“Although real estate executives see things moving in the right direction, they believe it’s going to be some time before they see evidence to support higher levels of confidence,” said Greg Williams, national leader of KPMG’s building, construction and real estate practice.

Additionally the survey noted that distressed assets appear to remain a key issue on the road to recovery. Sixty-six percent of the respondents noted that the marketplace for investment opportunities is better than it was a year ago and 75 percent said distressed real estate could impact their investment strategies over the next year.

Williams said executives are worried that prices in many markets may not have hit the bottom yet due to weak demand.

“Executives are struggling to find sectors and markets that can deliver a reasonable return on their investments commensurate with the risk involved,” he said.

When asked about barriers to growth over the next year, 36 percent of the survey respondents noted that a lack of tenant demand was a factor. Other important considerations include legislative pressures and pricing pressure.

However, the survey also revealed some bright spots. Respondents anticipate a significant amount of multifamily developments to begin in 2011. Williams also said there has been an infusion of capital into the industry from institutional investors and others seeking an alternative to the public equity markets and looking into commercial real estate investments.

During the downturn, Williams noted, the industry has focused on techniques to function more efficiently. When asked where they will spend capital over the next year, 44 percent of the respondents to KPMG’s survey indicated that they expect their companies to increase spending on information technology more so than other areas of their businesses, followed by acquisitions then new products and services.

CRE Execs Less Optimistic Amid Economic Challenges

Fri, 07 Oct 2011 00:00:00 -0400

Optimism in the commercial real estate industry is starting to take a back seat to lingering economic concerns, according to the “2011 State of the Market Survey“ conducted by DLA Piper in September.

In conjunction with the firm’s 10th Global Real Estate Summit on Oct. 4 in Chicago, DLA Piper revealed the results of the survey, which measured the attitudes and perspectives of close to 300 top executives within the United States commercial real estate market.

Jay Epstien, chair of DLA Piper’s Global Real Estate practice, said the results show volatility in the global financial markets, coupled with solvent concerns through the eurozone, stagnant job growth and grid lock between the White House and Congress, have led to a pullback in optimism

He pointed out that this less than optimistic view followed a variety of upbeat indicators and reports that characterized the first eight months of the year.

“The survey results at the moment in time that they were taken were less optimistic,” said Epstien, adding that if the survey had been taken in June or July the results would have been more positive.

“I think a very consistent theme at the conference was a lot of uncertainty and a lack of confidence,” Epstien said. “Confidence drives a lot of decision making. Looking ahead, we are waiting to see how much capital retreats to the sidelines of the commercial real estate markets.”

However, only a slim majority (53 percent) of respondents believe that recent capital markets activity will significantly derail transactions made in the third and fourth quarters of 2011. Additionally, Epstien said the majority of the respondents said the United States can weather current conditions without eliminating the “carried interest” provision or increasing the capital gains tax rate.

Looking ahead, despite last year’s survey respondent’s record high expectations for REITs in 2010, this year’s survey showed that 35 percent of respondents believe that private equity will be the most active in 2012 followed by foreign investors (25 percent), pension funds (20 percent) and REITs (16 percent).

When it comes to international investments, for the first time in the survey’s seven-year history, Epstien said the three top-ranked international regions for investment opportunity remain unchanged. Brazil, China, and India remained at the top of the list.

“Three or four years ago, the Middle East was highly ranked but is now at the bottom, driven in part by the fact that Dubai really hit the wall from the real estate side two years ago,” he said.

Weyerhaeuser Named to Sustainability Index

Wed, 05 Oct 2011 12:00:00 -0400

Timber REIT Weyerhaeuser (NYSE: WY) has been named to the Dow Jones Sustainability World Index (DJSI). The company, based in the state of Washington, was one of only eight companies that focus on building materials to be included in the world index.

Out of the largest 2,500 companies in the Dow Jones Global Total Stock Market Index, the Sustainability Index tracks the top 10 percent in terms of sustainability. It bases its ratings on companies’ economic, environmental and social performance. The Sustainability Index makes a determination based on reviewing factors such as corporate governance, risk management, customer relationships, climate change strategy and labor practices.

Weyerhaeuser has been on the Dow Jones Sustainability Index for North America since 2005. However, Shari Brown, director of environment and sustainability for the company, said this is only the second time the company has been listed on the world index.

“It’s exciting and a pretty prestigious recognition,” Brown said.

Brown said the seeds of Weyerhaeuser’s sustainability program were planted when the company was created in 1900.).

“We like to think that we’ve been doing sustainability since our founding,” she said. “Our product takes 40 to 50 years to mature.”

Brown added that the company has been publishing an environment report since the early 1990s and began publishing a sustainability report in 2002.

Dan Fulton, president and chief executive officer, said Weyerhaeuser works to incorporate all aspects of sustainability into the company’s practices.

“Third-party recognition, such as the DJSI, helps affirm that we are effectively managing sustainability risk and opportunities to deliver long-term results to our stakeholders,” Fulton said.

Brown said Weyerhaeuser is currently focused on its sustainability strategy, which was developed in 2010. At that time, the company made sustainability commitments based on benchmarking, gap analysis, and leadership engagement, then set specific targets to achieve by 2020.

So far some of the things that Weyerhaeuser has done include ensuring that 95 percent of its timberlands worldwide are certified to sustainable standards, certifying and labeling all of its forest products to sustainable forestry standards and adopting green building standards for new company-owned manufacturing sites and office buildings.

In 2011, Weyerhaeuser has also focused on making progress toward other goals such as integrating components of the sustainability strategy into business systems and planning, engaging and educating employees about the new strategy and finalizing its product stewardship policy.

In addition, Weyerhaeuser was also named the most admired forest products company in the world by Fortune magazine in June 2011.

Armour Residential REIT Prepping for Growth

Tue, 04 Oct 2011 13:00:00 -0400

Despite the lingering uncertainty in the United States Treasury yield curve and the state of the residential mortgage market, ARMOUR Residential REIT, Inc. (NYSE: ARR) executives are optimistic about the opportunities for both ARMOUR and the Agency Mortgage REIT businesses model.

The residential mortgage company invests in low duration agency mortgage-backed securities from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Government National Mortgage Administration (Ginnie Mae).

ARMOUR Residential has grown from 80 million to more than 600 million of additional paid-in capital from June 2010 to June 2011, and revenues have grown accordingly. Returns on equity have averaged close to 19 percent for the last year, according to company executives.

Jeffrey Zimmer and Scott Ulm, co-chief executive officers, started ARMOUR through a reverse merger with a special purpose acquisition corporation in late 2009. In June 2010 the company was listed on the American Stock Exchange following an underwritten deal led by Ladenburg Thalmann & Co. Inc., a subsidiary of Ladenburg Thalmann Financial Services Inc.

The Securities and Exchange Commission (SEC) is currently reviewing whether it should issue any new rules that would clarify under what circumstances companies primarily holding mortgages should continue to be exempt from the Investment Company Act of 1940. According to Zimmer, mortgage REIT stocks have faced pressure over the past few weeks as a direct result of this review.

If the Investment Company Act applies, an issuer would be subject to limits on the amount of leverage it could use as well as limits on the fees that investors can be charged.

“The SEC Investment Act review has to be resolved, ideally on a limited and rapid basis in order for capital raising to start again in the sector. I am quite optimistic about the long-term opportunities of this business model. Once the SEC issue is resolved, you should expect to see capital start flowing back into the mortgage REIT sector.”

Zimmer said mortgage REITs are well positioned as part of the solution to the residential mortgage issue, as Fannie and Freddie continue to be forced out of the market through legislative action.

ARMOUR also has a unique attribute in the mortgage REIT area, according to Zimmer.

“We pay a dividend monthly; we are the only type of company in this space that pays a monthly dividend,” he said.

In terms of corporate governance, Zimmer said the company prides itself on its transparency and application of best practices. He said the board chair, Daniel Stanton, is a non-executive with a REIT background. He has served as COO of Duke Realty Corporation, (NYSE: DRE) and serves on the board of Public Storage (NYSE: PSA). ARMOUR also publishes a monthly company update detailing its assets and liabilities, in addition to quarterly SEC reporting.

Target Assets

ARMOUR acquires its agency mortgage assets from various sources, including originators, dealer inventories and bid lists. Most importantly, however, Zimmer said the company focuses on the underlying credit, structure and particular characteristics of each mortgage pool.

“We dig very deep because we want to know exactly what we own; we have to know everything we can about the pool in order to manage our prepayment risk,” he said.

Zimmer added that the company targets mortgages with a low duration of 1.5 years or less. It purchases agency securities that are easily traded and priced, such as “pass-through” securities. It doesn’t own any derivative mortgage investments or collateralized mortgage obligations (CMOs).

“Our belief is we want to be extremely diversified in our securities selection so as not to be subject to idiosyncratic pool risk,” he said.

ARMOUR is very focused on liquidity and holds up to 40 percent of unlevered equity in cash between prepayment periods, which equates to about 18 to 22 percent of additional paid-in capital.

“We strive to maintain extremely high levels of liquidity,” he said. “This can really pay off in periods of stress, like today’s environment.”

Business Tenants Making Technology a Priority

Wed, 28 Sep 2011 16:00:00 -0400

Tenants said access to high-speed networks and services are a top priority over other building amenities, according to a commercial real estate survey released Sept. 26 by the cable provider Comcast Corp.

Respondents noted that access to advanced communications services, such as broadband Internet and voice- or video-related services, has become a top priority when it comes to choosing office locations, surpassing longtime favorites such as on-site gyms and cafeterias in importance.

In the survey, 90 percent of building owners and managers said access to advance communications services trails only price, parking and location in terms of importance as a selling point.

A third of survey respondents said the topic of access to advanced communications is raised in at least 75 percent of negotiations with prospective tenants. Comcast said this had led many owners and managers to expand their network infrastructure options to give them a competitive edge in attracting and retaining tenants.

As businesses look to increase the speed of their operations and reduce IT costs, Terry Connell, senior vice president for Comcast Business Services, said companies are realizing that a reliable network connection is critical to the success of their business. He added that access to multiple fiber network connections is a top priority for tenants in recent office space searches.

Additional survey findings revealed that 61 percent of respondents reported that having advanced communications in their building provides them with a competitive advantage in their field. Fifty percent said offering more than one network service provider in a building positively impacts occupancy rates by up to 19 percent.

Patricia Areno, senior vice president of real estate group Building Owners and Managers International (BOMA), said the survey results illustrate that advanced communication is an increasing priority for commercial property owners that gives them an edge when marketing their building to tenants.

“At our recent annual conference, building owners and managers were talking about strategies for making their buildings ‘smart,’ from both a sustainability and technological standpoint,” Areno said.

Comcast’s 2011 State of Communications Services in Commercial Real Estate Survey included findings from a poll in August of close to 500 commercial real estate building owners and property managers.

Headwinds Don’t Deter Real Estate Investors

Tue, 27 Sep 2011 15:30:00 -0400

Despite multiple challenges facing the industry, investors still view commercial real estate as a stable asset class, according to a survey from PwC.

Mitche Roschelle, partner and leader of PwC’s U.S. real estate advisory practice, noted that within the past quarter alone, investors have dealt with volatility in the public equity and debt markets, non-existent job growth, a U.S. rating downgrade, the global sovereign debt crisis and fears of a possible double-dip in the U.S. economy. However, PwC’s quarterly survey of commercial real estate investors revealed feelings of cautious optimism for the long term.

“There have been multiple headwinds impacting the real estate economy,” Roschelle said. “The global debt crisis is one of the single scariest things.”

However, while he said the list of concerns appears to be growing rapidly, investors continue to seek out commercial real estate for its ability to generate stable, predictable cash flows.

“When you look at all of the other investments that one can make, real estate is viewed as a bit of a safe haven in tumultuous times,” Roschelle said. “People tend to flock toward relatively stable income-producing assets.”

In a challenging economic environment, investors tend to add commercial real estate to their holdings in hopes of smoothing out some of the volatility in their returns, Roschelle said. He pointed out that while real estate fundamentals, including economic growth and job growth, have perhaps deteriorated, commercial real estate investors have yet to retreat.

The PwC report also noted that competition among buyers is strong. Sellers are beginning to gain more control over pricing in certain sub-sectors and dominant geographic markets, according to the report.

On average, 31.4 percent of survey participants indicated that they believe market conditions favor buyers, down from 58.6 percent in 2010 and 80 percent in 2009. At the same time, PwC found that 26.4 percent of survey participants currently view the market as favoring sellers, up from 12.3 percent in 2010 and 7 percent in 2009.

In terms of investor interest in sectors, Roschelle cited the office market as one of the big stories this year. The multifamily sector remains a favorite of investors, according to Roschelle, with industrial space enjoying a “comeback” in the last quarter.

Real Estate Recovery Threatened by Economy

Mon, 26 Sep 2011 14:30:00 -0400

Commercial real estate may be losing its momentum when it comes to recovering from the recession, according to a September 2011 report from Green Street Advisors highlighting the ups and downs in the current market.

A slowing economy combined with low confidence and overstretched balance sheets threaten to impede the real estate recovery, said Peter Rothemund, analyst with Green Street.

“What’s going on right now in the markets is that investors are saying we don’t know if it’s going to be sunny and 65 degrees or rainy and 35 degrees. They are packing a margin of safety that we see spilling over into the commercial property market,” said Rothemund.

The repot noted that the type of discretionary spending on which many REIT-owned properties depend is likely to be constrained for quite some time due to falling consumer confidence.

Additionally, Rothemund said the jobs picture has bleakened in recent month and the projected growth rate for the next few years has slowed from 200,000 per month to something closer to 150,000 per month.

“If the economy can grow at 1.5 to 2 percent a year then things will be fine and there will be rent growth, but if we double dip then people will vacate spaces and rents will fall, but if we go into something bigger who knows what will happen,” he said.

However, Rothemund said that a lack of new supply is the silver lining to a deep recession. The current pace of growth for new construction is at a multi-generational low so occupancy gains will likely be healthy, even if demand growth is slow.

“That’s great news if you’re not a developer,” said Rothemund. “New supply is very low in every sector in 2011. Pipelines are quickly rebuilding for apartments, but littler adverse impact will occur until 2013,” he said.

In terms of the public market valuation, the report noted that REITs are attractively priced when compared with investment-grade bonds. Additionally, Rothemund said office REITs are expensive while industrial REITs are cheap.

Despite the fact that real estate remains cheap relative to investment-grade corporate bonds, Rothemond said recent weaknesses in REIT share prices has caused the premium to asset value to nearly vanish.