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U.S. CRE Viewed as Stable, Secure Place to Invest

Wed, 08 Feb 2012 11:30:00 -0500

Foreign investors view the U.S. as a more favorable place to invest today than it has been in the past five years, according to Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate (AFIRE).

In a video interview with REIT.com at the NAREIT headquarters in Washington, D.C., Fetgatter shared some of the results of the association's 20th Annual Foreign Investment Survey.

He said that the U.S., which at one point had always scored highly in the annual survey as a stable, secure place to invest, has suffered from a decreasing score in recent years.

"That score has been gong down significantly in the past five years," Fetgatter says. "For some reason this year it went back up. Perhaps it's in comparison to other parts of the world but nevertheless they view it as being more stable and secure."

Additionally Fetgatter said that investors also perceive the U.S. as a place for less possibility of capital appreciation. He said the perception is that all of the appreciation has gone out of the capital markets that they want to invest in.

When it comes to countries that investors view as some of the more favorable emerging markets, Brazil was the most popular survey response, according to Fetgatter.

"That was a surprise to us all," he said, adding that investors are also still favorable on China.

"There were more countries listed in their responses this year than there has been in the last several years. They've been very conservative in which emerging markets they're thinking about going into," he said.

In terms of U.S. investments however, Fetgatter said the survey results still primarily favored the major gateway cities such as Washington, New York, San Francisco, Los Angeles, and Boston.

"They have not really spread out to any other city, at least as not as far as office and retail are concerned. Some are investing in secondary cities if they can buy a portfolio of multifamily housing," Fetgatter said.

January Payroll Numbers Bode Well for Industrial Sector

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

The economy seems to have gotten off to a good start in 2012, as the government reported Friday, Feb. 3 that payrolls rose 243,000 in January and the unemployment rate fell to 8.3 percent. NAREIT Vice President of Research and Industry Information Calvin Schnure said the report was considerably stronger than expected, with gains across most industries and a rise in average hourly earnings.

What’s more, Schnure added that benchmark revisions to last year’s employment figures show the slowdown in job growth last summer was not as bad as previously estimated.

“The most recent news is the clearest sign so far that the recent sluggish growth has been due to temporary factors, as well as the lingering effects of the housing and foreclosure crisis,” Schnure said. “But job growth in the 250,000 range and higher will go a long way toward helping heal the housing market.”

One of the surprises in Friday’s report was that manufacturing employment rose 50,000. Schnure said that news, in conjunction other recent data, certainly is a sign that manufacturing activity is picking up.

“Many people are worried that the loss of factory jobs means the U.S. manufacturing base is eroding, which could undermine one of the pillars of the U.S. economy,” Schnure said. “It’s true that many firms have outsourced lower-skilled jobs overseas, but an even more important factor in the trend in manufacturing employment has been the surprisingly robust productivity gains in domestic output. For example, manufacturing productivity growth has averaged over 3 percent annually over the past three years.”

Not only has total production more or less kept pace with the overall economy, U.S. manufacturers have shifted more and more to the high-value added areas, high-tech production, Schnure said.

“High-tech output is almost 50 times greater than it was in 1990,” Schnure said. “A lot of this growth has come during the past decade – output is currently more than 2.5 times its level at the peak of the tech boom in the late 1990s. So, despite the trends in employment, the manufacturing sector continues to play a very important role in the U.S. economy.”

Drilling down to look at the industrial sector specifically, Schnure said 2011 was a fairly good year for industrial REITs, despite the sluggish GDP growth in the U.S. and abroad. Vacancy rates in industrial properties have been moving down steadily as production has continued to ramp up, he said.

“If the economy continues to gain momentum this year, as we expect, the industrial market should benefit, especially since the lack of new supply will cause further firming in the market and helping rents stabilize,” Schnure said. “To be sure, we expect construction activity to pick up, but on balance, and the market should continue to firm.”

Schnure reiterated that there are still potential risks, however.

“As I mentioned, we are far from being out of the woods. The economic recovery remains fragile, and we will need several quarters of robust job gains to put U.S. households and consumers on more solid ground,” he said. “In the meantime, any shocks to the U.S. economy or global financial markets – whether it’s a spike in oil prices due to rising tensions with Iran, or another failure by U.S. policymakers to make progress on solving the budget problem – could derail growth.”

That doesn’t necessarily mean a double-dip recession, though. Schnure said recessions are almost always caused by a sharp drop in the most cyclical parts of the U.S. economy – capital spending by businesses, inventory investment, residential construction and the purchase of autos and other consumer durables.

“But most of these are still near their cyclical lows and wouldn’t fall much further,” he said. “One or more shocks to the economy could put the recovery on hold, though, like happened last year, causing a reversal of the recent improvements in the unemployment rate and such – but an outright recession is extremely unlikely absent a significantly worse negative shock.”

Dividends Help REITs Outpace Market in January

Thu, 02 Feb 2012 16:50:00 -0500

The FTSE NAREIT All REITs Total Returns Index climbed nearly 6.5 percent in January. REITs bested the S&P 500 by two percentage points for the month.

In a video interview with REIT.com, Brad Case, senior vice president of research and industry information, discussed the REIT market’s performance in the first month of the year. Case attributed part of REITs’ outperformance to strong relative dividend yields.

“One of the big differences between REITs and the total returns of the stock market is that so much of the returns come from income and dividends,” Case said. “Investors are looking for dividend yields and investments that will provide them with the income they need to pay their expenses. Certainly, investors are very happy with the dividends they get from their REIT investments.”

In terms of share-price appreciation, Case noted that an estimated $100 billion in debt on real estate assets are coming due during 2012. Most of these debts were assumed at the peak of the market in 2007 by investors other than REITs, according to Case.

“Many of those investment managers are going to have trouble repaying those debts,” he said. “REITs, because they have a competitive advantage in terms of access to capital, are in a position to buy those properties at good prices. So, I think investors are looking forward to the prospects of increasing earnings, not just from the improvement in the economy, but also from the fact that REITs can buy properties at good prices.”

As fears of even more economic turbulence continue to subside, the outlook is starting to brighten up in the lodging sector. The sector gained 10.9 percent in January.

“I think that’s a pretty good illustration of what I was just talking about the easing of concerns about, the economic recovery,” Case said. “When investors have a lot of concerns about the strength of the recovery and about whether we might go into another recession, lodging REITs tend to suffer in that kind of situation, because investors aren’t sure if they’re going to be able to fill their rooms with vacation travelers or business travelers.”

Dividend Growth Potential Key Part of REIT Story

Mon, 30 Jan 2012 12:00:00 -0500

Dividends have always been a core component of the REIT investment proposition, and with investors clamoring for yield in today’s market, REITs should be getting more recognition for the reliable income they provide, according to Keven Lindemann, director of SNL Financial’s Real Estate Group.

“It is difficult anywhere in the fixed-income world to find a really secured yield of 4 percent or greater,” Lindemann said, referring to a recent Barron’s article that focused on where investors could find yield above 4 percent, but neglected to mention REITs. Out of 126 equity REITs in the FTSE NAREIT All Equity REITs Index, 71 had a dividend of 4 percent or greater. “One of the things often not taken into consideration is the opportunity for REIT dividend income growth.”

Lindemann said that, of the 140 REIT stocks tracked by SNL Financial, 35 percent raised their quarterly dividends in 2011. He said he expects that trend to continue in 2012.

“If you look at where pay-out ratios are right now, the dividends are reasonably secure,” Lindemann said. “AFFO pay-out ratios across the board are ranging from the mid-50 percents to the mid-80 percents, which is really pretty solid. Given that we are looking to see some good growth out of these companies relative to what we’ve seen in the last few years, I would expect more companies to really start boosting their dividends.”

That growth potential makes REITs a very attractive investment alternative, Lindemann said.

“In uncertain economic times, income potential is something people look for,” he said. “Income-oriented vehicles have become very popular with investors. People are looking for safety and security. So, the dividend component of REITs is a critical piece of the REIT story.”

Multihousing Momentum to Remain Strong

Thu, 26 Jan 2012 15:00:00 -0500

The multihousing industry is poised for a strong year in 2012, according to Doug Bibby, president of the National Multi Housing Council (NMHC).

In a video interview with REIT.com at the NAREIT headquarters in Washington, D.C., Bibby discussed growth, maintaining the momentum and keeping up with the demand for multifamily housing.

On the heels of NMHC’s annual meeting in January, Bibby said that there is great optimism in the industry.

“We’re seeing a surging demand for rental housing and a preference for apartments, so that is providing great growth opportunities for our members,” Bibby said. “At the same time supply is more limited in the industry.”

He attributes the current lack of supply to the previous single-family housing bubble and added that NMHC’s member corporations have been much more restrained in their building within the last few years. As a result, he anticipates rental prices to continue to grow this year.

In order to sustain that momentum, Bibby said that it will take jobs and a growth in the economy. He also said that a healthy single-family sector needs to be established.

“Multifamily always performs better when there’s a healthy single-family sector,” Bibby said.

Bibby responded to President Obama’s recent State of the Union speech by saying the president rightfully focused on the single-family housing market since millions of homeowners are under water on their mortgages.

However, he said he would have like to see issues such as the need for housing reform addressed in the Jan. 25 speech.

“We want to know what’s going to happen with Fannie Mae and Freddie Mac, and we want to know what’s going to happen with private capital coming into our marketplace,” Bibby said.

Additional topics he would have liked to hear discussed in the speech include tax reform and Dodd-Frank regulations.

In terms of keeping up with the growing demand for renters, Bibby said the industry will have to be very innovative.

“We’re going to see a lot of innovation and customization,” he said. “We are already seeing units getting smaller, particularly in downtown areas as developers try to push for more density in the redevelopments that they’re working on.”

Bibby also noted that the industry is going to try and provide more choices for consumers.

Looking for Low Volatility REIT Stocks

Thu, 19 Jan 2012 15:00:00 -0500

Given the surprisingly high levels of market volatility in 2011, Nem Marjanovic, vice president with Cornerstone Real Estate Advisers LLC, says he is searching for low-volatility REIT stocks.

In a video interview with REIT.com at the NAREIT headquarters in Washington, D.C., Marjanovic offered his insights into the current investing environment for REITs. Marjanovic noted that volatility impacted REITs and other equities alike. The result was a quick change in the overall market mindset in the middle of 2011.

"One of the shocking events was how quickly we went from an environment of pre-recession pricing in July, to pricing in another recession by August," he said.

The upheaval of 2011 had a broad range of effects across the global markets and has left investors and companies alike facing some "unresolved issues" in 2012, according to Marjanovic. The ongoing credit crisis in Europe continues to hang over the global economic markets.

"We haven’t heard anything out of Europe in some time," he said. "No news is good news when it comes to Europe."

However, despite the lack of activity in the financial markets there, Marjanovic speculated that recent austerity measures in European countries could lead to backlashes against some governments.

"As a result, we’ll probably get at least one sovereign credit default in 2012," he said. "That will have a tremendous negative impact on the markets."

Additionally, he said “geopolitical risks” in the Middle East could affect oil prices, which would hinder the global economic recovery.

On the bright side, the upcoming elections in the United States in November should have a positive effect on the economy, according to Marjanovic.

To deal with the persistent market volatility, Marjanovic said his firm has “taken a page out of the 2008 investing handbook.” It is implementing an investment strategy focused on finding “low-beta” REIT stocks.

Analytics Important to Energy Efficiency Efforts

Tue, 17 Jan 2012 16:00:00 -0500

Low cost and no cost operational improvements geared toward energy efficiency will typically return 5 to 10 percent per year, if they are sustained, according to Phil Bomrad, president of Clean Urban Energy.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Bomrad pointed out the various levels of sustainability along with their anticipated savings.

He said that projects such as retrofits of lighting and electrical systems have a big impact on energy and sustainability. Bomrad added that the operational savings in those types of projects can easily be calculated with some degree of accuracy.

Lighting, for example, will typically have an 18 to 24 month payback, he said.

“Then there’s also your ongoing operational savings versus a one time retrofit project, those savings will typically be lower but will also be sustainable,” he said.

It’s important to remain committed to the sustainability program; according to Bomrad, who said that the savings is closely tied to how committed a company is in the long term to monitoring their operational changes and maintaining them.

There have also been advances that building owners can take advantage of to help them reduce energy in their building. Bomrad pointed out that a lot of emphasis recently has been placed on analytics as well as SAS-based (Software as a Service) models.

“So instead of making capital investments in big retrofit projects, people are looking more and more at how they can leverage what they have already got in place,” he said.

This includes looking at the building’s automation system, lighting control or meter technology. Then leveraging that data, and bringing it back to a central platform and doing some type of analytics on it, Bomrad said.

While a lot of the emphasis is placed on office buildings when discussing sustainability efforts, Bomrad said that other commercial real estate sectors, including retail, lodging and residential, all benefit.

“Everybody cares about a good payback and everybody needs to make a good investment and manager their bottom line,” he said.

Federal Government Focuses on Sustainable Buildings

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

Sustainable building is here to stay, according to Kevin Kampschroer, Federal Director, General Services Administration.

"We are beyond the 'we're thinking about it' phase, beyond the early adopters phase, we're in the 20 to 30 percent total adoption, so it's not a passing fad," he said. "We operate buildings that are at 20 percent less cost in energy than private sector buildings, and that all goes to the benefit of the tax payer."

In a video interview with REIT.com at REITWorld 2011: NAREIT's Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Kampschroer discussed the federal government's role in sustainability.

He said the government is looking to set standards for defining high performance buildings, as well as to establish the relationship between how buildings work and how they work for the building's occupants.

"So, we are very interested in making sure the people in the buildings get what they need to out of the building and use it very effectively," Kampschroer said. "We're looking at a broad swatch of energy reduction initiatives."

One of those initiatives includes developing different techniques to ensure that information is easily accessible and usable to building owners. He said that there's a tremendous amount of research in how buildings perform that isn't being utilized by the people who are operating the building.

GSA is also working with a number of energy savings companies and discussing ways to use the federal government properties more effectively.

Kampschroer said there's an over arching initiative in the federal government that started with data center consolidation and has now moved to property in general.

"We need to use the property more effectively. We know that 50 percent of the time, an office building is empty, at any given place. We think that we can drive huge cost out of our portfolio across the government, by really rethinking how the buildings get used, use them more effectively and use less of them," he said.

Additionally Kampschroer said as the workforce changes there's a new generation of employees who are looking to work in buildings and for corporations that have done the right things in terms of energy efficiency and sustainable building practices.

Jobs Jump Bodes Well for Continuing CRE Recovery

Tue, 10 Jan 2012 16:00:00 -0500

The market got a pleasant surprise in early January with a 200,000 rise in payroll employment in December, according to NAREIT Senior Vice President of Research and Industry Information Calvin Schnure.

“The report was a breath of fresh air, but we’ll need stronger wind in our sails to keep this recovery going,” Schnure said. “We expect the economy to build momentum gradually as the year progresses. Every analyst is cautious in predicting a ‘recovery’ as we’ve seen several false starts over the past two years or so.”

As for ongoing risks, Schnure pointed to the ongoing issue in Europe and the ongoing housing crisis.

When asked how does the payroll employment boost translate into the outlook for REITs and commercial properties, Schnure said the outlook is pretty similar.

“Though the recovery is fragile, the risks are starting to recede and we expect conditions in commercial real estate to continue to strengthen in 2012,” he said.

The key to this outlook is job growth, he said. “This is most obvious in the office sector, which has lagged to date due to the weak employment growth so far,” Schnure said. “But payrolls are pretty lean as firms slashed their workforce during the recession and so far have been cautious in any new hiring. This means they will need to add new staff to deal with sales and output growth, which will help boost the demand for office properties.”

Job growth also is needed to support consumer spending—and this paints a brighter picture for the retail sector outlook, according to Schnure. Retail sales have held up moderately well, considering the lackluster employment gains to date.

“One of the most encouraging pieces of information in Friday’s employment report was that average hourly earnings picked up—they are up 2.1 percent over 12 months—this provides support for spending growth going forward,” he said.

Apartment REITs have posted tremendous gains already; but Schnure said many investors might be surprised how much further upside there is to this sector. The housing crisis has shifted millions of households from home ownership into the rental market, and this has been responsible for the gains to date, he said.

“What’s important going forward is the amount of pent-up demand still in the system. Household formation has been unusually low since 2008,” he said. “Remember, the population didn’t stop growing or getting older during the financial crisis and recession. As these people get jobs they will want to move out on their own, and in the current market, the lion’s share of them will be going into rental housing.”

He added that this comes at a time when the new supply pipeline is empty. New construction of multifamily housing plunged during the crisis.

“We estimate there has been a shortfall (relative to population trends) of roughly 500,000 units constructed since the recession began,” Schnure said. “Even though multifamily housing starts have begun to turn up, they are still less than half the rate needed to make up the shortfall.”

Commercial Real Estate Still Recovering

Tue, 10 Jan 2012 12:00:00 -0500

The commercial real estate market is still in a period of recovery, according to Jay Leupp, managing director with Lazard Asset Management.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Leupp offered his insight on the state of play for REITs in the current market.

“In the real estate market right now, we’re probably in the early to middle innings of a recovery that started probably 18 months ago,” he said.

Although the apartment and self storage sectors have led the recovery, Leupp said he believes some of the sectors that have been muddling along, such as retail and office, will eventually follow.

In terms of challenges, Leupp noted that global volatility continues to impact the REIT market.

“The news, particularly out of Europe right now, is affecting the daily movement in share prices,” he said. “We all know that real estate investment trust share prices over the long term behave like the underlying commercial real estate that they own. But in the very short term, like other publicly traded securities, they’re subject to the short-term movements in the market.”

Leupp said one advantage available to REITs in the current market is their access to liquidity. REITs’ ability to tap the equity markets proved to be their “saving grace” during the Great Financial Crisis, according to Leupp. After shoring up their balance sheets, Leupp said, REITs have been able to acquire capital from both the debt and preferred markets at “attractive” rates.

“We think that trend will continue,” Leupp said. “Periodically, the equity markets will open and close as they always do. But over the very long term, we believe that the REIT equity markets will remain open and that REITs will continue to be the premium borrowers in the commercial real estate sector.”

Investors Real Estate Trust Active in the Midwest

Tue, 10 Jan 2012 12:00:00 -0500

Investors Real Estate Trust (NASDAQ: IRET) enjoys the lack of volatility in the Midwestern markets, according to Tim Mihalick, president and CEO of the North Dakota based company.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel in November, Mihalick pointed out the advantages, challenges and fundamentals in the Midwestern market.

“The Midwest seems to lag. When the coastal markets are doing well we are struggling and when the coastal markets are struggling, we are coming back,” Mihalick said. “Now we are starting to pick back up.”

He said there’s currently a “tremendous opportunity” in North Dakota where there are almost 18,000 job that need to be filled in the oil industry. Whether it’s warehouse, industrial or commercial, Mihalick added that energy companies are coming into the state and are looking for space.

Investors Real Estate Trust focuses on 13 markets including North Dakota, South Dakota, Minnesota, and Montana. He said the company likes the fact that there’s not a lot of volatility in those markets.

“They are kind of somewhat off the map from most REITs but within a less volatile market,” Mihalick said. “I think that’s allowed us to find acquisitions in those markets where you don’t see the normal player that you would from a REIT perspective.”

When it comes to dividends, Mihalick said the company believes that paying a steady and reliable dividend is important. He added that the 40-year old company began with retail based shareholders who relied on its dividends.

“We felt it’s important to continue to pay that, so we managed to pay 160 consecutive quarterly dividends,” he said.

Commercial Real Estate Trends Remain Same in 2012

Thu, 05 Jan 2012 13:30:00 -0500

Commercial real estate trends and issues that were prevalent in 2011 will continue into 2012, according to Steve Hentschel, managing director and head of Real Estate Banking, Gleacher & Co.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel in November, Hentschel discussed sector fundamentals and recovery.

He said that topics including global economic uncertainty, sovereign debt issues, nervous investors and market volatility, will continue into the New Year.

When it comes to REITs specifically, Hentschel said one of the trends from 2011 that will carry over into 2012 is the trend of REITs owning core real estate.

“People are looking for safety and want to own the highest quality assets,” he said. “There will be a continued emphasis on major market 24/7 cities that have global appeal.”

In terms of trends that will be different, Hentschel pointed to leverage. He said that currently there’s too much of a penalty for REITs with high leverage.

“The pendulum has swung a little too far in the other direction, so I think that gap will close,” Hentschel said.

He added that there’s going to be more of a focus on debt maturities schedules and less focus on the absolute level of leverage.

“Another thing that’s developing is that we are watching more private capitol become frustrated with the low cap rates in high quality assets. The spread has just tightened too much,” Hentschel said.

“So I think you are going to see more B quality assets in secondary markets trade from the public into private,” he said.

Hentschel added that when it comes to recovery it’s more of a tale of two markets. He said while apartment fundamentals are the best witnessed in a generation, the industrial sector faces though headwinds because its fortunes are more closely tied with the global economy.

“Then if you look at the secondary markets, I think there’s challenges for office, lower quality retail and lodging,” Hentschel said. “And that I think is going to take longer to recover, at least until we get through the election.”

REITs Fairly Valued

Thu, 05 Jan 2012 13:25:00 -0500

REITs are fully valued under current market conditions, according to Rod Hinze, KeyPoint Capital Management’s founder and portfolio manager.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Hinze provided an analysis of the current state of the REIT market. He noted that implied cap rate on REITs stands at approximately 6 percent, whereas the average historical implied cap rate is roughly 8 percent. Hinze attributed the disparity to “artificially low” Treasury 10-year yields.

“I think that’s a function of people looking for dividend yield in their portfolios, and I think REITs are a good place to find that yield,” Hinze said.

Hinze also discussed some of the sectors he currently favors. For example, he singled out data center REITs as an attractive investment in the current market.

“Data centers are not getting credit for the growth that’s out there in the marketplace,” he said. “They trade at the same multiples as suburban office REITs, yet the demand for that space is three to four times greater than suburban office REITs.”

Additionally, in light of the trend towards universities outsourcing the on-campus housing, Hinze said he is high on student housing REITs. Hinze also said there may be value in student housing REITs, which have been affected by the potential for government spending cuts.

Hinze picked out two sectors where he is proceeding with caution. First, he indicated that suburban office REITs are trading at higher multiples than growth projections would suggest. Second, he said he is concerned about retail REITs that have exposure to big box tenants.

Dividend Income Boosts REIT Returns in 2011

Thu, 05 Jan 2012 10:40:00 -0500

The FTSE NAREIT All REITs Index gained 7.28 percent and the FTSE NAREIT All Equity REITs Index was up 8.28 percent in 2011, according to NAREIT Senior Vice President of Research and Industry Information Brad Case. Those totals compare to a 2.11 percent gain for the S&P 500 over the same period. Case said REIT dividends played a strong role in that outperformance.

“Well over half the total REIT return for the year was dividend income,” Case said. “In fact, it has been very remarkable to see how strongly income produced by U.S. REITs has held up even at the weakest part of the commercial real estate market cycle.”

Another impressive note from 2011 was the fact that U.S. listed REITs raised a record amount of capital during the year.

Case said all of the capital raised positions listed REITs very strongly in 2012 and beyond. Of the total $51.3 billion raised in 2011, $35.2 billion was secondary equity, $13.8 billion was unsecured debt and $2.3 billion came from IPOs.

“If you look at the two factors likely to drive earnings growth for REITs going forward, one of them is the improvement in operating fundamentals. The other is the fact that REITs have a strong ability to acquire properties at good prices because of their access to capital markets,” Case said. He added that in addition to acquiring assets in 2011, REITs also used the capital raised to strengthen their balance sheets so they will be in an ideal position to acquire properties going forward.

Case said he expects the acquisition of properties to be a major theme in 2012 as the loans taken out in 2007 among non-REIT investment managers mature and those owners are unable to refinance and put the properties on the market.

Strong operating fundamentals were a key to the strong growth posted by the apartment REIT sector in 2011 (up 15.4 percent for the year). Case said he sees a number of positive signs for operating fundamentals improving across many sectors of the commercial real estate space. Occupancy levels and rent growth, for example, improved in most property sectors in 2011, he said.

“In the broader economy, we have a whole array of signs,” he said. “We have seen steady growth in private sector employment, consumer retail spending and consumer confidence.”

Case added that these signs don’t point to a quick economic recovery, but that the economy is going to steadily improve and that will improve operating fundamentals in commercial real estate.

Benefits Continue to Accrue for Luxury Apartments

Wed, 04 Jan 2012 16:45:00 -0500

Apartment fundamentals are strong but the office sector faces the toughest headwinds, according to Hans Nordby, managing director with PPR, a CoStar company.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel last month, Nordby discussed opportunities and challenges within the various REIT sectors.

Apartment REITs have enjoyed lower vacancy rates, having gone from about 8.3 percent at the end of 2009 to approximately 6.5 percent today, Nordby said.

“They’ve already seen the decrease in vacancy rates. This is when you get the honest to goodness rent growth. We expect a lot of the benefits to continue to accrue for class A apartments, which is where REITs tend to play,” he said.

He added that the increase in jobs within the past year has benefited the better educated, higher income population who often rent in class A apartment buildings.

“There is less of an interest in buying that condo as a means of getting rich, a lot less this year than in the past,” Nordby said.

The class B and C apartments will do better when housing growth comes back in about two more years, according to Nordby. He said a big part of that population of renters tend to be construction workers or people who don’t make as much money.

He also likes the warehouse sector. Nordby said that warehouse is a sure thing when it comes to GDP growth. Nordby said the correlation between occupied warehouse space and GDP growth is .9 percent.

However, the office sector is currently facing the toughest challenges, according to Nordby.

“Office has it tough, and it really boils down to one thing,” he said. “Apartments average a one year lease term that’s over pretty fast, now that hurts in 2009 when the market goes down, but with the office sector in 2009, the NOI felt pretty good. But the flipside is that you don’t get the benefits of recovery either.”

Real Estate Acquisitions Creating Value

Wed, 04 Jan 2012 11:59:00 -0500

Many REITs were able to acquire assets in desirable markets in 2011, according to Haendel St. Juste, equity research analyst with KBW.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, St. Juste pointed out that the acquisition pace is playing out as expected.

He said that banks were putting more assets on the market as over levered borrowers were “facing the music.”

“The REITs were able to take advantage of their cost and access to capital to really be able to pursue and acquire some well located assets at, more often than not, very reasonable prices,” St. Juste said.

Today, the cap rates are in the high fours and low fives for a high quality asset in one of the core coastal markets, according to St. Juste. He added that there’s a good chance for REITs to create value with those acquisitions, especially with good NOI growth over the next couple of years.

In terms of how 2011 has fared, St. Juste said most REITs took a conservative approach amid the uncertain economic outlook.

“We weren’t seeing much job growth and I think most tended to default to a more conservative baseline projection for their year,” St. Juste said.

However, he added that there were a few surprises in the apartment sector because landlords were able to increase rents, without material job growth.

“Despite what you read in the news, apartment fundamentals are strong and you have a number of confluence factors driving that,” he said.

In addition to a decline in home ownership rates, St. Juste said that the apartment sector is benefiting from a reduction in supply because of the construction freeze during the downturn.

He said that factor, coupled with a modest job growth among the rental age population of 25-34 year olds, places the apartment sector in a good space.

“These companies are professionally managed, have strong balance sheets and there is prospect for dividend growth across many of the sectors, especially in apartments,” St. Juste said.

Business Back to Normal in Industrial REIT Sector

Thu, 29 Dec 2011 16:00:00 -0500

In the industrial REIT sector, it’s “back to business as usual,” according to Ben Butcher, CEO of STAG Industrial (NYSE: STAG).

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Butcher discussed some of the major trends among industrial REITs.

“The industrial sector is benefiting from a general economic recovery,” said Butcher, who indicated that companies in the sector have returned to normal operations. “We’re seeing reasonably strong results in the field.”

The increase in shopping being done online is having little effect on the sector, according to Butcher. He said the need for warehouse space might grow slightly.

“I don’t think, in general, it’s going to have that much impact on the industrial sector,” he said. “I suppose there’s going to be a need for a little more warehousing. Instead of having goods stored in the stores, they’re going to be in warehouses.”

Butcher said STAG benefits from warehouse operators’ hesitance to buy the kinds of single-tenant properties that his companies own, which they view as risky.

“People are afraid of them,” he said. “You either have a tenant paying rent, or you don’t have a tenant paying rent.”

As a result, competition in the sector isn’t as intense, according to Butcher. Additionally, the sector is attractive because of the low capital expenditures associated with it, and high levels of tenant retention.

“So, we are able to buy in a very good competitive environment and get very good returns for our shareholders,” Butcher said.

Class B Mall Operators Make Good Real Estate Investments

Wed, 28 Dec 2011 15:00:00 -0500

Investing in class B mall operators is a wise choice, according to Sam Wald, portfolio manager with Fidelity Investments.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel last month, Wald discussed both opportunities and challenges in the REIT industry.

“We feel class B mall operators are very inexpensive right now relative to the other retail REITs and to the broader REIT universe, especially considering the current capital markets environment,” Wald said.

The markets are currently underestimating the future growth of class B mall operators, added Wald.

“We feel they make great investments at this point,” he said.

In terms of sectors that may be faced with challenges, Wald said that government spending has been a big tailwind for a lot of different industries, including the healthcare sector.

“A lot of companies are depending on job growth in the greater Washington area, we think that going forward that, along with budget concerns, are going to be headwinds for a lot of those sectors,” Wald said.

Additionally he said that Fidelity is concerned about any sectors, including healthcare that are dependent on government reimbursement.

When it comes to investing in REITs, Wald said that he likes to remind clients that REITs are a good diversifier and should be an important piece of every well balanced portfolio.

When deciding on investment choices, Wald said the company focuses on staying disciplined and tries to look at the same factors in every market environment.

“That being said, when the capital markets get disrupted there is a lot of opportunity for management to add valued and destroy value through the managing of their balance sheets,” Wald said. “So we do pay more attention to management quality, access to capital and balance sheet quality in this type of environment.”

American Assets Eyes West Coast Real Estate Market

Fri, 23 Dec 2011 12:00:00 -0500

American Assets (NYSE: AAT ) is off to a good start after going public earlier this year and is looking forward to 2012, according to John Chamberlain, president and CEO.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel last month, Chamberlain discussed the company's first year since it's initial public offering.

"It's been very exciting, we have been public for 11 months now and accomplished most of what we set up to do in terms of having all of the policies and provisions in place to be a public company," Chamberlain said.

Since becoming a public company American Assets has modified their portfolio from a national platform to one that is more West Coast specific. Chaimberlain said the company is focused on markets in places like Portland, San Francisco, Southern California and Hawaii.

American Assets recently acquired properties in the Portland area and the company is continuing to search for assets in the Pacific Northwest, according to Chamberlain.

"We are pleased to find the same level quality of product that we are adding to our existing portfolio," he said.

Looking ahead to 2012, Chamberlain discussed strategies to revenue growth and expansion. He said that while acquisitions are still difficult, the company is hopeful that acquisitions will match approximately the amount of what it did last year.

However, he said he expects that immediate growth will come from internal development

“We own quite a few properties where we own the land free and clear, we are in the process of securing building permits and look forward to pursing with that development,” Chamberlain said.

He said the risk in doing so is much less than buying a new development site.

“Those properties we already own could provide immediate growth strategy for going into 2012,” Chamberlain said.

Strong Transaction Volume Expected to Continue

Thu, 22 Dec 2011 11:50:00 -0500

It has been a “really active year” for deals in the REIT industry, according to Mark Decker Jr., managing director with BMO Capital Markets.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Decker gave an overview of the deal-making environment in the commercial real estate market. Decker said he was “pleasantly surprised” to see trades on the magnitude of the deals in the health care sector and the merger of the major industrial REITs AMB Property corp. and Prologis (NYSE: PLD).

Whereas commercial real estate companies spent 2009 and 2010 cleaning up their balance sheets, buyers grew more aggressive in 2011, according to Decker. Decker speculated that the high volume of transactions would carry over into 2012, which should benefit publicly traded REITs.

“I think the market is moving the way of the public companies because of their incredible access to capital relative to most market participants,” Decker said. He noted that a number of REITs have started extending and expanding their lines of credit, a sign they could be preparing to make acquisitions.

In terms of some of the more interesting developments in the capital markets, Decker said he has noticed an increase in the number of seven-year loans being written.

“Those are not that profitable for most banks, depending on how they view their capital,” Decker said. “We’ve seen a lot of those cropping up in the last six months.”

Decker also pointed out that the dormant commercial mortgage-backed securities (CMBS) market continues to throw the capital markets for a loop.

“I think the lack of a CMBS market right now is unique,” Decker said. “That has been a big part of the real estate market now for almost 20 years.”

International Investors Look to U.S. Real Estate

Wed, 21 Dec 2011 15:00:00 -0500

Foreign investors continue to be attracted to the real estate market in the United States, according to Paul Curbo, portfolio manager with Invesco Real Estate.

Curbo sat down for a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel last month to discuss real estate fundamentals.

“If you look at 2011 we are roughly on par to double the amount of foreign investment in the United States as we saw last year,” he said.

Curbo attributed this to a number of factors including the declining dollar, which he said has made real estate in the United States cheaper. He added that the positive fundamentals have also played a role in increased international investments.

“If you look at the fundamentals they are fairly attractive. In terms of supply and demand we are not seeing a tremendous amount of economic growth yet but construction is very low,” Curbo said.

As a result of worldwide volatility and sovereign debt issue concerns, Curbo said investors are more confident in investing in gateway markets like New York or Washington, DC.

“There’s a sense of a bit more stability in what you’re purchasing then perhaps some of these other things,” he said.

As far as economic indicators that Curbo has his eye one, he said that in terms of property fundamentals, the supply and demand side of real estate, the supply side looks “really good.”

“The demand side is going to be driven by job growth, so that’s the primary indicator that you’re going to watch,” he said.

However, Curbo said that there are factors that are more specific to individual sectors. He said in the retail sector investors may look at sales while the industrial sector may look at industrial production or GDP growth.

Client’s perceptions of REITs have changed over the years and Curbo said many more investors are attracted to REITs because they like the total return history.

“REITs have done much better than the S&P 500 and much better than the Russell 2000, over long term periods. That’s attractive for investors,” he said.

Fundamentals Nearing an Inflection Point

Wed, 21 Dec 2011 12:00:00 -0500

Commercial real estate market fundamentals are approaching “an inflection point,” according to Philip Kibel, senior vice president with Moody’s Investors Service.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Kibel offered his thoughts on the current state of the REIT market. He said the market is showing signs of a turnaround.

“Today you’re seeing some recovery,” he said. “That trend of positive increases is still not there for most of the sectors, except multifamily.”

Although the multifamily sector has enjoyed higher occupancies and greater pricing power on rents, other sectors are still feeling downward pressure on net operating income and rents. He did note, however, that “investment-grade” REITs have experienced positive leasing momentum.

Another positive factor working in REITs’ favor is the lack of demand for their liquidity, according to Kibel. For example, the slowdown in development pipelines means there are fewer projects that require investment.

In 2012, REITs will have to deal with troublesome uncertainty, according to Kibel. In terms of U.S. public policy, concerns about the debt ceiling have yet to be alleviated.

“There’s clear uncertainty going forward until after the elections,” Kibel noted.

Additionally, REITs lack certainty on interest rate policy and the prospects for inflation, which Kibel termed “the gorilla in the room.”

Regarding the big story in the coming year, Kibel said it would really be a matter of REITs “continuing to execute on their core portfolio.” He said Moody’s expects REITs to eventually reach a point where rent rolldowns end.

Life Science REIT Focuses on Build to Suit Space

Tue, 20 Dec 2011 14:00:00 -0500

There’s a substantial demand for new build to suit spaces, according to Joel Marcus, president and CEO of Alexandria Real Estate Equities (NYSE: ARE). The company specializes in providing life science real estate space.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel last month, Marcus offered his insights on the life science real estate market.

He said fundamentals in Asia have been “very satisfying,” adding that the country continues to operate at a healthy level. Alexandria Real Estate Equities also has properties in India and China.

In terms of life science markets that are beginning to dissipate slightly or new ones emerging, Marcus said that the Houston market has a lot of potential.

“The Houston market is an interesting market, one that has a biofuel and energy component that we find very interesting,” Marcus said. However, he pointed out that there is slowed growth in Maryland.

“I think that’s due to some of the government cutbacks, but where you see a quieter market; you also see an emerging market. Energy has been a huge opportunity here in Texas,” noted Marcus.

Much of the company’s growth can be attributed to the build to suit development. Marcus said that one of the biggest assets of the company is that with the land bank it owns today it could double the size of the company.

“We are heavy in New York City, Cambridge, and Mission Bay, Cal., great barriers to entry markets,” Marcus said. “Going forward the majority of our growth will come from build to suit development.”

Marcus said that there is evidence of demand in New York City where the company currently has no vacancies. Alexandria Real Estate Equities has about a two to three percent vacancy in Cambridge where the company just began a new build to suit project in partnership with Boson Properties (NYSE: BXP).

Outside Factors Influencing REIT Volatility

Tue, 20 Dec 2011 12:00:00 -0500

Changes in “financial technology” that are beyond the control of REITs are impacting the industry’s level of volatility, according to Richard Adler, managing director and co-founder of European Investors.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Adler noted that volatility has grown into a major concern throughout all capital markets and has affected all corners of the global economy, including REITs.

“Certainly, macro issues such as the euro crisis and the de-leveraging that was the basis of our financial crisis years ago are the kind of macro factors that affect everybody,” Adler said. “But there are other factors that are more micro in character that we believe are exacerbating volatility. The capital markets are the channel through which we distribute real estate when we use publicly listed real estate. What happens in that channel matters in terms of how the values are measured and reported.”

Adler said the advent of certain investment products has helped fuel the volatility in the REIT market.

“Specifically, through deregulation, the evolution of exchange-traded funds, and particularly leveraged exchange-traded funds, together with high-speed trading are phenomena of financial technology that have changed this cycle in the way that real estate securities are valued,” Adler said.

Adler also covered the European property investment market. He said the widespread upheaval in the financial markets is impacting the prospects for investment in all countries.

“Everyone is exposed, and we’re all having to become experts in Greek and Italian politics instead of focusing on the more traditional local issues that are the primary focus of the real estate companies,” Adler said.

Adler noted that developments in U.S. public policy could be a boon for the REIT market.

“We see important deregulation occurring that is opening the way for the mortgage REITs to play a much larger role in the future,” Adler said. “As regulatory changes are developed to deal with problems of this last cycle, it allows the mortgage REITs to compete with much less leverage internally, and they, in turn, become more stable platforms. We believe they can serve a very important role in mortgage creation in the future and can become a much larger part of our fixed-income markets.”

REITs Will Continue Global Expansion

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

As REITs grow and expand their presence in the commercial real estate landscape, more will begin to build global portfolios, according to Peter Slatin, financial columnist with Forbes and associate publisher and editorial director for Real Capital Analytics.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Slatin discussed his outlook for the future of the REIT approach to real estate investment. He said he expects to see diversification in the industry in a variety of ways.

“We’ll see continued expansion, but we’ll also see increased variation as some companies experiment with financial structures, development ideas and locations,” he said.

Slatin also predicted that more institutional investors will continue to gravitate towards the REIT approach to real estate investment, increasing their allocations to commercial real estate securities over direct forms of commercial real estate investment. He noted that the inherent transparency and liquidity are the “enduring legacy” of the REIT model.

“Without these two things, real estate would have remained—and some of it still does remain—a secretive, private, closed investment world,” Slatin said. “Without the transparency that is required for institutional and professional investors to really judge what’s happening with their money, the impetus to invest in real estate is pretty much gone.”

Reflecting on the 20th anniversary of the start of the Modern REIT Era, Slatin said the momentum behind the move towards securitization made the advent of the REIT approach to commercial real estate investment inevitable.

“We’d still have the REIT world that we have, because the pressure to find an investment outlet in commercial real estate—not just for the average investor, but for the institutional investor who does not want to be a direct player in the industry—has been there for years and years and years,” Slatin said. “That was what really gave rise to that outlet.”

Sustainable Real Estate Requires Culture Change

Mon, 19 Dec 2011 12:00:00 -0500

Jon Moeller, senior vice president with MACH Energy, an energy monitoring software company, said that sustainability efforts should be a management driven process.

Speaking with REIT.com during REITWorld 2011: NAREIT’s Annual Convention for All Things REIT in Dallas at the Hilton Anatole hotel last month, Moeller discussed energy efficiency and benchmarking.

“What we have found is that it requires a management driven process; it’s a culture change,” Moeller said.

He said that building owners often have to balance that culture change for both tenant comfort and a more cost effective operation. Moeller also added that investing in energy efficiency operations typically results in a 5 to 10 percent savings.

Making a building sustainable happens on many different levels. Moeller said that capital upgrades are the most expensive.

“It’s a higher up front investment with a longer term, higher payback. This is where you are actually upgrading the infrastructure of the building,” he said.

However, he said many building owners are opting for a lower payback period by doing things like lighting retrofits.

Additionally, technology is playing a large role in today’s sustainability programs for commercial real estate.

“A data recorder, which is pretty much an industry standard, is a low cost device that is now widely prevalent,” said Johnson. “Then you combine that with web based analytic software, which is what we do.”

Local mandates have had an impact on sustainability efforts and data collection, according to Moeller.

“We are seeing some real impact from those mandates. It’s driving for more benchmarking and because of that transparency for tenants and investors, people are trying to determine how to save money,” he said.

Building owners are also wondering whether or not an operational efficiency program is enough or whether or not they need to invest capital, according to Moeller.

He added that in some cases, some of the buildings that are going to be in a company’s portfolio long term may be too far away from being efficient enough or attractive enough for its tenant base.

REITs Will Continue to Outperform in 2012

Fri, 16 Dec 2011 12:00:00 -0500

Investors have become more favorable toward REITs since the financial crisis, according to Arthur Hurley, vice president and senior portfolio manager with Columbia Management.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Hurley discussed investor’s opinions and his outlook for 2012

“I think REITs did a really great job of demonstrating that they had access to capital,” said Hurley. He added that it started out with access to the equity market and moved on to access to the debt market.

Additionally, he said that REITs have also demonstrated that they have the highest qualities of portfolio across the spectrum.

Looking back on 2011 Hurley said that it’s been a busy year with a variety of major events.

“We had a lot of merger and acquisition activity taking place. In addition to that we certainly had some macro events that stirred the marketplace,” Hurley said.

However, he said that he believes one of the biggest issues was that throughout all of the volatility and activity in the equity market, REITs continued to outperform and show that they have the ability to continue to provide a steady income stream.

When it comes to 2012, Hurley said that REITs have a good opportunity to outperform once again. He said the last time that REITs underperformed the broader equity market was in 2008.

“It’s been a pretty good run for the group,” he said. Hurley added that fundamentals continue to improve, occupancies continue to tick up and rental rate growth continues in the market place.

“Therefore you have this property level income that continues to grow. It really lines up, that the space, throughout the volatility can offer a continued steady improving income stream, and certainly gives the group the potential to outperform once again,” Hurley said.

Distressed Deals Should Drive REIT Market Activity in 2012

Fri, 16 Dec 2011 10:30:00 -0500

Morgan Stanley Managing Director Seth Weintrob said the large public-to-public REIT mergers that took place earlier in 2011 were outliers and not part of a larger trend. Speaking with REIT.com during REITWorld 2011: NAREIT’s Annual Convention for All Things REIT in Dallas last month, Weintrob said a key component to the steady stream of REIT M&A activity this year has been companies selling off non-core assets.

On the capital market side, Weintrob said 2011 has been a very active year in terms of debt and equity capital raising. “REITs still have access to capital at attractive rates,” Weintrob said.

Regarding single-asset sales and property transactions in 2011, Weintrob said the first half of the year was extremely active, probably more than people thought, and that tailed off as the year went along and concerns about market volatility persisted.

As for 2012, Weintrob said deal activity will be tied to market volatility and the situation in Europe.

“It feels like that process, in terms of figuring out and solving some of the European debt crisis issues--and, frankly, our own fiscal issues—is going to take some time,” Weintrob said.

Weintrob added that market activity will also be dependant on the type of deal. He said he expects initial public offerings to remain constricted while regular access to capital will be less impacted.

Because the multifamily sector has been less impacted by the general volatility in the economy and markets, Weintrob said he expects that to be the most active sector in 2012. “The supply-demand concerns in the housing market are driving activity,” he said.

A second area he said should be very active in 2012 surrounds distressed debt. “I think we are in the early innings in terms of a wave of both U.S. and European banks clearing some of the debt on their balance sheets,” Weintrob said. “Frankly, there is also a lot of overlevered CMBS and other debt that is going to result in recap activity.”

He said that will drive transaction activity both from value-add and opportunity fund players and, increasingly, with REITs.

Growing Demand for Senior Residential Real Estate

Thu, 15 Dec 2011 17:00:00 -0500

Healthcare REIT fundamentals are in excellent condition going into 2012, according to David Hegarty, president and chief operating officer of Senior Housing Properties Trust (NYSE: SNH).

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Hegarty spoke about acquisitions and challenges.

In addition to senior housing, Senior Housing Properties Trust also has medical office space. Hegarty said the company is about one-third medical office and two-thirds senior housing.

He said fundamentals are positive and added that the long recession has provided some interesting dynamics.

“With the recessionary period extending so long there’s been no new financing for senior living. The inventory has grown modestly over the past year or two and that continues to be the outlook for the net year,” Hegarty said.

As the population ages the demand for senior living assets will increase, Hegarty said. He said that this makes for excellent fundamentals for those companies who are already established in the industry.

Senior Housing Properties Trust has been one of the most acquisitive in the healthcare REIT space in 2011, according to Hegarty. The company has bought more than $1 billion in properties this year, which he said amounts to a 25 percent growth of its asset base.

“There are a number of private equity and other investor types that have caught on to the positive fundamentals and have been able to attract a considerable amount of capital to invest in this space,” Hegarty said.

As a result, Hegarty expects increased competition which he said will continue to hold cap rates down. However, he added that one of the bigger questions is whether or not the competition will have access to the debt financing that makes returns attractive enough for them to want to constitute investing in the space.

In terms of challenges, Hegarty said that the sector may be challenged with all of the talk about potential Medicare and Medicaid cuts. However, he said that in Senior Housing Properties Trust portfolio, less than 5 percent of its NOI is tied to government dependent type properties.

“We have sold off assets that are in the skilled nursing area in the last several years and we’ll continue to sell off those assets,” Hegarty said.

First Potomac Adapting to Government Spending Cuts

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

With the federal government apparently headed towards spending cuts, First Potomac Realty Trust (NYSE: FPO), which focuses exclusively on the Washington, D.C. area, is adjusting its strategy accordingly.

“There are a lot of concerns and headwinds in Washington related to the perception of some future downsizing by the federal government and the fact that the federal government has not really been an active tenant in the market this year,” said Doug Donatelli, chairman and CEO of First Potomac. “From an investor standpoint, there’s a tremendous amount of concern.”

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Donatelli offered his insights on the state of the market in the nation’s capital.

The presence of the federal government in Washington has historically made it one of the strongest commercial real estate markets in the country. Despite the pullback in federal spending this year, Donatelli noted that the locale has still seen positive net absorption throughout 2011. He attributed the continued stability of the market to the growth of private industry in the area.

“We’ve seen a number of companies moving their headquarters into Washington,” Donatelli said. “That has really given our market a lift overall.”

Donatelli observed that the concerns over spending are forcing government agencies to use their workspaces more efficiently.

“We’re seeing that the federal government really has a lot of pressure on them to utilize their real estate more intelligently,” he said. “From our perspective, it’s really not a bad thing overall.”

That pressure is pushing the government to seek out more efficient work facilities, according to Donatelli. It’s no different from the pressures facing the private sector, he said.

“We have designed a portfolio that we think fits the demand of tenants–both federal government and non-federal government tenants,” Donatelli said.

Looking back at the REIT market overall in 2011, Donatelli identified the overall level of volatility as the biggest story in the industry this year. It has forced REITs to be especially prudent in how they access the capital markets, according to Donatelli.

Staying Cautious With Leverage

Wed, 14 Dec 2011 17:00:00 -0500

The financial crisis taught Pebblebrook Hotel Trust (NYSE: PEB) important lessons about the use of leverage, according to Jon Bortz, the company’s chairman and CEO.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Bortz said the upheaval in the financial markets demonstrated the potential effects of the inherent uncertainty across not only the REIT industry, but all buisnesses. Consequently, he said, Pebblebrook takes a conservative approach to using leverage.

“We don’t understand all the risks in the world,” Bortz said. “The world is much more globally interconnected. What happened wasn’t something we could have even imagined.”

Another major change for Bortz in the hotel industry has been the growing influence of technology on how companies attract and retain customers. Not only are companies doing more and more business online, they’re also using online channels to do more marketing and advertising.

“Technology is really changing the way we get our guests,” he said.

Bortz noted that during the economic downturn, the hotel REIT sector saw a number of companies struggle, with hotels losing, on average, 40 percent of cash flow. However, he also pointed out that businesses are moving to send their employees back out on the road, which should actually benefit hotel REITs. Meanwhile, he said, leisure travel has held steady.

When all is said and done in 2011, Bortz said Pebblebrook is expecting that its revenue growth will exceed that of the industry average. The same goes for 2012, he said.

Overall, Bortz said he’s pleased with where things stand for Pebblebrook two years after going public.

“Things have played out far beyond what we would have ever expected,” he said. “I think we hit the market timing well for opportunities. We’ve put together a portfolio that far exceeds what we would’ve expected in all the major gateway cities. It’s a portfolio that has just tremendous upside.”

Lack of Supply Beneficial to REIT Recovery

Wed, 14 Dec 2011 13:31:00 -0500

A lack of new supply will help the commercial real estate market thought its continued recovery, according to Sheila McGrath, managing director with Keefe, Bruyette and Woods, Inc. (KBW).

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, McGrath said her outlook for the REIT space was positive going into 2012.

“We continue to have a positive outlook on REITs,” she said. “We expect dividend growth over the next twelve months to be appealing to many income alternatives.”

Additionally, McGrath said new supply across most property sectors is very controlled and that’s a plus for the industry.

“There’s a very low percentage of inventory coming on line, so we think that is a favorable backdrop for continued commercial real estate recovery,” she said.

KBW is pulling back from overweighting a certain sector, according to McGrath, who added that the company is advocating more picking stocks and not sectors, especially until the end of the year.

“A lot of the portfolio managers aren’t necessarily going to change big weightings, so we think in the near term it’s picking stocks over sectors,” said McGrath.

However, McGrath added that lodging has had a tough year but the thinks the sector will improve in 2012.

“We think that with continued controlled supply in lodging and REVPar growth, we feel positive on the sector,” she said.

Earlier this year KBW awarded REITs with a REIT Dividend Honor Roll. McGrath said the company has a favorable outlook for REIT dividends.

“We’re looking for eight to ten percent annual growth in dividends which is a welcome change since most of the REITs cut their rates in the downturn,” she said.

She added that payout ratios are conservative right now and cash flows are improving.

D&O Insurance Key to Attracting, Retaining Quality Boards

Tue, 13 Dec 2011 15:20:00 -0500

Even though three years have passed since the depths of the credit crisis, Raymond DeCarlo, senior managing director with Frank Crystal & Company, said publicly traded companies and their directors and officers continue to face a heightened exposure to claims and litigation that can put their corporate and personal assets at risk.

DeCarlo said that environment reiterates the importance for directors and officers (D&O) liability insurance.

“D&O insurance is an important source of protection both for the company as a balance sheet and for the personal assets of individual directors,” DeCarlo said. The policy can cover claims made by shareholders or regulators, investigations and claims made regarding M&A, joint ventures and more, DeCarlo said.

NAREIT’s Directors & Officers Liability Insurance Program was designed more than two decades ago for NAREIT Corporate Members that addressed the specific needs of the REIT sector, DeCarlo said. Frank Crystal is the program manager/outside advisor for NAREIT’s D&O Liability Insurance Programs. Arch Insurance Group is the primary plan provider.

DeCarlo said the existence of this coverage is a key tool in a REIT being able to attract and retain a quality board.

Brian Chiolan, vice president of Arch Insurance, said there are three key features of NAREIT’s D&O program. He said the unique and customized form of the insurance, keeping in mind the needs of REITs, is the first key element.

“It keeps in mind who is insured under the policy. What entities are insured under the policy and what constitutes loss within the policy,” Chiolan said.

The second key point, according to Chiolan, is the financial strength of the insurer. Arch Insurance maintains an A+ financial strength rating with Standard & Poors. “Because D&O insurance is a method of risk transfer, we believe that the financial strength of the insurance company is a key component in the decision,” Chiolan said.

Third, Chiolan said the superior customer service delivered by the exclusive administrator (Frank Crystal) and Arch’s dedicated team sets the program apart.

“It is evident through our underwriting, administration and claims handling that we have a dedicated team of professionals that have extensive knowledge of the REIT marketplace and remain committed to the REIT sector over the long run,” Chiolan said.

LaSalle Hotel Properties Looks to Strong Fundamentals

Tue, 13 Dec 2011 13:01:00 -0500

Hotel fundamentals are still strong, according to Mike Barnello, president and CEO of LaSalle Hotel Properties (NYSE: LHO).

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Barnello discussed how the uncertain economic climate has affected the lodging sector.

Lodging stocks rebounded in October after suffering earlier in 2011. Barnello attributed this volatility to investor’s uncertainty about the macroeconomic climate.

“It caused a lot of folks to get into a panic mode,” he said. “I think what happened at the end of the third quarter, after people announced earnings, is that it went a long way to calm a lot of investor's nerves that the fundamentals are still strong and what we’re seeing is more a result of some macroeconomic uncertainty.”

However, Barnello said he expects deal activity to remain at the current pace.

“Our expectation is that there will be a slight lull in the transaction market. As a result of the third quarter I think a number of buyers moved their expectations, both in terms of initial yield and returns they’re looking for on a short term basis,” Barnello said.

He added that unfortunately many sellers don’t move as quickly and will need time to digest what’s happened in the market to decide whether or not they will adjust their prices.

In some situations that may cause sellers to adjust quickly if the fundamentals were not strong, according to Barnello. However, he said fundamentals in his markets were strong and added that the sellers may prefer to wait until 2012 to see what happens with pricing and reevaluate whether or not they want to sell.

When it comes to getting the biggest return on its investment, Bornello said reinvesting in LaSalle Hotel Properties’ portfolio is a way for the company to get top notch returns.

“Our perspective on that is that we know the properties inside and out and we feel like it’s the lowest risk for us,” he said.

REITs Overcame 2011 Tests

Mon, 12 Dec 2011 15:42:00 -0500

REITs have passed the tests that have come their way in 2011, according to analysts from Morningstar.

“Strong fundamentals allowed this sector to successfully manage through a very difficult financial and economic environment,” said Philip Martin, REIT strategist with Morningstar, in a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel. Martin and his colleague Jason Ren also offered thoughts on the upcoming year in the REIT market.

Ren said 2011 showed that “the REIT model works.” Looking ahead, he said the story for REITs in 2012 won’t just be growth, but how REITs grow.

“I think responsible growth will be key,” he said. “We think there’s a lot of opportunity for public REITs to use their cost of capital advantages and grow their balance sheets.”

Martin mentioned that he thinks “organic growth” should be an area of emphasis for REITs.

“In that environment, where rates are low and uncertainty is rampant, we need to focus more on dividends and instead of external growth, potentially organic growth,” he said.

Martin didn’t cite specific sectors that he thinks are in position to benefit from a strong 2012. Instead, he predicted a strong year for specialized real estate sectors, such as education real estate data centers.

In terms of challenges for REITs in 2012, Martin cited a number of macroeconomic concerns. They include tepid economic growth, economic uncertainty around the world and ongoing problems in the commercial mortgage-backed securities market.

“Without that yet fully functioning, that could have an impact on cap rates in terms of driving them up,” he said.

Martin described REITs as “well-positioned” to deal with the potential for rising interest rates and levels of inflation.

California REIT in Acquisition Mode

Mon, 12 Dec 2011 14:32:00 -0500

The San Francisco area offers one of the best commercial real estate markets in the country, according to Victor Coleman, chairman and CEO of Hudson Pacific Properties (NYSE: HPP).

In a video interview with REIT.com, Coleman said in 2011 the company has placed an emphasis on acquisitions in the California region.

“This year we focused primarily on the marketplaces in California that we thought were advantageous to growth around media, entertainment, social media and technology,” Coleman said. “San Francisco has really been a huge acquisition target for us.”

Hudson has witnessed the growth of the San Francisco market through its leasing and rental rates, according to Coleman.

In terms of other markets the company is keeping its eye on, Coleman said that Hudson Properties is also monitoring the penninsula area of California and looking at growth or acquisision opportunities in that particular market as well.

In Southern California, Coleman said that the company has also seen a lot of growth in the West Los Angeles markets, from Santa Monica to Hollywood.

“We’ve acquired assets and will continue to acquire assets in that marketplace. We think that growth will escalate,” Coleman said, adding that a lack of construction in that market may help build up some of the surrounding areas.

Coleman has overseen the initial public offerings (IPOs) of two REITs and said he is a big fan of the public real estate format and its benefits.

“It’s led us to having access to various types of capital, not just a joint venture partner and not just debt related capital,” he said, adding that it was important for his company to have the ability to mix and match the right kind of capital resources to build the company.

“That’s what the public markets have done for us and we’ve been very successful in the past,” said Coleman.

REITs Ready to Act on Opportunities

Fri, 09 Dec 2011 12:00:00 -0500

REITs have generally put themselves in a strong position to be opportunistic in the commercial real estate market, according to Gil Menna, partner with Goodwin Procter LLP.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Menna discussed the current state of the capital markets for commercial real estate. As more debt comes due, REITs should have a chance to be active buyers in cases of distress, according to Menna.

REITs are “incredibly well-positioned to take advantage of whatever stress might exist in the marketplace,” Menna said.

Companies looking to go public as REITs are finding roadblocks in the capital markets, Menna noted. Even companies presenting strong investment potential are having trouble securing IPO funding, he said.

“I think the new issues are the harder piece of the puzzle, because the IPO market is closed,” he said. “There are a lot of companies in registration that deserve, in my judgment, to have access to the public equity markets and would be very competitive.”

Existing REITs aren’t having much trouble tapping the equity markets, according to Menna. However, he said, few are in need of significant amounts of equity capital at the moment. He attributed their favorable cost of capital in the current market to REITs’ efforts to clean up their capitalization structures following the financial crisis.

“REITs don’t have to raise too much equity capital, unless it’s for a pending transaction, because they’ve right-sized their balance sheets on a relative basis,” he said.

Instead of traditional equity offerings, Menna said more REITs are pursuing at-the-market (ATM) equity offerings.

“Almost all mature REITs have ATM programs,” he said. “They’re raising enough capital on a regular basis that it’s causing the right side of their balance sheets to come down, improving their debt-to-capitalization ratios.”

U.S. Recovery, European Uncertainty Moved REITs in 2011

Thu, 08 Dec 2011 16:27:00 -0500

Through the first 11 months of 2011, the FTSE NAREIT All REITs Index gained 2.61 percent and the FTSE NAREIT All Equity REITs Index was up 3.33 percent, according to NAREIT Senior Vice President of Research and Industry Information Brad Case. Those totals compare to a 1.08 percent gain for the S&P 500 over the same period.

Case added that if you look at the numbers over a longer-term perspective it highlights the extraordinary situation we are in. REIT returns over any meaningful historical period average between 10 percent to 12 percent per year, and that has investors looking for earnings growth going forward as REIT shares continue to rebound from the downturn following the Great Recession.

Reflecting back on 2011 so far, Case said the year has been defined by two predominant stories impacting the REIT market. The first, he said, is the improvement in the U.S. economy which has lead to improvement in operating fundamentals for real estate investment managers, especially REITs.

“That has been slow but steady all year,” Case said. “At the same time there has been an overlay of concern about the European debt crisis. The year has been one where in a given day or given month which one of those stories has outweighed the other.”

Looking ahead, Cased said the driving forces behind REIT performance in 2012 will be the same ones at work since the bottom of the market in 2009. The first of those being continued improvement in operating fundamentals.

“We have seen the worst in terms of occupancy rates. We have seen the worst in terms of rent growth,” Case said. “The U.S. economy seems to be shrugging off concerns about Europe and that will continue steadily increase REIT earnings going forward.”

Case said the other main story for 2012 will be the continued competitive advantage that publicly traded REITs have over non-REIT investment managers in their ability to access capital and acquire properties.

“This will be very important going forward because there will likely be quite a few more high-quality properties coming to the market,” Case said.

Student Housing REIT Fills a Void

Thu, 08 Dec 2011 16:20:00 -0500

As states tighten the budget on higher education, Ted Rollins, CEO and co-founder of Campus Crest Communities (NYSE: CCG), said his company is helping to fill a void.

Rollins sat down for an interview with REIT.com during REITWorld 2011: NAREIT’s Annual Convention for All Things REIT in Dallas last month to discuss the campus REIT’s operating platform.

The squeeze on higher education has impacted business, as Rollins said that 38 states so far have decreased higher education funding. This has impacted their ability to finance much needed, new housing, according to Rollins.

“There’s a limited amount of money for schools to invest in non-core assets, so more and more we’re seeing the private sector fill that void,” Rollins said. “Housing stock needs to be replaced on campus and that’s an opportunity for our company.”

Student housing has changed over the decades, and Rollins said that students have quite a bit of input as to the type of housing and amenities included. There are nine student community assistants at every Campus Crest property, and Rollins said they continuously offer input into program development.

“If you look at the way we operate, we build all of our products ourselves and continue to grow organically,” he said.

Rollins added that each year the company has the opportunity to upgrade and adapt campus housing programming according to feedback from both student employees and resident surveys.

In terms of keeping the student housing facilities fresh and free from damage, Rollins said the company involves the students so that they are active in the housing community.

“When you create a sense of place, they are generally better on the asset,” he said.

Additionally, Campus Crest inspects the units regularly and bills any damage back to the student.

Long-Term Solutions Needed to Revive Economy

Wed, 07 Dec 2011 16:00:00 -0500

Tim Riddiough, professor of real estate and urban land economics at the University of Wisconsin-Madison, said he expects 2012 to play out much the same as 2011 in terms of economic recovery efforts.

Speaking with REIT.com during REITWorld 2011: NAREIT’s Annual Convention for All Things REIT in Dallas last month, Riddiough said you will not see the benefits of good political decision making immediately. He pointed to issues that require a long-term thought process and commitment to solve.

“Our education system is broken. That has been one of the long-term competitive advantages that the United States has had in the world, and that advantage is eroding,” Riddiough said. “Reinvesting in our educational system is really important. We won’t see dividends from those investments immediately, but that is the kind of thing we need to consider.”

Looking at the commercial real estate space, Riddiough said there is a trifurcation at play. “The upper end of the market (higher quality properties located in coastal cities) has been doing very well,” he said. “What are still struggling are the middle and lower ends of the market. We have a large number of commercial banks in the United States that are struggling with poor commercial mortgage loan performance, and we haven’t seen the recovery in the lower and middle-tier market.”

Riddiough said not enough attention has been paid to the looming debt maturity crisis in the commercial real estate sector. He said because 2003 to 2007 was the boom for commercial real estate lending the majority of these loans will begin coming to due in 2013 and will cause a real issue through 2017.

“This will be an even bigger issue as we get into 2012, especially if the economy doesn’t improve,” he said.

RioCan Touts Positive Retail Fundamentals

Wed, 07 Dec 2011 15:00:00 -0500

Positive retail fundamentals in Canada are being driven by the expansion of big box stores into the market, according to Ed Sonshine, president and CEO of Riocan (TSX:REI.UN.CA)

Speaking with REIT.com during REITWorld 2011: NAREIT’s Annual Convention for All Things REIT in Dallas last month, Sonshine said Canada is a great market that is underscored dramatically when compared to the United States.

“There’s quite a gap so there are still new development opportunities,” he said. “The two biggest factors affecting retail in Canada today is the entry of Wal-mart and Target.”

Another factor that has had a significant impact on the market has been the urbanization of the major cities including Toronto and Vancouver, according to Sonshine.

“Big box retailers are not represented in the urban parts of the city and yet that’s where all of the population growth is, so there are a lot of opportunities in Canada for us,” he said.

RioCan made it’s entry into the United States market in 2009. Sonshines said the company had begun researching the market in 2005 but said “things were very overpriced then and we didn’t have a competitive advantage, we didn’t understand the local market.”

Sonshine said that all changed in 2009 when prices went down with the economic crisis. He added that Canada came through the recession better than most American REITs and that gave the company a competitive advantage to moving into the market.

To better understand the local markets, he said part of RioCan’s strategy is to buy with partners who understand the local markets. RioCan currently has partnerships with Cedar Realty Trust (NYSE: CDR) and Inland Western Retail Real Estate Trust Inc.

“As we start to understand the market we bought a few assets in the north east on our own, 100 percent, as people got to know us,” Sonshine said.

Diverse Real Estate Investments Pay Off

Tue, 06 Dec 2011 16:30:00 -0500

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, CEO Trevor Bond said that W.P. Carey is invested in about 28 industries at any given time. He said any one of the company’s funds may have 20 or so different industry types represented within it.

“So naturally, as you get ups and downs in the economy, those risks will be buffeted by the spreading out of those risks,” Bond said.

W.P. Carey also views diversity as more complex than usual, according to Bond. He said the company likes to diversify by country, or region within a country, to get the full benefits of relative movements in different economies.

However, he said one of the primary benefits comes in the form of having long term leases. Bond said long term leases take the risk out of the short term swing of its investment.

“With any given dislocation, such as the one we’re currently in, if you have a five to seven year down cycle and we’re signing leases that are 15 to 20 years, we feel comfortable that if we’ve done our homework and evaluated that particular tenant and credit appropriately, as long as they can continue to pay rent we can deliver income to our investors,” he said.

Bond said that the best investment opportunity is in the triple B credits or below. He added that they may be very good companies that experienced difficulty accessing the credit markets at a particular time.

“So we can step in and provide them with credit at a time when they might not be able to get it. We’re seeing quite a lot of that; that’s been our sweet spot,” Bond said.

Bond has also noticed more good credits in secondary markets where there hasn’t been a lot of new construction.

“We are seeing some very good credits that either want to build a new campus or take over existing buildings, or use our funding to renovate it and then occupy that building,” he said.

Office REIT Emphasizes Sustainability

Tue, 06 Dec 2011 13:00:00 -0500

As one of the winners of NAREIT’s annual Leader in the Light award, Bill Hankowsky, chairman, president and CEO of Liberty Property Trust (NYSE: LRY), spoke with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel.

The office and industrial REIT has worked for nearly a decade in various sustainability initiatives, according to Hankowsky, who said the company has developed both Leadership in Energy and Environmental Design (LEED)-certified buildings and Energy Star buildings.

“It’s a very comprehensive program. I think to have peers in the industry say ‘job well done’ is great for us and our team,” he said.

Going forward, Hankowsky said that goals include building only LEED-certified buildings. Liberty Property Trust has ten buildings in construction currently. The company also has a goal of lowering energy consumption across the entire portfolio.

“One of the things that we did to aid that was to put in place a building-wide area network, so we can now actually monitor real time electric utilization at a central point for 13 separate assets,” Hankowsky said.

Additionally, new initiatives include meeting the new round of LEED specifications, which require much higher standards and more energy efficiency, according to Hankowsky.

Liberty Property Trust is currently developing an office project in Philadelphia, a former navy yard neighborhood, where Hankowsky said the company is putting in “green streets.”

“It’s literally taking the storm water from the initial rain, collecting it in basins at the curb, and having it get filtered through vegetation and stones before it actually goes in the storm sewer system,” he said.

“We’re looking at everything out there and how we might test it and use it to apply new technology,” said Hankowsky.

Liberty Property Trust is also active in research efforts. Hankowsky added that the company is working on a project, funded by the Department of Energy, to come up with ways for existing buildings in that same Philadelphia neighborhood to lower their energy consumption.

Home Properties Ramping Up Development

Mon, 05 Dec 2011 13:45:00 -0500

The time is right for Home Properties Inc. (NYSE: HME) to ramp up its development program, according to Ed Pettinella, the apartment REIT’s CEO and president.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Pettinella discussed the positive momentum in the multifamily sector and the favorable conditions for Home Properties. Pettinella said his company has enjoyed strong quarterly earnings for the last two years, and its appetite for new development projects is growing.

“We’ll have probably one or two projects over the next year or so,” he said. “I think for us, like many others, it will be a supplemental stream of income, versus the acquisitions that we buy for the core portfolio.”

Pettinella also noted that Home Properties has developed a reputation for its ability to upgrade existing assets, and he reviewed some of the benefits of renovating existing properties in the company’s portfolio. He said the Home Properties redevelopment strategy focuses on improving the “whole ambience” of a property, which can include outdoor landscaping, computer centers and exercise facilities.

“It’s a whole experience that we try to create on a particular property,” Pettinella said.

In terms of refurbishing apartment units themselves, Pettinella said fixing up kitchens and baths tend to be “the biggest hits,” as well as adding washers and dryers to units.

Looking ahead to 2012, Pettinella said he’s confident that Home Properties can continue its strong operating performance.

“I guess unless truly there is a double dip and we go back into recession, I would say not a lot is scaring us for 2012,” he said. “We’re already operating with very high unemployment, 9 percent. Yet, we’re still doing very well from a fundamentals and an earnings standpoint.”

Pettinella said declining homeownership rates are creating “a huge wind at our back.”

REIT Transactions Rise in 2011

Mon, 05 Dec 2011 12:00:00 -0500

One of the dominant stories in the REIT industry this year has been the revival of the capital markets, according to Paul Adornato, managing director of research, BMO Capital Markets.

Adornato sat down with REIT.com for a video interview at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel. He said the capital markets came back to life in 2011, providing well priced debt and equity for most companies that sought to tap those markets.

“We also saw the transaction market come back to life, with companies much more active in buying and selling,” he said.

However, Adornato said that one of the most important stories has been that of supply and demand.

“Perhaps most importantly, we saw just basic supply and demand start to swing back in favor of the real estate owners and operators,” Adornato said. “That is, even though there was very little new growth, the lack of new supply kept the overall operating dynamics reasonably healthy for most sectors.”

Additionally, Adornato said there has been a lot of capital looking to buy properties. He said that income-oriented, core type investors are back, and this has provided a good opportunity for REITs to dispose of assets that may not be in their long term strategic plan.

Looking ahead, Adornato said he anticipates that 2011 will bring “more of the same,” in terms of a general recovery.

“I think there’s the potential for upside surprises if the economy turns out to be not as bad as the headlines seem to indicate today,” Adornato said. “I think with all of the noise surrounding Europe and the presidential election, if that were to subside and folks were to look at the real economic growth, we might see a different picture and perhaps have a bit more confidence in the REIT market.”

At the same time, Adornato also said that valuations price in a fair amount of optimism.

“But we’re a little bit cautious so we’ll see what happens,” he said.

More Opportunities Await Healthcare REITs

Fri, 02 Dec 2011 14:30:00 -0500

Mary Hogan-Preusse, managing director & co-head of Americas Real Estate, APG Asset Management US Inc., is excited about healthcare REITs and the transactions they made during the beginning of the year.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Hogan-Preusse, said the healthcare sector has only tapped the surface of the opportunities for buying assets from the operators.

“It’s the one area of the economy, where people have to agree, is definitely going to be expanding,” she said.

She noted, however, that there are some issues that concern all REIT sectors, including the global outlook and the American economy headed into the recession. Hogan-Preusse added that the access to capital is going to be “the great financial crisis 2.0.”

“I think that’s going to be something that affects REITs, and we’ll start to hear about the 'haves vs. the have nots' again in terms of access to capital,” she said.

Since many of the larger REITs have exposure to the Washington, D.C. region, she said investors are concerned about a shrinking government and what that could mean.

“I have to say that I haven’t seen the government shrink in my 20 years at this,” said Hogan-Preusse. “Even for the government to shrink, you have to hire consultants to help it shrink. I don’t think it will be as bad as some people think it ultimately will be, but we’ll have to watch.”

In terms of volatility, she said that while it’s been a huge concern for investors, she thinks people are getting more comfortable with REITs.

“The moves can be startling - we’ve been in this volatile phase for long enough - but I do think the returns remain very good,” Hogan-Preusse said.

Duke Realty Repositioning Portfolio

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

Duke Realty Corp. (NYSE: DRE) has made “tremendous progress” towards its goal in repositioning its commercial real estate portfolio, according to Denny Oklak, the company's chairman and CEO.

In a video interview with REIT.com at REITWorld 2011: NAREIT’s Annual Convention For All Things REIT in Dallas at the Hilton Anatole hotel, Oklak noted that Duke Realty is approaching its goal of a portfolio that consists of 60 percent bulk industrial assets, 25 percent suburban office properties and the remaining 15 percent in medical office assets. That has spurred the company to sell off some of its suburban office portfolio and acquire industrial and medical office properties. Recently, the company sold approximately $1 billion in suburban office assets to Blackstone Real Estate Group.

In terms of the latest real estate cycle, Oklak said the recovery has been surprisingly slow.

“When we look at where we are in the cycle, I’d say we’re a little bit behind in what we’ve typically seen in some of the other recoveries,” he said. Lease rates in the company’s industrial portfolio are improving, but not as strongly as expected, according to Oklak.

On the office side of the company’s portfolio, the pace of the recovery remains restrained, said Oklak, attributing the slow growth to high unemployment.

“It really isn’t surprising when you look at where our economy is today with 9 percent unemployment,” he said. “A lot of that is in the office-using space, so that has been slower.”

Looking ahead, however, Oklak said Duke Realty is actually more optimistic than the general consensus about the prospects for growth in 2012. He noted that the company is projecting GDP growth roughly half of a percentage point higher than most analysts.

Duke Realty’s property development business slowed significantly during the market downturn in 2009 and 2010, two of the company’s slowest years in terms of development in its history. The company has already announced two major development projects in 2011, including an industrial facility in Atlanta and medical offices in Indianapolis.

“We’re starting to see more interest in build-to-suit projects,” Oklak said. “I think we’ll see a few of those projects get off the ground here shortly.”

Private-to-Public REIT Deals Could Highlight 2012

Thu, 01 Dec 2011 16:00:00 -0500

REITs were praised for their ability to stabilize their balance sheets during the Great Recession and they continue to be in a strong financial position as another wave of debt maturities looms on the horizon in the broader commercial real estate industry.

Speaking with REIT.com during REITWorld 2011: NAREIT’s Annual Convention for All Things REIT in Dallas last month, Jeffrey Horowitz, global head of real estate, gaming and lodging for Bank of America Merrill Lynch, said there is about $200 billion per year of maturities through 2017 in the commercial real estate space. He said REITs have accounted for about 20 percent of the transactions in 2011 and that percentage should continue to grow in coming years.

“REITs’ access to capital has been very dramatic. The industry has raised about $120 billion in capital over the past three years, with a little more than half of that in the form of equity capital,” Horowitz said. He added that REITs have about $15 billion of available cash on their collective balance sheets and about $50 billion in access to untapped lines of credit.

So far in 2011 there has been about $50 billion in transaction activity, which Horowitz is more than many people think has taken place due to larger deals (notably AMB-Prologis merger) that occurred earlier in the year. Fast forwarding to the coming year, Horowitz said he expects to primarily see three types of transactions take place.

“There will be some public-to-public deals due to differentials in multiples,” he said. “There will be some activity in public-to-private because there have been some private players that have suddenly been able to access significant pools of capital and we have seen REITs sell good-sized portfolios to some of those players.”

Lastly, Horowitz said he expects to see a lot of private-to-public activity.

As for the REIT IPO market, Horowitz said the last three years have not been as poor as many believe in the context of the 20-year period of time during the Modern REIT Era.

“When you look at the pipeline it is not that big, but it is characterized by deals of some scale,” he said. He added that anytime there is substantial market volatility certain transactions become harder to get done, with an IPO being chief among those.

“As we look forward, there are many high-quality (private) companies out there,” he said. “There are many high-quality companies that went private where debts are going to mature over the next few years. So long term, I am bullish on the growth of the sector from that perspective.”

Inland Real Estate Eyes Acquisitions Heading into 2012

Thu, 01 Dec 2011 11:00:00 -0500

Mark Zalatoris, president and chief executive officer of Inland Real Estate Corporation (NYSE: IRC), said the company’s occupancy levels have improved as new tenants have entered key markets in Chicago and Minneapolis.

Speaking with REIT.com during REITWorld 2011: NAREIT’s Annual Convention for All Things REIT in Dallas last month, Zalatoris said those new tenants include Ross Dress for Less, Gordmans and H.H. Gregg.

“We have been very fortunate in that we have been the beneficiary of their market expansions,” Zalatoris said. In addition, he said, “some of our tenants are doing some right-sizing and we have been able to offer them the right type and size of space and drawn them from competing centers.”

Inland has capital available to pursue strategic acquisitions, including funds from Dutch pension fund PGGM. Zalatoris said the two are targeting necessity-based shopping centers in the upper Midwest.

Looking to 2012, Zalatoris said what has him most optimistic is that there is capital available (particularly from inland’s partners including PGGM) and there are quality acquisitions to target.

“We are also working with some of our developers we have done business with in the past on off-market deals,” he said.

Zalatoris said he expects to see the company continue to have a robust pipeline of new acquisitions going into 2012. “The fact that the retailers feel very optimistic about the future and are continuing to express a desire to expand should continue in 2012 as well,” he said.

On the flip side, Zalatoris said macroeconomic issues continue to be a concern throughout the real estate industry and country as a whole.

“There is concern European contagion could possibly spread back to the United States. Consumer sentiment is what could impact our retailers in a negative way. And if it does turn negative there expansion plans may be scaled back and that would trickle down and affect us,” he said.

Regency Weathered the Recession

Wed, 30 Nov 2011 15:30:00 -0500

Grocery-anchored shopping centers have held up well during the economic downturn, according to Martin “Hap” Stein, Jr., chairman and CEO of Regency Centers (NYSE: REG).

Speaking with REIT.com during REITWorld 2011: NAREIT’s Annual Convention for All Things REIT in Dallas this month, Stein discussed how his company fared during the recent recession.

The fact that Regency Centers focuses on grocery-anchored centers with restaurants has helped the company weather the storm, according Stein, who said that eating is a necessity.

“People have to eat and they are still spending money in restaurants. The supermarkets at Regency Centers average over 25 million in sales,” Stein said.

Throughout the recession he said that the 92 percent occupancy was a testament to the benefits of grocery-anchored shopping center properties. Stein added that the occupancy number is currently moving back up to 93 percent.

Despite challenges in the economy, when it comes to attracting new tenants, he said the demand for shopping center space is picking up. This is true for both the larger chain tenants and the smaller tenants including those like Starbucks Coffee, Panera Bread, and other quick service establishments.

“They are looking for locations and no new supply has been added to the market. I think that has helped make the demand for better shopping centers and the result in the pick in occupancy that we’ve seen,” Stein said.

Regency has been active in acquisitions in order to strengthen its portfolio. Stein said the company is selling shopping centers that don’t meet Regency’s standards of strong anchored supermarket sales in excess of $25 million dollars.

“So we are investing that capital in shopping centers that do meet our criteria,” Stein said.