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REITs Using Capital for Immediate Needs

09/25/2012 | By Carisa Chappell

With REITs on pace to raise a record amount of capital in 2012, companies don't appear to be waiting to deploy those funds.

REITs raised a total of $44.93 billion through Aug. 31, 2012, including $32.55 billion in equity offerings and $12.39 billion in unsecured debt offerings. In all of 2011, U.S. REITs raised $51.28 billion including $37.49 billion in equity and $13.79 billion in debt.

Paul Whyte, managing director and head of real estate investment banking for the United States at Credit Suisse, says REITs are using the proceeds to grow through acquisitions and development. They're also using the funds to pay down debt and reduce their leverage.

The multifamily sector has seen the most new development activity, according to an Urban Land Institute (ULI) report. Permits for multifamily development projects in July 2012 were at their highest monthly level since September 2008, according to ULI data. Furthermore, while ULI said the retail, office and industrial sectors are witnessing near historic lows in completions of new projects, completions of apartment developments are running at approximately 80 percent of their historical average.

ULI also noted that multifamily fundamentals are strengthening further as rents grow and vacancies decline. In light of the sector's strong performance, Whyte says he anticipates that multifamily properties will continue to be in demand.

"I would say residential should continue to command the premiums. Renting continues to become more affordable relative to homeownership," he says.

From multifamily to office to retail, the market appears to be gravitating towards select markets for development and acquisitions. Since the recession, companies have undertaken a flight to quality in terms of targeting trophy assets and a strong focus on the coastal markets, according to Whyte.

 "The top four or five markets of New York, Boston, San Francisco, and Los Angeles, command the largest premium," he says.

Those markets are also among the 10 most active sales markets in the past 12 months, according to data from the ULI report. Additional markets, including Chicago, Dallas, Houston, Seattle, Atlanta and suburban Virginia outside of Washington, D.C., have each recorded more than $6 billion in transactions since Aug. 2011.