Development Pipelines Still Trickling

By Clay Risher

Development itself is not an indicator of a particularly strong or weak economic or real estate market. Companies have many strategic reasons for ramping up or slowing down their development pipelines. But it is clear the various facets of the Great Recession have led many real estate developers to halt, or at least slow, development this year.

Representative of many REITs contacted, Michael Fascitelli, CEO at Vornado Realty Trust (NYSE: VNO), said simply, "there are no new projects going on at Vornado at this time." 

Peter Slatin, editorial director at Real Capital Analytics, which tracks sales trends and market research for the commercial real estate industry, was not surprised by responses like Fascitelli's. Slatin, who is also author of Forbes' "Slatin Report" cautioned that development inquiries at REITs right now could be met with some ambivalence, but that this should not be viewed as negative.

"Even if substantial development is underway, few REITs want to be seen as the first on the bandwagon of recovery," Slatin said. "REIT managers are continuing to act judiciously right now; paying down debt and playing it conservative." Slatin also warned that "regardless, very few REITs are showing signs that a real boom in development is going to occur overnight."

In Development
However, if you listen hard enough you can hear the sounds of shovels digging dirt. Alexandria Real Estate Equities (NYSE: ARE), a leading provider of real estate to the life sciences industry, is finalizing development of 90,000 square feet of laboratory space in Manhattan for ImClone Inc., a subsidiary of Eli Lilly. The project, known as the East River Science Park, is located on a 3.7 acre site between 1st Avenue and FDR drive. When fully built out, the East River Science Park will contain 1.1 million square feet of research and development space that will provide labs and offices for 2,000 bioscience related workers.

Properties focusing on technology, retail, multifamily housing and life sciences seem to be leading the way out of the recession in terms of new development. San Francisco-based technology REIT Digital Realty Trust (NYSE: DRT) broke ground in July on 135,000 square feet of spec data room space in Ashburn, VA. The development is part of an assemblage of properties owned by DRT and will be located on the same site as existing clients and Cap Gemini.

According to Digital Realty's Director of Investor Relations Pamela Matthews, "no development projects were shelved over the last year. Everything we had under construction is being completed or is complete. Demand remains high for data room development. However, we aren't building as much as we did in 2008, and we will have to be more selective about the allocation of capital for development this coming year."

Mark Wetzel, CFO at DuPont Fabros Technology (NYSE: DRT), another REIT focused on the space needs of the technology industry, commented on this year's drop in development, saying "last fall we delayed three projects of approximately 86,000 square feet of data center space (each) in New Jersey, California and Virginia due to the credit crisis. However, we recently completed the Virginia location at the end of August."

Wetzel went on to say that, although his company's had some setbacks in development over the last year, "DFT remains bullish on the prospects of demand in the wholesale data center space both short and long-term."
Several retail REITs have maintained active development programs. Regency Centers Corporation (NYSE: REG) has 43 projects currently under construction in 18 states representing $868 million under development. Simon Property Group (NYSE: SPG) opened The Promenade at Camarillo Premium Outlets in Camarillo, Calif., in April and has several projects in development in the U.S. and abroad.

Industrial Cos. Adapt To New Climate
Development in previously high-flying REIT sectors like industrial have also been affected by the recession. AMB Property Corporation's (NYSE: AMB) CFO Tom Olinger shed some light on issues hamstringing development this year and his prognosis for getting back on track. "As the global credit crisis grew into a global economic crisis last year, our goal was to limit development activity to situations where we were fulfilling prior commitments.''

He went on to say that "as of June 30, 2009, we have approximately 9 million square feet of development happening globally, the majority of which will be completed in 2010." In the meantime, AMB remains focused on preserving its balance sheet, controlling costs and positioning the company for future development opportunities. When asked where AMB would forecast growth for the remainder of 2009 and beyond, Olinger replied, "first in China, followed by the U.S., Mexico, Europe, then Japan."

However, most of AMB's new development requirements are projected to be build-to-suit due to record lows in industrial deliveries forecast for the remainder of 2009 and 2010. Olinger added that AMB will continue to approach capital deployment prudently. "Our long-standing strategy for development remains in in-fill markets near airports, seaports and major highways. This strategy has proven to withstand many cycles." AMB will also try to sidestep the credit squeeze by creating private equity vehicles as a way to hedge against the continued slow thaw in bank lending.

Another industrial REIT stalwart, ProLogis (NYSE: PLD), has been actively inking new development deals abroad, including a build-to-suit deal with Hi-Logistics (LG) in the Netherlands for a 554,000 square-foot building that was announced in July. ProLogis will build the facility on a 20-acre parcel of land that the REIT currently owns.
Regarding managing risk since the markets collapsed, ProLogis CEO Walter Rakowich said, "we've taken some major steps to reduce the overall level of risk in our business. We had to redefine how we approach new development—focusing more on development management opportunities and build-to-suit transactions utilizing our land bank, and when possible, investing our capital alongside that of our partners and customers."

Good to Come from Absence of Development
Richard Campo, CEO of Camden Property Trust (NYSE: CPT), one of the nation's largest apartment REITs, was very forthcoming about the status of development projects at his REIT. "All development is on hold" for the time being due to an onslaught of "lower rents and lower occupancy rates," Campo said.

Campo believes, though, that the credit crisis has "done some good things for development," which Camden expects to capitalize on in the future. According to Campo, "commercial development of multi-family housing units did not reach nearly the levels of excess that single family housing development did prior to the crisis."

So, although Camden's not actively developing right now, Campo sees breaking ground on 50,000 to 80,000 new units over the next 12 months. "Managing the crisis has been interesting but being a publicly traded REIT has been a blessing," he says.

Unlike private real estate companies, Camden has been able to tap equities markets over the last several months to secure dry powder for future acquisitions and development. This has had a solid impact on share prices moving Camden from $16 per share in April 2009 to nearly $36 per share at the end of August 2009.

Campo says he sees "good news for development and acquisition activities in the next 12 to 18 months when rents begin to stabilize and the shortage of multifamily units will again fuel development growth in our sector."

Clay Risher is a freelance contributor to Portfolio. This article originally appeared in the November/December issue of Real Estate Portfolio magazine.