REIT WEEK 2011: U.S. INVESTMENT UPDATE BY SECTOR
REITs are leading the real estate recovery by boldly going into the market looking to acquire, develop and improve assets aggressively. At REIT Week, sponsored by National Association for Real Estate Investment Trusts (NAREIT), public companies from around the U.S. gathered to inform investors of their current plans and projects. Because the information they shared is company and market specific, it gives a wide-ranging snapshot of some of commercial real estate’s largest and most active players in every sector.
Here’s a short review of several key commercial sectors sector — office, industrial, retail multifamily, and lodging — reported on site at REIT Week by REBusinessOnline.
The Macro View: Mergers & Acquisitions
A general session panel discussed the macro state of the REIT market, focusing in on mergers and acquisitions, and the trends affecting the public markets. One of the biggest pieces of news coming out on this front was the June 3 closing of the ProLogis and AMB Property Corporation merger.
“The stars really have to align to put together a large merger like this. While this is the sixth merger we’ve had at ProLogis since 1998, all of them to this point rolled into our platform, but with AMB it’s really a merger of equals,” Rakowich said. “The dynamics in the market have changed. Liquidity has changed, and now we’re in a better position to do deals.”
Moderator Jackson Hsieh, vice chairman and global head of real estate, lodging and leisure for UBS Investment Bank, noted that IPOs have been tough for new REITs coming to the market, and on average, new REITs are coming in at 33 percent below their expected offering. One of the reasons is that many of these new REITs are smaller in size, but the second is that investors right now are looking for the big names; most of the newer offerings have a specific rollout they have to hit, which creates a challenge.
But with that said, most of the movement in the current market at the M&A level has been in the public arena. Hsieh brought forth some stats showing that in 2007, there was a strong trend for public companies moving back into the private realm. While that has fallen exponentially, and all activity was down in 2009 and 2010, public-public deals are nearly equivalent to 2007 levels in 2011.
Though true of every sector, office certainly differs from market to market. Cousins Properties and SL Green Realty Corp. work in disparate markets, and thus have unique strategies and perspectives on office real estate. But both came to pretty much the same conclusion: though it’s a good time for growth, that’s likely not by way of new development.
“You have to understand the markets, and how they move very differently,” said Lawrence Gellerstedt, III, president & CEO of Cousins Properties. “New office development in Atlanta is years off from making sense. And on the flipside in Austin, Texas, the numbers support a new downtown office development in the next 12 to 24 months.”
With that said, Gellerstedt noted that office acquisitions are where their opportunities will play out, and the company is active in the Southeast and Texas.
In New York City, SL Green Realty Corp. is an “active manager of capital that takes on projects opportunistically one-by-one,” according to Marc Holliday, the REIT’s CEO. With stable job growth in the New York City business community, the office market is operating well, and there’s a lot of capital flow into the market. This is mainly due to scarcity value for blocks of space with an imbalance of tenants looking for big blocks. “You can make a lot of money in this market,” Holliday said.
But as in Cousins’ Southeastern realm, development in New York City is going to be tough. Land values are appreciating rapidly and all sectors are drawing investment activity. At this rate, land is already costing $1,000 per square foot, Holliday said, and in some cases upward of $1,200. Therefore, significant office construction is a ways off, but the market is there for leasing and acquisition.
As mentioned, the AMB/ProLogis merger is the biggest deal in the industrial sector. But as now the second largest industrial REIT, First Industrial Realty Trust is focusing on improving occupancy and internal growth. Bruce Duncan, president and CEO, says the AMB/ProLogis merger gives his company greater value, since there are very few national industrial platforms.
The market for industrial is still in recovery in a lot of ways, and First Industrial’s portfolio is reflective of that. At 84.7 percent occupancy nationwide, the immediate goal is to raise occupancy and rents. The long term view of the market is that those fundamentals need to come back in a big way before new development returns.
“You don’t see much new development on spec except Southern California and Florida, and rents have to go up significantly before we see new construction,” Duncan said. “This is a great time for internal growth.”
That said, First Industrial has a couple 100,000-plus-square-foot build-to-suits in development, and a spec project in California’s Inland Empire on its way. That Califorinia project is a $30 million, 694,000-square-foot deal. Duncan says this speaks to the volatility in the market in recent years as well as to the company’s porfolio.
“A year ago, Inland Empire was one of the worst markets, but now it’s getting better,” he said.
“Even our Rust Belt properties are doing well, as 40 percent of our portfolio is in Midwest,” Duncan added in direct response to a question about those markets. “In Cleveland our portfolio is 99 percent full, and it’s good product. Even Detroit is seeing new demand for space. We are seeing lots of activity.”
Don Wood, president & CEO of Federal Realty Investment Trust summed up the state of retail in the U.S.: “We are over-retailed — oversupplied and under demand. You have to be careful in what you invest in because I think much of it will be worth less 5 years from now. When you look at online impact, supply/demand, absolutely there are challenges in retail. Close in to urban core, socially based and necessity based with restaurants and health clubs, is the future of retail.”
Of course, this is coming from a company who invests in every kind of retail except enclosed malls. But, that’s not because malls don’t generate demand. In fact, Federal is seeing opportunities to compete in mall submarkets with main street-style retail. And Wood sees that as a center for growth because the malls aren’t going anywhere.
“If you have a B or C class mall whose future does not look bright in terms of growth, what are your choices? Tenants have long term leases, and it’s very expensive to reposition,” Wood said. “Sometimes for them it’s better to milk as long as they can. So if you think about that oversupply, you have to create demand. We create value in real estate by competition for space.”
Though multifamily isn’t getting as much individual attention by specific companies here at REIT Week, commercial residential components are a central talking point across multiple development types. Current growth opportunities remain in the urban residential model, complementing both office and retail.
Cousins’ primary focus remains on Texas, Georgia and North Carolina, the latter two where they have mixed-use developments. Emory Point, next to Emory University in Atlanta, is starting construction in next 60 to 90 days, and that deal led to a 12-acre acquisition on Franklin Street in Chapel Hill, North Carolina, just off the University of North Carolina campus there.
“Grocery-anchored retail and multifamily is a good place to be, and we’re finding opportunities for off market transactions via relationships,” says Gellerstedt. “Emory is a joint venture because we’re not in the multifamily business, and we didn’t delude ourselves that we could magically become a multifamily developer. But it makes sense from operational product type standpoint.”
Wood agreed from Federal Realty’s standpoint. “Much of what we’re doing includes residential component — close-in, densely populated areas with high income base. Unless you’re flipping, long term investment is the way to look at it.”
“It’s nice to actually be talking about a new development pipeline and not getting booed out of the room,” Gellerstedt added. “Growth dynamics are great in these areas and so is our local knowledge. You just have to know when to buy and sell when it’s low barrier to entry.”
Finally, the lodging sector is seeing strong industry dynamics, and according to Chatham Lodging Trust, the supply and demand component of the industry is driving those, and there’s continued upside looking forward over the next 2 to 3 years.
Of course, Chatham itself is a little bit different in the world of lodging REITs. While there are about 10 hotel REITs, only two are focused on the same asset class as Chatham, which is select service, urban hotels in the Northeast, Mid-Atlantic and West Coast, nearly exclusively.
“There are four times the select service brands than there are upper upscale, and we can benefit where we are getting good cap rates and going in with potential growth,” said Jeffrey Fisher, chairman, CEO and president of Chatham. “We’re pushing nearly $100 in RevPAR for our select service hotels, while full-service brands like Marriott and Renaissance are at $100 to $108 or so. It shows the value of these types of assets.”
— Dan Marcec