|
COVER STORY, NOVEMBER 2004
REITING IS FUNDAMENTAL
REITs never lose sight of the basics in western markets.
Haley Shuler
 |
|
In San Diego, Kilroy Realty
Corp. recently completed a 209,000-square-foot,
6 story office building.
|
|
The real estate investment trust (REIT) industry has performed
well in comparison to many other investment sectors, accounting
for a majority of 2004 net investment. Consolidation in the
office and industrial markets has had a minimal effect on
the industry, but is likely to continue in the retail and
multifamily markets, where it should yield positive results
for the REIT industry. Though it is difficult to predict how
REITs will fare in the future, REIT performance should remain
stable given the economic recovery that is underway.
To gain a better perspective of how major real estate players
operate, Western Real Estate Business has profiled four leading
REITs in the region — Arden Realty, Pan Pacific Retail
Propeties, Kilroy Realty Corporation and United Dominion Realty
Trust. The following relates each REIT’s investment strategies
as well as their outlooks for the future.
Arden Realty
Southern California is prime real estate for West Los Angeles-based
Arden Realty. Boasting a portfolio of 128 properties comprising
210 buildings and approximately 18.6 million square feet,
the real estate investment trust is the largest landlord of
office buildings in Southern California.
Southern California continues to be the sweet spot for the
office market. “Its economy is diverse and well-balanced
and this diversity buffers the impact from potential contractions
of any one industry,” says Howard Stern, chief investment
officer of Arden Realty. “Real estate investors are keen
to this profile and therefore, the investment demand for office
is overwhelming coupled with the unprecedented amount of capital.”
Los Angeles, Orange and San Diego counties are prime markets
for investors targeting Class A trophy buildings. Between
January and August of this year, the price per square foot
for San Diego office space was the third highest in the nation
behind Washington, D.C., and Manhattan. According to Stern,
these buildings continue to be in high demand because of “continued
flight to quality and the desire to garner stable cash flows
with credit tenants.” However, due to the limited amount
of Class A product, competition also remains fierce for quality
Class A-/B+ properties with stable rent rolls.
Though consolidation has been a factor in the REIT industry,
especially among multifamily and retail REITs, consolidation
in the office sector should be minimal. The majority of consolidation
should come from national REITs, which are looking to gain
critical mass and presence in specific regional areas. “Consolidation
of office REITs will be challenged because most REITs are
currently trading at a premium to net asset value,” Stern
says. “Additionally, over the past few years, growth
has come internally and most REITs have tightened up their
operating expenses. Therefore, consolidating and recognizing
operating efficiencies will be harder and harder to achieve.”
In the current investment market, REITs are faring much better
and account for the majority of 2004 net investment. If the
market feels prices have peaked and an interest rate increase
is likely in the near term, REITs will be perceived as more
solid cash buyers, Stern notes. “This will alleviate
any concerns about interest rate shifts that could cause a
private leveraged buyer to re-trade or go sideways during
a sales transaction,” he adds.
This year, Arden Realty has sold approximately $79 million
in assets, with the possibility of closing another $100 million-plus
of sales by the end of the year. Currently, its main focus
is to dispose of properties that are non-strategic to its
portfolio — those properties in secondary submarkets
that are subperforming on a relative basis.
According to Stern, Arden Realty owns the four remaining parcels
located at the Howard Hughes Center project in Los Angeles.
The company has already built or owns approximately 1.4 million
square feet of office space in the development, with entitlements
to build an additional 488,000 square feet of office product.
Arden has plans to build the 160,000-square-foot 6040 Center
Drive, a state-of-the-art office building designed by Gensler.
With the addition of this building in 2005, the Howard Hughes
Center will comprise eight Class A office buildings on a 70-acre
campus that includes 20 acres of greenbelts and parks, 33
restaurants and shops, and an entertainment center.
Taking an aggressive approach, Arden Realty is set to acquire
approximately $150 million by year’s end 2004. The office
REIT focuses on acquiring high-quality multi-tenant assets
in its familiar Southern California submarkets, but desires
to acquire more critical mass.
Pan Pacific Retail Properties
Formed in August 1997 as an equity real estate investment
trust, Vista, California-based Pan Pacific Retail Properties
(PPRP) specializes in the acquisition, ownership and management
of community and neighborhood shopping centers across five
western markets: Northern California, Southern California,
Washington, Oregon and Nevada.
Strong demographic and economic trends have led retailers
to aggressively pursue expansion plans in PPRP’s core
markets. Currently, grocery-anchored retail properties are
in high demand. Buyers are seeking well established and well
located grocery-anchored neighborhood centers that are in
densely populated infill markets where there is little risk
of new supply entering the market, according to Stuart Tanz,
president and CEO of PPRP.
Individual private investors hunt for properties under $10
million in value in order to take advantage of the favorable
interest rate environment and availability of debt capital.
Tanz says that PPRP focuses on properties that are $20 million
or greater where there is less competition from private buyers
and the pricing is more rational.
Tanz believes that consolidation will have a positive effect
on the REIT industry. “If REIT valuations continue at
their current strong levels, further consolidation is likely,
which should bode well for the overall REIT industry as larger,
more diverse companies attract a broader universe of investors,”
adds Tanz.
PPRP selectively acquires established grocery-anchored centers
in its core markets. “Generally speaking, we look for
properties that are among the dominant centers within their
immediate trade areas, feature a good mix of daily necessity
retailers and allow us to add value by capitalizing on our
management and leasing programs,” Tanz remarks.
For the past 3 years the company has been proactively selling
non-core properties, which are located within tertiary markets
that were included in portfolios PPRP acquired several years
ago. Instead of expanding its geographical reach, the REIT
company chooses to focus on the markets where it has strategic
market knowledge and established industry relationships and
contacts.
Kilroy Realty Corporation
Los Angeles-based Kilroy Realty Corporation (KRC) owns, operates
and develops more than 12 million square feet of Class A office
and industrial real estate, primarily in the Southern California
market. Since January 1997, the company has operated as a
publicly traded real estate investment trust.
Demand for high-caliber office and industrial property in
Southern California is intense. “There are not a lot
of high quality properties available, and when they do become
available, there is a tremendous amount of interest from a
variety of investors,” says Tyler Rose, senior vice president
and treasurer of KRC.
Founded in 1947, KRC focuses its operations in several of
Southern California’s most promising suburban submarkets.
Currently, suburban office properties offer a lot of appeal
for investors, suggesting a greater long-term value since
most employers want to work near their residences. “Northern
San Diego County is one of the strongest office markets in
the country right now, given its diversified employment base
and quality of life,” says Rose. Additionally, KRC points
to Orange County as another solid market due to its 3.2 percent
unemployment rate.
As far as the Southern California office and industrial markets
are concerned, consolidation has had a minimal effect on the
industry. Rose says that consolidation has occurred in the
mall sector, but not much in other sectors.
REITs have done very well in comparison to the rest of the
investment market. Though it is difficult to predict how REITs
will fare in the future, office REIT performance should continue
to be strong given the economic recovery that is underway.
KRC will continue to focus on new office development, particularly
in northern San Diego County. “Kilroy has been selling
a few non-core, mature office and industrial assets each year
over the last several years,” says Rose. Rose adds that
KRC is the pre-eminent developer in Southern California’s
coastal submarkets. The REIT company has successfully developed
4.5 million square feet of office and industrial space with
a total investment of $713 million in the last 6 years. Most
recently, KRC completed a 209,000-square-foot, six-story office
building, in which five of the floors are leased to AMN Healthcare.
The property is located at 12400 High Bluff Dr. in the Del
Mar submarket of San Diego.
United Dominion Realty Trust
United Dominion Realty Trust (UDRT) is a multifamily REIT
that owns and operates more than 287 apartment communities,
mainly in the South and West, spanning from Virginia to California.
The western real estate market for multifamily properties
is strong right now. UDRT reports that the Southern California
market is extremely strong because of high rental demand,
supply constraints, low vacancy and employment growth. Cap
rates remain compressed and are even falling on higher quality
deals due to condo converters and pension funds, which are
extremely aggressive. Cap rates in markets such as San Diego
have fallen to sub-5 percent levels in some cases.
Instead of expanding its area of ownership, UDRT is reducing
markets in which it is active and is shifting its portfolio.
UDRT recently sold the 334-unit Campus Commons in Pullman,
Washington, for $16.5 million. At the time of sale, the community
was 72 percent occupied with average monthly rents of $716.
Most recently, the company has been involved in a $1.6 million,
414-unit multifamily development in Rancho Cucamonga, California.
UDRT is in approximately 40 markets, down from the mid-60s
3 years ago. It is focusing on increasing its net opertating
income, completing acquisitions in its core markets.
©2004 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints
of this article contact Barbara
Sherer at (630) 554-6054.
|
