It sounds counter-intuitive; as we continue to report all sorts of problems in the commercial real estate market, not the least of which is rising defaults in commercial mortgage-backed securities, real estate investment trusts, many of which invest in commercial real estate, are on a roll.
REITs have been raising capital and paying down debt like nobody’s business.
Last year REITs raised $34.7 billion, according to their industry group, NAREIT. So far in 2010 they’ve raised nearly $27 billion with equity offerings and unsecured debt, therefore on track to meet and possibly exceed last year. The industry has also reduced its leverage by one third in just the past twelve months. While REIT shares are still about 30 percent below their peak in 2007, they are roaring back.
REITS now have access to the needed capital, unlike some of their private equity counterparts, but it’s not a buying spree…yet. “REITS have been the most active buyers recently in commercial real estate, but there have been very few transactions,” says NAREIT’s Brad Case. “The reason for that is that owners on the private side who are in trouble are not yet forced to sell their properties because their debts haven’t come due.”
“REITS have been the most active buyers recently in commercial real estate, but there have been very few transactions.”
But as they do come due, and as the commercial market recovers, banks are more willing to let those properties go into foreclosure. That will open up opportunities. Still, Don Wood, President and CEO of Maryland-based Federal Realty Investment Trust, isn’t convinced “distressed properties” are the way to go.
“A bargain is very hard to define. Things that look like bargains are often not,” Wood says. He’s looking for three things: High income, high traffic and barriers to entry. Federal has committed about $60 million of acquisition capital in Boston, MA, Southern California, Long Island, NY and Bethesda, MD since the first of the year. Wood is all about infill and upgrades in major metropolitan areas.
That’s not as easy as it sounds.
“We’re certainly aggressively looking,” says Wood.
“But finding something where there is value to be added over the next five, ten, fifteen years, is simply harder than it would seem. Part of the reason is that because there is a lot of money on the sidelines that is pushing values up.”
REITs, which only rule about 10 percent of the commercial real estate market, appear to have a leg up on private equity because they sold at the top of the market while PE bought at the top of the market.
“As we see bad news about commercial property values and about debts going bad, that is not REITs having trouble making their payments. It is going to be non-REITs having trouble making their payments,” says Case. “And REITs are in a position to take advantage of that.”