Luci Joullian

In an age when money market accounts are paying less than 2 percent returns and the stock market is taking a beating, real estate investment trusts, with typical returns hovering around 7 percent, are looking more and more attractive in this bear market. Although a 7 percent return on investment may have looked meager a few years ago, REITs are providing stable returns for long-term investors, many of whom would not otherwise venture into the real estate market on their own.

Kirk

“I think REITs in general have something to offer that the public might very well be hungry for after the news that we’ve gotten from Wall Street over the past couple of years,” says Ross Kirk, managing director of Chicago-based First Industrial Realty Trust’s eastern region. “What we own is a hard, tangible asset that has a value you can readily determine. I think that we really offer a secure alternative in today’s investment environment.”

Bob Chapman, executive vice president of Indianapolis-based Duke Realty Corporation’s southern region, agrees. “It’s a good time to invest in real estate. Our stock was recently at an almost all-time high at $28.29 per share. And with a 7 to 7.5 percent dividend, it’s pretty attractive for a lot of people. It’s just been a good place to be from an investment standpoint,” he notes.

The Southeast

Just as REITs are looking favorable compared to traditional investments, real estate development in the Sunbelt area of the Southeast is looking, well, sunny, compared to the level of development in other regions.

Cosenza

Joe Cosenza, chairman of Inland Real Estate Acquisitions, a subsidiary of Oak Brook, Illinois-based Inland Real Estate Group, comments, “The Southeast is absolutely one of the best, if not the best, investment markets in terms of traffic, sales per square foot and the increase in population.”

“The Southeast has any number of benefits, the greatest part of which is the growing population base,” says Kirk. “The Sunbelt remains an area of significant growth and growth is a requirement in real estate of all asset classes. We have fared well in the Southeast so far this year, in the face of a challenging market.”

While the Southeast’s ripeness for development may present REITs with numerous opportunities, it also provides a level of competition unseen in other, less popular regions. The recent overall heightened interest in real estate has also made the acquisition process more competitive for many companies.

“The challenge we face in 2003 can best be characterized as one of intense competition — in every facet of our operations — in response to the current state of the real estate markets,” explains Kirk. “Despite this challenge, however, we are confident that via our infrastructure and the value-creation efforts of our regional teams, we will continue to deliver success stories.”

For First Industrial, these success stories include build-to-suits for Ford Motor Company — including a recently completed facility in Mebane, North Carolina, and one scheduled to break ground in McDonough, Georgia, in June. Also in McDonough, First Industrial completed a speculative development for Aero Plastics in February. Last December, the company completed a build-to-suit for USCO (JC Penney) in Lakeland, Florida.

Chapman

“It’s a faster growth area, but there’s a lot more competition,” Chapman says of the Southeast. “Investment in real estate in the Southeast is always, in our minds, a lot more up and down; there are higher peaks and lower valleys. And when there are a lot of transactions out there, it’s enough to feed everybody, but when it gets slow like it is now, it really gets tough.”

Strategies

Even in boom times, REITs have general operating strategies that can include any combination of developing, acquiring or selling properties for their portfolios. In lean times, though, these strategies must be honed and refined for maximum investment potential.

Inland Real Estate Acquisitions focuses on buying select properties. The company has acquired more than 3 million square feet of retail space to date in 2003, including StoneCrest Market Place in Lithonia, Georgia; Market Place at Mill Creek in Buford, Georgia; Colonial Promenade Bardmoor Center in Largo, Florida; Commonwealth Center in Richmond, Virginia; and Downtown Short Pump in Richmond.

Still, says Cosenza, “A major challenge is locating properties that meet our strict criteria, which includes finding properties in which the seller hasn’t put in his own debt. Many owners have high debt ratios and we like to keep our debt at approximately 50 percent of the value.”

Boca Raton, Florida-based Koger Equity, an office REIT that currently owns and operates 124 office buildings totaling 7.7 million square feet, also focuses on acquisitions, especially suburban office parks that are closely located to residential areas. The company plans to reduce the average age of properties in its portfolio and expand into new markets throughout the Southeast, including Atlanta; Northern Virginia; Suburban Maryland; Memphis, Tennessee; Charlotte, North Carolina; and all of Florida, according to Koger Vice President Angelo Bianco.

First Industrial Realty Trust utilizes what it calls its “INDL” infrastructure — a mix of industrial properties, national presence, diversified product type and local management teams — “to create value in real estate projects wherever those opportunities may be in the Southeast,” says Kirk.

Particularly interested in build-to-suit development, redevelopment and sale-leaseback opportunities, Kirk explains that First Industrial is also interested in adding to its portfolio holdings in Atlanta and Tampa, Florida, currently 7 million and 2.4 million square feet, respectively. “We have a big appetite for new acquisitions,” he says.

Big appetite or not, some REITs are finding that the smorgasbord of acquisition opportunities that existed a few years ago may be somewhat picked over at this point. Chapman notes that while Duke Realty’s multifaceted strategy of producing build-to-suits and doing third-party construction is successful, the company “would love to be acquiring more right now, but it is just too difficult. We are finding a few things, but there just aren’t that many properties out there that meet our criteria,” he says.

Nevertheless, Duke recently purchased two buildings in a $32 million, 10-year sale-leaseback transaction. Lucent Technologies sold the buildings, which are located in the Atlanta suburb of Alpharetta. Duke also just finished construction of a building for Ford Motor Company in Lakeland and is working on a build-to-suit for BioLab in Atlanta.

Chapman notes that Duke also has a pipeline of dispositions that are ready for sale because “we are always trying to cull the bottom 5 or 10 percent of our portfolio,” he says.

Property Types

Of course, each REIT sector faces its own set of challenges and opportunities. “The retail REIT sector will continue to be the best and shiniest of all REIT sectors even if the stock market shoots way up,” says Cosenza. “The retail market simply has better and stronger fundamentals than apartment, office and industrial REITs.”

Although industrial space may have been constricted lately due to recession-prone companies delaying expansion, growth is right around the corner, especially in the Southeast, according to Kirk. “With that kind of growth comes the need for services to an increased population, and with this comes the need for warehouses. We are well positioned to take advantage of that,” he adds.

“As soon as you see that the economy is going to start taking off, I think that’s when the industrial business will start picking up again,” predicts Chapman, who also says that office REITs are facing more of a challenge due to the failure of so many telecom companies and the resulting flux of sublease space available. “[Excess office space] is getting absorbed pretty quickly, but there’s still a lot of it,” he explains. “I think the up-tick on the office side is going to be a little further out there than for industrial space, probably a year and a half.”

Outlook

No matter what the future may bring for all property sectors, will REITs still be a viable and popular option for investment as the stock market approaches normalcy? For now, at least, the outlook seems to be positive. “The REIT market will continue to grow in two ways,” says Cosenza. “First, you will see more investors, both private and public, putting their money into real estate through REITs. Secondly, REITs themselves will grow by acquiring other REITs and other real estate portfolios.”

“The biggest problem with real estate is liquidity, and liquidity is going to play out as being an even bigger factor,” Chapman notes. “The advantage of having a REIT stock is that it is immediately liquid. That was the basic rationale in the first place for why REITs came into existence.”

Kirk notes that most investors want some type of real estate in their portfolio, even if they do not want to actually purchase the real estate themselves. “Real estate doesn’t go away,” he explains. “The underlying attributes of real estate will always be there and the REIT vehicle provides the public access to that.”


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