COVER STORY, NOVEMBER 2004

REITs Remain Active in the Southeast
Real estate investment trusts are encouraged by strong Southeast markets.
Dawn Pick Benson

Highwoods Properties’ GlenLake One, a 158,000-square-foot Class A office property, is the first building of a 100-acre exclusive commercial and residential community in Raleigh, North Carolina. There is a unique Town Square central plaza, covered parking, an attractive lake and an extensive sidewalk system throughout the development.

Markets remain strong and continue to show encouraging signs for the future, according to several of the Southeast’s real estate investment trusts. To learn more about recent developments and acquisitions, Southeast Real Estate Business recently interviewed several REITs about their current activity in the Southeast.

Equity One

North Miami Beach, Florida-based Equity One is an owner, developer and operator of community and neighborhood shopping centers located in predominantly high growth markets in the southern United States. The company has 182 properties that total approximately 19.9 million square feet.

“We’ve had a very good year so far,” says Chaim Katzman, chairman and chief executive officer of Equity One. “Between the beginning of this year and the end of [the third] quarter, we will have acquired around $300 million in new assets, including penetrating a new market in New England.”

Equity One also has several new developments underway, according to Katzman. They include Waterstone, a 12-acre, 85,000-square-foot Publix-anchored shopping center located at S.W. 288 Street in Homestead, Florida. Construction already has begun on the center, and it is expected to be complete by late 2005.

Phase III of the Shops at Skylake will include 35,000 square feet of additional retail office space. Located at 1600 N.E. Miami Garden Dr. in Miami Beach, the office space will become Equity One’s new headquarters. Completion is expected for the first quarter of 2005. Westridge, a 588,000-square-foot shopping center, also is under construction in McDonough, Georgia.

Katzman

According to Katzman, Equity One also has recently purchased six grocery-anchored retail properties in the Boston metropolitan area, totaling 390,979 square feet. The transaction is valued at $120 million, including debt assumption. “This emphasizes our commitment to supermarket-anchored shopping centers and to further diversifying and expanding our portfolio and our reach to regions on the eastern border,” says Katzman.

In the Southeast, Katzman remains bullish on Florida. “It’s been our core market for many years,” he says. “Almost 50 percent of our portfolio is still in the state of Florida.” In terms of acquisitions and new developments in the area, Katzman says that Equity One is interested in areas spanning from Georgia down to Florida and west to Louisiana. “We view these as our core markets, and we will keep looking to expand in these markets.”

Looking toward the future, Katzman says, “The Southeast is a very competitive market, but it still presents plenty of opportunities to savvy investors, buyers and developers.”

Highwoods Properties

Founded in 1978 and publicly traded since 1994, Raleigh, North Carolina-based Highwoods Properties is one of the nation’s largest fully integrated REITs. Highwoods provides leasing, management, development, construction and other tenant-related services for its properties and for third parties. As of June 30 of this year, the company owned or had interest in 527 properties encompassing approximately 41.6 million square feet.

Highwoods Properties is developing a 115,000-square-foot office building for Saxon Capital at Innsbrook in Richmond, Virginia.

In recent months, Highwoods has experienced a time of transition as the company’s new president and chief executive officer, Ed Fritsch, has taken the helm. Fritsch says the company is implementing a new strategic management plan with three core prongs: enhancing the platform for Highwoods’ earnings growth, maximizing operating efficiencies and strengthening the company’s balance sheet. “Our goal,” he says, “is to improve the overall quality of our portfolio through delivering newer, differentiating assets under our development pipeline and selling older, non-differentiating assets.”

In the last year, Highwoods’ leasing has been strong and the company continues to see encouraging signs in the market, according to Fritsch. “In our view, recovery is underway even though it’s moving at a dramatically slower pace than we — and many others — would like to see it,” he says.

Fritsch

Fritsch goes on to say that in the second quarter of this year, all of Highwoods’ top five office markets reported positive net absorption for the first time since the second quarter 2001. “It’s clearly a good sign for all five markets to simultaneously post positive net absorption in the same quarter,” says Fritsch.

Highwoods currently has several developments underway, totaling nearly 1 million square feet. “Most of the developments are office space, and they are better than 90 percent pre-leased, representing an investment of about $140 million,” says Fritsch.

Included in these developments is a 112,000-square-foot build-to-suit field office for the Federal Bureau of Investigation in Tampa, Florida. The $26.6 million project included the purchase of approximately 7 acres of land, and construction commenced in the second quarter of this year.

Highwoods also is constructing a 115,000-square-foot, four-story Class A office building for Saxon Capital. The building will be located adjacent to its Highwoods Two building at Innsbrook in Richmond, Virginia, and will be 100 percent occupied by Saxon under a long-term lease.

In Tampa, Florida, Highwoods recently signed a lease for 85,000 square feet with VoiceStream PCS Holding, which operates as T-Mobile, at Building V in Highwoods Preserve. Also in Highwoods Preserve, Highwoods sold a vacant two-story, 176,000-square-foot building for $18 million to Depository Trust and Clearing Corporation.

With regard to development and acquisitions in the Southeast, Fritsch says that Florida is a sound and active market. “Richmond and Nashville have done well for us throughout the downturn,” he says. “Raleigh is slow in coming back, but we remain optimistic that in the long-term, it’s a very good area to own and operate real estate.”

Because demand has remained high for acquisitions in the Southeast, Fritsch says he anticipates that Highwoods will be more of a net seller than a net buyer. “For the near term, we believe the pricing for most assets is high and out of sync with the risk profile,“ he says.

Fritsch points out that the characteristics of the Southeast that initially made it so attractive to companies — the comparatively low cost of doing business, a readily available educated workforce, a good quality of life and a favorable business environment — are all still in place. “As the country begins to pick up steam as the recovery comes around, all those things that made the Southeast attractive are still here and will attract growing and new companies.”

First Potomac Realty Trust

Bethesda, Maryland-based First Potomac Realty Trust has been acquiring and operating industrial and flex properties since 1997. According to Doug Donatelli, president and chief executive officer at First Potomac, the company’s focus is on markets located from Baltimore to Norfolk, Virginia, with a heavy concentration on the Washington, D.C., metropolitan area. Since the company went public last October, it has acquired approximately $225 million worth of property.

First Potomac has acquired Aquia Commerce Center I & II in Stafford, Virginia,for $11.2 million. The 64,000-square-foot, two-building property is 100 percent leased to the U.S. Government.

“We operate in markets where the economy has been very strong,” says Donatelli. “The vacancy rates in the Washington, D.C., area have been some of the lowest in the country, and we see those trends continuing.” Donatelli also says First Potomac is experiencing strong increases in rental rates and decreases in vacancy rates in its own portfolio. “We started the year with our portfolio 91 percent leased and we expect to end the year with our portfolio 95 to 96 percent leased,” he says.

According to Donatelli, First Potomac focuses on industrial and flex properties. “It’s an overlooked property type — especially in the Washington, D.C., area — and it makes for a good niche for us,” he says. “Concentrating on a niche in a local area is the best way to add value to a real estate portfolio and to get solid returns to our stock holders, which is our primary job.”

Donatelli

First Potomac has been very active on both the acquisition and leasing fronts.

The company recently acquired a 14-property, 1.4 million-square-foot portfolio located in the Maryland suburbs of Washington, D.C., for $123 million. Most of the properties are located along the Interstate 270 corridor, between Gaithersburg and Frederick, Maryland. The portfolio consists of seven flex properties totaling 692,199 square feet; three industrial properties totaling 371,440 square feet; three multi-story office buildings totaling 133,561 square feet; and one retail property totaling 201,350 square feet.

The company also acquired two flex properties in the Washington, D.C., metropolitan area. Alexandria Corporate Park, a 278,000-square-foot, multi-tenanted industrial and flex property located in Alexandria, Virginia, is currently 68 percent leased to six tenants. The largest tenants are the U.S. Government, which leases 60,241 square feet; CACI, which leases 46,207 square feet; and IKON Office Solutions, which leases 25,000 square feet. The purchase price was $40 million. First Potomac also acquired 6251 Ammendale Rd., an 87,000-square-foot flex property that is currently 38 percent leased to Lockheed Martin Corporation. The property is located in Beltsville, Maryland, and the purchase price was $6.1 million.

First Potomac recently acquired Patrick Center, a 66,356-square-foot office building in Frederick, Maryland.

In Herndon, Virginia, First Potomac has acquired Herndon Corporate Center, a 127,353-square-foot, single-story flex property, for $20.5 million. The property is currently 98 percent leased to 14 tenants, with the U.S. Government being the largest tenant occupying 23 percent of the space.

First Potomac also has announced the acquisition of Virginia Center, a single-story flex property located in Glen Allen, Virginia, totaling 119,672 square feet, for $9.52 million. The seller was Principal Life Insurance Company.

In terms of future acquisitions, Donatelli says, “We are very targeted and we have no intention of straying from our core markets in the Baltimore, Washington, D.C., Richmond and Norfolk areas. We’ve been operating in these markets for years, and we know them very well.”

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