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The apartment market in Los Angeles County remained weak during the quarter, with the vacancy rate virtually flat at 94.9%. The average rent during the period rose only $7 to $1,304. First-quarter rent growth in Orange County was the weakest in a year, with the average rent climbing only $3 to $1,234 during the period. The average occupancy, meanwhile, dropped one percentage point from the previous quarter to 94.8%. In the Inland Empire, the average rent rose 1.2% during the quarter to $903, according to RealFacts. On a year-over-year basis, the average rent was up 7.6%. The average occupancy fell slightly to 94.0%. In San Diego County, the average rent rose 1.1% from the previous quarter to $1,153. The occupancy rate dipped to 94.3% as new apartment complexes boosted supply, according to RealFacts. RealFacts surveys only large apartment complexes - usually with 100 units or more - that tend to charge higher rents than smaller properties. The firm's Southern California surveys cover 1,787 rental properties with more than 410,000 units.
In early March, the Fording Canadian Coal Trust, which controls North America's biggest exporter of coal for making steel, listed its units for sale on the New York Stock Exchange. The trust replaced Fording common stock as part of a merger with two other Canadian coal producers. Fording's shares closed at $19.08 on Friday, roughly the level at which they were listed. Three other Canadian trusts - the Enerplus Resources Fund, the Pengrowth Energy Trust and the PrimeWest Energy Trust - have also listed in New York. More than 100 trusts have been set up in Canada the last two years. They accounted for 57% of the value of new listings on the Toronto Stock Exchange in 2002. Currently the trusts account for about 7% of the market value of the S&P/TSX composite index, the main benchmark for stocks on the Toronto exchange. Canadian income trusts were initially confined largely to the oil, gas and real estate sectors. But those set up recently are in industries as diverse as horticulture, food processing, check printing and telecommunications. The typical yield on an income trust is 8 to 14%. United States residents are subject to a 15% Canadian withholding tax, though this can be applied as a credit against American taxes. Under Canadian law, no more than half the units of any trust may be held by foreigners. Currency risk is also an issue, because almost all the trusts, including those listed in New York, pay their distributions in Canadian dollars. The currency has strengthened in recent months; it now trades at 68.85 American cents. Some American businesses have raised financing in Canada by selling income trusts. One is the Specialty Foods Group Income Fund, based on a processed-meats business in Cincinnati, which raised 201 million Canadian dollars last month. American companies generally have not formed income trusts in the United States because they would be regulated as mutual funds, with strict reporting requirements and limits on fees. Leslie A. Lundquist, who manages an income trust fund for Bissett Investment Management in Calgary, Alberta, cautioned that the trusts, by and large, "are fully valued, and there are probably pockets that are more than fully valued." Still, Ms. Lundquist said, "if you choose your trust carefully, you can get very nice cash distributions, even if you do see a bit of weakness in the capital value."
This was the ninth straight quarter of rising vacancies and declining rents, and landlords and real-estate analysts aren't optimistic about the near term. "We're probably six to nine months away from a bottom," says John Lutzius, an analyst with Green Street Advisors. Real-estate executives say they're dropping rents and boosting tenant allowances to get deals done. "We're going to err on the side of making the deal," said Philip Hawkins, president and CEO of CarrAmerica. Hawkins says the continued downturn in rents and occupancies in the first quarter represents more of a "bumping along the bottom," rather than a drastic deterioration. Hawkins said most markets resemble "a game of musical chairs," as big leases are signed at the expense of other landlords, with little net new demand. The extent of rent declines in the current cycle is becoming a matter of debate. Green Street's Mr. Lutzius, who is among the more pessimistic, wrote in a recent report that actual rents, which include commissions for brokers and outlays for tenant improvements, may be down as much as 30% to 50% from market peaks. A Green Street analysis of Equity Office, estimates a 41% decline in actual rents from the peak in early 2001 to the end of this year, including a 21% increase in the cost of improvements and leasing commissions, according to Mr. Lutzius. Equity Office, though, said in a statement that it feels "rents are overshooting on the downside as much as they did on the upside" during the boom times, adding that the small amount of construction will help rents rise as the economy improves. Tad Leithead, a senior vice president of Cousins Properties, said that new supply in Atlanta, like other markets, is at a minimum, and that the end of economic and political uncertainty could yield a strong recovery in office markets. "I don't feel good about tomorrow, but I do feel good about the medium term," he said. Cushman & Wakefield Office Stats Steve Kerch, CBS.MarketWatch 4-22 The U.S. office market continued to soften in Q1 amid some signs of stabilization, according to Cushman & Wakefield. Vacancy rates rose to 15.2%, up from 14.8% in the last three months of 2002. "While the markets remain soft or stable at best, the leasing trends and slowdown in new deliveries and sublease space are positive signs for the future," said Maria Sicola, senior managing director of research at the real-estate-services firm. Leasing activity was 17.6 million square feet in the 32 downtown markets the company studied in the quarter, up from 13.1 million square feet in the first quarter of 2002. Chicago, Midtown Manhattan, Orange County, Calif., enjoyed the largest amounts of leasing during the quarter. Midtown Manhattan, Boston and Washington continue to have the highest rental rates in the nation, with Washington reporting a six-percent increase in rental rates this quarter. Silicon Valley, Houston, Dallas and Seattle, all hard hit by the economic downturn, are among the weaker markets, Cushman & Wakefield said. U.S. suburbs, which experienced large amounts of new construction in recent years, saw their vacancy rate rise to 21.3% from 20.5% in the fourth quarter. Atlanta, Northern Virginia and Dallas remain the softest suburban markets, the firm said. Wachovia Securities Office Forecast Jessica Roe, CPN Online 4-22 According to a recent report issued by Wachovia Securities, the next 12 to 24 months (for the Office market) are likely to be defined by continued downward pressure on rents, higher percentages of free rent, free parking and other inducements including even larger tenant improvement packages. With no large-scale job expansion on the horizon, sublease space will continue to drag down earnings as landlords simply recycle tenants through lease renewals or space consolidations. To make matters worse, the reports said: "From a macroeconomic standpoint, we believe most REIT management teams have factored in at least a modest economic recovery in 2003 into their earnings guidance." Having just caught the attention of a number of new investors, office REITs now find themselves with very few options for retaining the confidence of those new investors. Efforts to shore up balance sheets may likely include even more asset dispositions this year. But while there is still a lot of capital looking to acquire real estate, buyers are still looking for either the trophy properties or those where they can add value. That may lead some REITs to start nibbling away at core assets, thereby further shrinking their portfolios. According to the report, REITs with assets in secondary and tertiary markets in the Southeast may also benefit from the relative health of those markets. Cities such as Tampa and Charlotte continue to attract corporate relocation activity given their lower leasing costs and skilled workforces. These markets may well be among the first to rebound and those office REITs with a reasonable percentage of properties in these areas may experience early positive growth. In the meantime, office REITs will have to continue fine-tuning their portfolios, maintaining aggressive tenant retention efforts and trying to achieve as many economies of scale as possible--because the bottom doesn't appear to be anywhere in sight. More on Office Vacacies National Real Estate Investor 4-01 A wave of CBD development begun in the late 1990s will soon dump more than 20 million sq. ft. onto Chicago, Boston, New York and Washington, D.C. This additional space, combined with an already high double-digit vacancy rate and a nationwide sublease glut, could further depress rents and delay a full-fledged office recovery. "Nowadays, the office market isn't as overbuilt as it was in the early 1990s, but nowadays anything delivered to the market is too much," says James Costello, a senior economist with Torto-Wheaton Research. National office supply will expand by 4% as a percentage of overall stock this year, based on Torto-Wheaton data. The last time the market posted a 4% increase was in 1991. One positive sign: unlike the new supply that crippled real estate markets a decade ago, much of this new space is pre-leased. But in a fickle economic climate that has seen anchor tenants like Arthur Andersen dissolve, no credit tenant's leasing commitment is set in stone. The former accounting titan terminated its lease in one of the nation's biggest office projects - Boston Properties' Times Square Tower, slated for May 2004 completion. The 1.2 million sq. ft. building now is only 17% pre-leased, reports CoStar Group. Across town, Brookfield's new 1.2 million sq. ft. tower - 300 Madison - is dealing with a similar problem. Anchor tenant CIBC decided in January to market more than 800,000 sq. ft. of its new space as sublease. And in February, Phillip Morris announced its decision to vacate its longtime headquarters just one block east of 300 Madison. That decision is expected to dump more than 700,000 sq. ft. onto the Midtown market. Manhattan-based brokerage Colliers ABR reports that lease expirations nationwide will increase over the next three years as long-term deals signed in the mid-1990s expire. Tenants who moved into brand-new buildings between 1991 and 1993 may choose to relocate entirely once their lease term expires. The final variable - turnover supply - will pit existing space [much of it vacant or subleased] against new space. Without steady demand, the new space could drag the market down and keep rents in the doldrums nationwide.
The apartment-vacancy rate for the nation's top-50 metropolitan areas rose to 6.8% in Q1, from 6.3% in Q4-02 and 5.7% a year earlier, according to statistics from Reis. Effective rents - the rents landlords actually get as opposed to what they ask for - fell 0.3% from Q4-02 and 0.1% from a year earlier to $854 a month. Class A properties were hit harder as low interest rates continued to transform some would-be renters into buyers. Class B and C properties were hit by economy-related job losses. Reis estimates that the vacancy rate for Class A apartments rose to more than 7.5% in Q1, from 7.2% in Q4 and 6.8% a year earlier. Vacancies rose an estimated more than 6% for Class B and C apartments from 5.8% in Q4 and 4.9% a year ago. While apartment owners conceded that rents had fallen slightly during the quarter, some say their occupancy rates actually bucked the trend. Thomas Toomey, CEO of UDR, says that occupancy in its portfolio of Class B properties remained flat on a sequential basis and turnover had decreased. He attributes that, in part, to the REIT's focus on "middle-market" properties. Michael Hefley, COO of Gables, which owns mostly Class-A apartments, says occupancy increased and turnover decreased in Q1. He attributed that partly to rents dropping but also to "the drop in consumer confidence [that] resulted in less of our residents moving out to buy homes." JP Morgan REIT Ratings Changes 4-8-03
"A nice 5% correction would be healthy" for real-estate stocks, Trotman figures. Indeed, he thinks investors should use a correction in the group as an opportunity to "buy the sector hand over fist." A few of the names he likes are Vornado, which owns "the highest-quality midtown Manhattan office property," Pan Pacific Retail Properties and General Growth Properties, which Trotman estimates will expand earnings from 8% to 10% during the next two years.
"Demand for space will increase as the economy grows," adds Martin Cohen, co-manager of the Cohen & Steers Realty Shares Fund. "You don't need to have the vacancy rate go to 5% before you see rents stabilize, if not increase." As a group, REITs trade at a 4% premium to net asset value, well below their 30.2% peak premium in late 1997. Office REITs, meanwhile, fetch a 1% discount to NAV, according to Green Street. Office REITs have a more immediate problem - the beleaguered commercial real estate market. The vacancy rate in the top 50 U.S. markets stood at 16% at December 31, according to Reis. Reis projects that will actually increase to 16.4% this year. But the firm sees an improvement next year, to 15.8%, and to 14.8% in 2005. Another encouraging sign: fewer new office buildings. Reis expects 48 million square feet of new space this year, down from 65 million last year and 113.2 million in 2001. "Short term, there are probably more negatives than positives" in the office REIT group, says Jay McKelvey, a portfolio manager of the John Hancock Real Estate Fund. "But longer term, I think it's a good place to be." One company McKelvey likes is SL Green Realty, which has big holdings in New York City, including some properties near Grand Central Terminal. Cohen calls one of those, the Graybar Building, "a Class B building in an A+ location. [Green] has been very skilled at renovating and upgrading Class B buildings to be very competitive in the marketplace," he observes. "There aren't many competitors for that type of property." The company's debt-to-capital ratio is a manageable 42%, and it yields 6.3%. Another office REIT, Alexandria Real Estate Equities, has a strong presence in the office and laboratory market, with tenants such as Pfizer, Merck and the Food and Drug Administration. Alexandria's fourth-quarter same-store occupancy rate was 97.1%, essentially flat from a year earlier - a sign that its business is holding up well. "We like that they are a focused company and that they have a targeted market," says Nancy Holland, portfolio manager of the ABN AMRO Real Estate Fund, which holds the stock. Alexandria is more insulated from economic gyrations than many office REITs, says analyst David L. AuBuchon of A.G. Edwards. The company's leases often last seven to ten years, compared with a more typical five- to seven-year span. AuBuchon expects Alexandria to grow its FFO by 8.4% this year, well ahead of the peer group's 3.9% projected average decline. Its dividend yield is about 6%. Quick Facts, Stats & Opinions Imperiale's top picks are two industrial REITs - AMB Property and Duke Realty - and a Canadian apartment company, Boardwalk Equities Inc. (BEI). The portfolio manager is bullish on industrial REITs as he believes this sector will be among the first to recover. AMB and Duke both have savvy management teams and have not faced the severe occupancy declines that office REITs have. The two target different parts of the industrial warehouse sector, and both stand to benefit as corporations step up capital spending. Boardwalk is a Canadian apartment company. Imperiale is bullish on the company, based on its valuation and what he considers strong industry fundamentals. (Janet Morrissey, Dow Jones Newswires, 4-21) Fifty-seven REITs have raised their payouts since Q3-02, while only seven have lowered their dividends, according to National Association of Real Estate Investment Trusts. (Christopher Williams, Barrons 4-21) Heading (senior REIT analyst at Merrill Lynch) Steve Sakwa's recommended list are REITs that combine sterling dividend-coverage ratios with strong balance sheets, high credit quality and long-term leases. These include Rouse and Federal Realty Investment Trust, which has increased its dividend for 35 straight years. Sakwa touts the REITs' "high-quality portfolios." (Christopher Williams, Barrons 4-21) WorldCom was the Mark Rothko of financial artifice, creating billions in fake profits with what prosecutors say were broad, bold strokes. Enron was Jackson Pollock, deriving illusory riches from an arrogant, colorful riot of lies. HealthSouth seems to have been Georges Seurat. HealthSouth ledgers were rendered in tiny, carefully aimed daubs that produced a stunning effect when one stepped back from the canvas. (Jay Hancock, Baltimore Sun 4-13) [Note: It is HealthSouth's troubles that have sunk the stock of HR - landlord to HealthSouth in about 13% of HR's properties and one of the stocks in 'Real World Experiment in Stock Picking' in data table below.] According to Morgan Stanley research, REITs have now repeatedly beaten the S&P: over the trailing three years (REITs' 14.9% to the S&P's negative 13.4% -- a massive 28.3% gap); the trailing five years (3.9% to negative 2.8%); and even held their own over the last 10 years (9.3% to 9.8%). Only going back to February 1985 do the broader markets pull ahead (12.3% to 10.2%), and REITs gave the Dow, which gained 10.9%, a run for its money. For all the knocks REITs take - those kinds of bottom-line achievements should not be overlooked. (Dean Starkman, WSJ 4-9) Note: This experiment began in October - when the market was dipping - with my selection of a 10 REIT sector balanced portfolio. So far I have some proof that I am able to 'time' the market - but not quite beat the market. The inclusion of HR has harmed the short term performance of the group (as of 4-21, performance would be up 14.95% vs actual 12.45% without HR) - but I expect that HR will bounce back over time. I already think that I relied too much on valuation tables to pick temporary bargains - and not enough emphasis was placed on picking great companies with great long term performance records. In hindsight, I would have chosen CHP instead of RSE, BXP over high yielding HIW, KIM over MRR, PLD over AMB, and EQR over UDR. Home Page Previous REIT Update Top Sites
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