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In all, there are about 20,500 properties, with 2.27 million apartments. Of these, 90 percent are owned by for-profit companies. The median rent is $2,200 a month, but in some markets, it may be closer to $4,000 a month, and the average stay is two years, according to data compiled by the trade group. Despite the slowdown in construction, many assisted-living operators are still struggling to fill their properties. The median occupancy rate declined from 86% to 83%, according to the National Investment Center for the Seniors Housing and Care Industries. Occupancy rates of less than 83% are considered inadequate to generate a return on equity, the organization said.
Torto Wheaton Research says the national industrial availability rate - which includes vacant space and space that is occupied but available for lease - rose to 11.5% in Q2 from 11.3% in Q1 and 10.8% a year earlier. Meanwhile, rents fell to $5.54 a square foot from $5.57 in Q1 and $5.77 a year ago, according to Torto Wheaton's study of 51 markets and 71 metropolitan statistical areas. Net absorption was at minus 12.1 million square feet, compared with minus 4.5 million in Q1 and minus 9.6 million square feet a year ago. A third report showed some improvement. Grubb & Ellis, which tracks 38 markets with inventory of 10,000 square feet or more, says the vacancy rate fell to 9.96% in Q2 from 10.06% in Q1, still well above the 8.98% rate of a year earlier. Warehouse asking rents rose to $4.44 a square foot from $4.43 in Q1, but were down from $4.82 a year ago. The firm says absorption in the markets it studies rose to 19.66 million square feet from 2.56 million in Q1 and 8.94 million a year ago. Second-quarter results so far from several industrial REITs offer little evidence that the industrial real-estate market has improved. Several cited softness in U.S. markets and reduced forecasts or gave cautious, pessimistic outlooks for the rest of the year.
Marty Cohen, co-manager of Cohen & Steers Realty Shares, says investors are so down on skyscrapers that office REITs are trading at substantial discounts to the value of their real estate. He believes job growth will come sooner than later, leading to rentals and rising REIT prices. He dislikes apartments for the same reason everybody else does: With mortgage rates at historic lows, the best tenants are becoming homeowners. But low rates also encourage speculative development, so apartment buildings continue to be built even though existing ones are failing. Even though Cohen doesnĖt like most apartment REITs, he makes exceptions for Essex Property Trust and AvalonBay Communities, which operate on the high-cost coasts. 'There are barriers to entry there, and the cost of single-family homes is much higher than the national average,' he says.
But REIT players are betting that investors are smarter this cycle. REIT executives say stock-pickers will not fully abandon the sector because they will need well-diversified portfolios - something in which real estate will stake its claim. REIT heads also expect to maintain or increase their market share with their push into the 401(k) arena.
Class A space leased for $24.54 per square foot in the second quarter of 2003, down from $27.50 per square foot a year earlier. The construction boom is over. After building a total of 15 million square feet from 1998 to 2002, new construction has dwindled to a trickle - less than a million square feet in 2003.
One portfolio manager, Sam Lieber, co-chief executive of Alpine Woods Investments LLC and president of Alpine Funds, expects the group to deliver further 5% to 10% returns in the second half of 2003. Lieber, who holds shares in seven health-care REITs, moved into the sector for its "relatively stable cash flow" and attractive dividend yield. Currently, health-care REITs boast a 7.6% dividend yield on average, according to NAREIT. His holdings include Senior Housing Prop (SNH), Nationwide Health Prop (NHP), Health Care Property Inv (HCP), Health Care REIT (HCN), Ventas (VTR), Healthcare Realty Trust (HR), and Universal Health Realty (UHT). Prudential Financial analyst Jim Sullivan, seizing on the low valuations, upgraded the sector to perform from underperform on April 9. Since then the group has traded up about 24%, he noted. Sullivan now believes the group is fully priced. Health-care REITs took a hit earlier this year after investors learned that Centennial Healthcare Corp. had filed for Chapter 11. Investor concerns were fueled further when accounting scandals and financial uncertainties hit at two other health-care companies - HealthSouth (HRC) and Tenet (THC). Bob Steers, co-portfolio manager at Cohen & Steers, is more bearish on the group. He sold off many of his health-care REIT shares at the beginning of 2003 in anticipation of an economic rebound. As the economy improves and interest rates tick up, he said, he tends to seek out more growth-oriented REITs that will reap the benefits of an economic rebound. Legg Mason analyst Jerry Doctrow said business fundamentals in the health-care REIT sector are sound, and the dividend yield remains attractive. Even if the economy is rebounding now, other real estate sectors, such as office and industrial properties, tend to lag the overall economy in their recovery. As a result, health-care REITs, with their stable growth and dividend yield, continue to remain attractive.
The down numbers are "by no means a sign of doom," says Lloyd Lynford, chief executive of Reis. With job losses continuing to mount in the general economy and consumer debt at an all-time high, retailers may be becoming more cautious. A significant gauge of retail's health - sales per square foot - has fallen 1% during the past two years, says Mike Kirby, an analyst with Green Street Advisors. The situation in the strip-mall market has led some to say there's not enough supply on the market. "When vacancy stays the same but absorption goes down, there's not enough supply generally," says Glenn Rufrano, CEO of New Plan Excel. Supermarkets, which normally are a strip-mall's anchor, have been fairing poorly in the face of tough competition from giant retailers Wal-Mart and Target, says Mr. Kirby of Green Street Advisors. "It's possible Wal-Mart is responsible for some of the loss in absorption."
In 2004, the S&P's average operating earnings per share growth is estimated at 13.2%, which outpaces the REIT sector's estimated funds from operations growth, pegged at about 4.3%, Whyte said. The REIT sector's attractive dividend yield and stable predictable earnings could help offset the softer earnings growth, he said. Whyte said certain REIT sectors are poised for greater growth than others. Hotel REITs, for example, are on track to post 11% FFO growth in 2004, while industrial REIT earnings are expected to rise 5.7% on average, he said.
That may be true for Atlanta, but don't write Dallas off just yet. Certainly the real estate investment community hasn't. Office buildings sales are booming, and there's a line around the block every time a grocery-anchored shopping center goes on the market. We've heard this all this doomsaying before. It's been written that it will take more than 10 years for the Dallas property market to rebound. That forecast was published in the early 1990s, and we've already had another boom since then. Yes, we tend to overdo it with construction when times are good. But boy, can this town bounce back when the economy takes off.
In addition, the Morgan Stanley REIT index hit a 52-week high recently and is up about 15% since the beginning of 2003, compared with a gain in the S&P 500 stock index of about 8%. "I wouldn't be rushing into them. They're very overpriced," said David Shulman, senior REIT analyst at Lehman Brothers. "REITs are trading 115 to 120 percent of net asset value," he said.
In the 1,384 sales of apartment buildings it was involved in nationwide over the past 12 months, 35% of private sellers bought retail, office or warehouse properties with their proceeds, while 20% didn't buy another property. Some 45% of investors did buy apartment properties with their proceeds - despite high vacancy rates and lowered rents overall. The most common alternative apartment-building sellers have been looking at is single-tenant net-lease properties. The average yield for single-tenant net-lease properties ranges from 8% to 9%, compared with 6% to 8% for apartment buildings.
"It looks like senior REIT executives think the stock is expensive. If it was cheap, they probably wouldn't be selling," said Lehman Brothers analyst David Shulman. The analyst estimates REITs are currently trading at about a 16% premium to the value of their underlying assets, or net asset value. The top ten sellers were: Boston Properties (BXP). Vornado (VNO), Catellus (CDX), Liberty Property (LRY), Equity Office Properties (EOP), Post Properties (PPS), SL Green (SLG), Arden Realty (ARI), Rouse (RSE) and Equity Residential (EQR). There were bugs in this program that caused the initial calculation of equivalent shares for IFC and RWR to be overstated. While the dollar amounts are not comparable, the percentage gains are.
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