|
Previous REIT Updates and Stat Updates CPN Globe St. ICSC Rl Es Journal Reis ReBuz RSR NaREIT NREI Property ICSC REIT Week NAIOP ShopCntToday ShopCntrWrld Factoids Q3-03 Index Q2-03 Index Q1-03 Index Q4-02 Index Q3-02 Index Q2-02 Index Q1-02 Index Q4-01 Index Q3-01 Index Q2-01 Index Q1-01 Index Biz Links Business News Columnists Econ Reports Stock Exchanges Searches Tax News |
The industry is finishing a year that saw it rebound from a dismal 2002. The NAREIT Equity Index, which tracks returns from 50 companies, is up nearly 34% thus far in 2003, compared to gains of around 5% for 2002. "If our current prognosis for the economy remains unchanged, with some decent [gross domestic product] growth from here and moderate job growth at least in the second half of next year, we would argue that the S&P [500] is likely to outperform the REITs," Morgan Stanley analyst Greg Whyte told the NAREIT panel. The S&P hasn't outperformed the REIT index since 1999, an especially difficult year for REITs. The index was down 6% as investors favored the big returns from tech stocks over real estate.
We have also refined our flow through analysis from last quarter to reevaluate the positive impact on cash flows that could result next year from increases in occupancy and the resultant growth in tenant reimbursements. We continue to believe that this impact could be significant, even after taking rent roll downs and cap ex into consideration. This is a principal reason why we have suggested that investors ramp up their allocation to the office sector. The number of names in our office REIT coverage universe that carry an Outperform rating has increased to seven: American Financial, Corporate Office, Equity Office, Maguire, Arden, Brandywine and Prentiss. (Other Office REITs that James rates at "Market Perform": HRPT, Parkway & SL Green.) Although we believe that we are at or near an inflection point, conditions remain challenging across many parts of the country and a recovery will require some time to take shape considering that the trickle down to office leasing will lag overall economic improvement. However, as investors have already witnessed, waiting for good news to show up in earnings estimates before buying the stocks will likely prove to be a mistake. Reis estimates that in 3Q03, average vacancy rates ticked up across the country, from 16.6% in 2Q03 to 16.8% in 3Q03, while the average effective rent (asking rents less tenant improvements and leasing commissions) fell 6.0% year over year (1.1% sequentially) to $20.79 per sq. ft. Net absorption totaled -4.7 million sq. ft. compared to -4.0 million sq. ft. in 3Q02 and -3.5 million sq. ft. in 2Q03. The inventory of office space in the United States rose less than 0.1% sequentially and 0.9% year-over-year in the third quarter. Reis also estimates 3Q office employment of 20.8 million jobs, essentially flat both sequentially and year-over-year. In the prior recovery, the four-year period from 1991-1994 produced a net gain of approximately 925,000 office jobs, or a 5.6% increase. Reis economic projections for the four-year period from 2003-2006 contemplate 1.7 million new office sector jobs, or an 8% increase on the current base. In the 50 office markets that Reis tracks, only 33.2 million square feet (1.0% of stock) are expected to be delivered this year, followed by 24.9 million square feet (0.7% of stock) in 2004. As fundamentals have softened, there has been a speedy reduction in office development, which has helped ease the impact of the weak demand picture. With little supply expected, we believe any up tick in demand should produce meaningful occupancy gains and begin to alleviate the downward pressure on rents.
Landlords have focused on customer service during the downturn in an effort to attract new business and to keep existing tenants from moving. Deals often include months of free rent and interior remodeling. Those incentives and falling rental rates have spurred many large companies to renegotiate leases earlier than usual - especially now that conventional wisdom is that the market has hit bottom. Cushman & Wakefield predicts rental rates will continue to tick down next year before starting to grow again in 2005. The average asking rate in Seattle has dropped from $35.55 a square foot in 2000 to $24.38 today. Although the vacancy rate has fallen slowly over the past six months, brokers say it could grow slightly in downtown Seattle next year, mostly because of empty biotechnology space as Amgen moves into its new Helix campus on Elliott Bay.
The latest statistics show a loss of almost 13,000 jobs through the first 11 months of 2003 for the the North Texas [D-FW] job market. And that's on top of the 60,000 jobs lost last year and even more in 2001. For the Dallas-Fort Worth commercial property market to rebound from recession, we need jobs. Forecasters are hoping that 2004 will bring an uptick in job growth in Dallas-Fort Worth. If it does, it will be the first positive year for the employment market since 2000. Take the worst Dallas office market since the 1980s, add a dodgy national economy and what do you get? An investment property rush. Seems investors weren't buying all the bull that the Dallas bashers were printing this year. Instead of redlining the city, they were pulling out their checkbooks and buying suburban office buildings, shopping centers and hotels. The buyers - pension funds, foreign investors and wealthy individuals - are betting that Big D is about to bounce back.
Several big-name REITs still pay around 7%, including office companies Reckson (7%), EOP (7%) and Prentiss (6.9%), while a slew of REITs pay over 6% and some, including Crescent, even pay 8.8%. Tempting? So is it time to look for higher-yielding REITs? Lee Schalop, a Banc of America Securities analyst, believes high-yielding stocks are generally a bad bet. In a recent note, Mr. Schalop divided high- and low-dividend paying REITs at the start of the year and tracked their total return through last Thursday. At the beginning of the year, the median dividend was 7.58%. The high-yield REITs produced a total return of 29%, while low-yield REITs produced a total return of 37%. That's a big advantage, which, Mr. Schalop says, low-yield stocks have reproduced four of the last five years. He believes low-yielding companies are usually better managed and have better prospects for earnings growth, which drives the share-price appreciation that can overtake companies with high initial yields. Plus, he says, a higher yield is the stock market's way of demanding a higher return for higher perceived risk. But higher-yield REITs have their partisans. Steve Brown, managing director and portfolio manager for Neuberger Berman, a unit of Lehman Brothers, runs four closed-end REIT mutual funds that place a priority on higher current income as opposed to longer-term share-price appreciation. He says that by focusing on high-yield REITs with relatively strong earnings, strong balance sheet and comfortable dividend-coverage ratios, high yields can give a big head start to hitting low-double-digit-return targets. [At this point in time, I think strong and growing coverage ratios are the 'key' - and the level of dividend is relatively immaterial.] Mr. Brown's choices as of Sept. 30 included Brandywine, a office company now yielding 6.45%; Colonial, a diversified REIT yielding 6.7%; and Health Care Property Investors yielding 6.6%.
That's good news for prospective tenants - and also represents a huge change in the way office space usually is leased to corporate customers. Typically, landlords rent space in the condition that previous tenants left it; or, if new, in a raw condition. Customarily, owners allot what the industry calls tenant improvement dollars to cover all or a portion of building out the space. But awash in unleased, and therefore unprofitable, space, landlords are spending the money upfront - sometimes shelling out even more than they would in tenant improvement dollars - to redesign or furnish their vacant property even before a tenant comes along. Building owners typically are slicing up their vast unleased spaces into offices that can hold as many as 50 employees. They're marketing them as "prebuilt offices" or "speculative suites" to smaller tenants, which have been leasing more space these days. Often, these landlords are saving money over what an individual tenant would spend by building out several offices at once. And the move has an added bonus: By controlling the colors and look of the suites before they are rented, owners can ensure they have more marketable office suites at the end of the leases, if new tenants must be found. EOP began installing suites in its office properties across the U.S. this year. So far, the Chicago-based real-estate investment trust has built out about 200 such suites, ranging in size from 2,500 to 10,000 square feet. Building several at a time costs 10% to 20% less than building out a single suite "because we get the economies of scale," says COO Peyton Owen. The upfront investment appears to be paying off for Equity Office. The company completed about 37,000 square feet of suites last month in San Francisco. About half of that space is leased. "We've had incredible response," says Mr. Owen. "Small businesses are leading us out of the recession." Giving tenants a taste of what a space could look like was the idea behind Brookfield Properties' decision to build at its Denver buildings speculative suites outfitted with phones, furniture and even a dishwasher in the kitchenette. Local furniture sellers interested in showcasing their merchandise loaned their goods to Brookfield to display. The speculative suites are leasing three times as fast as other vacant space, says David Morrison, Brookfield's VP of leasing in Denver, a market that has nearly five million square feet of vacant office space, or roughly 16% of the total market. In some cases, Brookfield leased the suites even before construction was completed, Mr. Morrison adds.
Steven Roth, the chief executive of Vornado Realty Trust, says there is an easy way to explain this seeming paradox. It is difficult to build in Boston, where land is scarce, residents are vocal and zoning disputes can last years. The opposite is true in Atlanta and Dallas. "Wherever it's almost impossible to add supply," Mr. Roth said, "that's where I want to invest." This year, according to Real Capital Analytics, a research firm that tracks real estate sales, Trizec sold $993.4 million worth of property, making it the biggest seller among the REIT's. EOP was second, with sales of $705.6 million, and Vornado ranked fifth, with sales of $292 million. Vornado sold buildings in Hagerstown, Md., and Baltimore. EOP has divested itself of buildings in Charlotte and Albuquerque. During the last two years, Trizec has left Detroit; West Palm Beach; and Memphis, reducing the markets in which it owns buildings from 20 to 13. These days, said Lee Schalop, a REIT analyst for Banc of America Securities, "everyone wants to be in the hard-to-build markets - that's not Dallas, not Atlanta, not Charlotte, and not Raleigh." The high entry-barrier cities share other characteristics that these REIT executives find desirable: a vibrant night life, usually in or not far from the central business district, with appealing restaurants and cultural and sports attractions. (In Los Angeles, the developers cite the presence of dispersed central business districts in places like Santa Monica and Pasadena.) Cities with these features are likely to attract the highest-caliber work force, said Timothy Callahan, the chief executive of Trizec. "There's more focus than ever on where workers want to be," he said. But Robert White, the president of Real Capital Analytics, said that in the long run, investors might do well in some of the cities that the REIT's are now scorning. He said the average purchase price for office buildings in Dallas and Houston was below $100 a square foot, while in Atlanta it was $115 - well below the market average for central business districts of $206 a square foot and far below replacement cost. Yet the average rate of return in these cities is about 9.5% or more in the first year. "That's pretty compelling, if you can buy at high yield and low replacement cost," Mr. White said. David G. Shulman, a REIT analyst for Lehman Brothers, said it was not at all certain that rents in the major urban office markets would continue to rise. He said the huge increase in Manhattan rents in the 1990's was based on the vast improvement in the city's quality of life, a "one time only" event. Another critic, James P. Sullivan, a senior analyst at Green Street Advisers, points out that people who invested in San Francisco office buildings at the height of the market, when annual rents sometimes climbed to as much as $100 a square foot, are now able to get only about $40 a square foot and have lost much more money than investors in the Atlanta or Dallas markets. "High barrier to entry is often a strategy that sounds good theoretically," Mr. Sullivan said, "but it works much less well in actual practice, since these markets tend to be very volatile." Some REIT's, like Corporate Office Properties Trust, which owns 118 office properties with a total of 9.9 million square feet, primarily between Washington and Baltimore, would just as soon avoid central business districts. This year, OFC bought $164.5 million worth of suburban office property, making it the 11th-largest buyer among REIT's, according to Real Capital Analytics. In central business districts, said Randall M. Griffin, the president and chief operating officer, taxes and operating expenses are higher and the lengthy permit process means the risk of missing the development cycle. "In the suburbs," he said, "we can be more nimble in meeting market needs."
By the end of the third quarter, warehouse tenants had absorbed 9.5 million square feet of space, compared with 1.6 million last year. "You have retailers within the home-furnishings and home-center business that are doing extremely well and doing more and more big facilities," says Stan Danzig, a Cushman & Wakefield broker. But in a sign many companies are still in cost-cutting mode, a lot of the big-box deals are being signed by companies that are consolidating their operations, Mr. Danzig says. The manufacturing market, meantime, is facing a problem with shadow space. And the high-tech industrial space is continuing to see negative absorption.
Although rents have continued to slip in the office sector, Fitch believes "property fundamentals have reached a cyclical trough" as occupancy levels appear to be stabilizing. "Property quality, geographic diversification, embedded rent growth and management discipline have mitigated the impact of weak property-level fundamentals," the report said. As a result, Fitch maintains a "stable" outlook for the real estate investment trust sector for 2004. Real-estate fundamentals are expected to remain weak through 2004 with the office and apartment sectors taking the biggest hit, Fitch Ratings, predicts in an outlook report.
According to the Forecast, Riverside and San Bernardino Counties will experience strong office markets in 2004 and 2005, primarily because of a strong trade sector and available land that helps maintain the steady flow of new businesses to the region. Currently, there is upward pressure on rents, but Bostic expects that the rate of increases will slow in 2005. From an industrial standpoint, the Ontario Airport continues to be a key driver for the Inland Empire. According to the Forecast, "demand for nearby industrial space remains strong as firms and investors seek properties in less expensive submarkets located near transportation hubs." In fact, 2004 and 2005 are expected to be historic years for the Inland Empire industrial market as vacancy rates are projected to fall by 10% from 2002. [More info from the Casden Forecast in article below.] Casden Real Estate Economics Forecast USC Lusk Center press release 12-04-03 Los Angeles County Office: While it endured a less than stellar 2003, the Los Angeles County office market should begin to show a noticeable turnaround beginning early next year thanks to expansion in manufacturing and growth in service employment. The Casden Forecast sees vacancy rates broadly retreating from current levels as heightened demand is seen across the county. Rents will stop their two-year downward creep next year and a reduction in concessions will be the first order of business for property owners facing increased demand for space. Pasadena and Burbank will continue their leadership with growing rents and declining vacancies. Properties in the low cost Mid-Wilshire submarket are poised to experience strong demand. The long-suffering West Los Angeles submarket will see some life as lease activity picks up in and around cities such as Marina Del Rey, but significant improvements are not expected in this submarket until 2005 when capital should return to the high tech and communications sectors in larger volumes. Industrial: Although the overall picture for the Los Angeles County industrial market will be generally stable over the next two years, the improving economy will allow struggling submarkets to solidify. The hemorrhaging in the West and Central San Fernando Valleys will end, while Santa Fe Springs and other parts of the Mid-Cities submarket will see rents stabilize. But Carson and Compton in the South Bay will see rents continue to slide as they feel the heat of businesses moving to less expensive locations in the Inland Empire. Orange County Office: The County has not recovered significantly from the dive in technology jobs that took place in 2001, but employment will show token growth in 2004 and approach a respectable three percent in 2005. Orange CountyÌs reliance on telecommunications, high tech and business services that has been a liability of late will prove to be an out and out asset in the next two years as the economy expands. Upward pressure could push office rents up by 10% between now and 2005. By the end of next year, the County should see vacancy levels close to their pre-recession levels of 12 to 13%. The most activity will center around John Wayne Airport, which has been the focal point of the market weakness the past three years. The Airport submarket was responsible for 44% of all net absorption in the County during the third quarter of 2003. Industrial: Gradual growth next year will accelerate in 2005 and 2006, boosted by expected employment gains. The slight growth will not give landlords any pricing power, so those firms fortunate enough to survive the economic downturn should be able to lock in rents in the face of an impending rise in economic fortunes. A two to three percent rise in the average level of asking rents coupled with a 0.5% increase in vacancy rates over the next two years should be considered a positive move. Inland Empire The Inland Empire will continue to lead the Los Angeles metropolitan area, with jobs, sales and income all growing at rates well over five percent in 2005. The biggest story is RiversideÌs robust rebound covering six quarters and counting. This area felt the recession harder than other parts of the Inland Empire, but asking rents for class A property are now at historic highs while vacancy levels are at a five-year low. Office: Riverside and San Bernardino Counties will continue to feature strong office markets in 2004 and 2005. The main drivers are a strong trade sector and cheap, available land to help maintain the steady flow of new businesses to the region. Upward pressure on rents will be relieved somewhat by new office buildings opening. The rate of rent increases should slow in 2005 as the economy reaches a new, slower equilibrium growth rate. Vacancy rates will fall as occupancy levels rise, translating into significant profit opportunities for property owners. Industrial: The Ontario Airport continues to be a strong focal point for the regionÌs economic activity. Demand for nearby industrial space remains strong as firms and investors seek properties in less expensive submarkets located near transportation hubs. Total Inland Empire sales and lease activity in 2003 is more than double the rate for Los Angeles CountyÌs industrial market, pointing to the power of the airport and the wholesale trade sector overall. The Casden model predicts that 2004 and 2005 will be historic for the Inland Empire industrial market, with vacancy rates expected to fall by 10 percent from 2002.
Historically, REITs sometimes experience some investor movement out of the sector in the first 60 to 90 days that rates start to rise. But after that, he said, they stabilize. Yields and safe dividends remain attractive. Research by Hemel, Sakwa, and Bhattacharjee (1995) showed that REITs have a lower correlation with interest rates than the S&P 500 index has with interest rates. Still, rising rates could affect REITs that have high levels of floating rate debt. Sherry Rexroad, portfolio manager at Clarion CRA, said "any CFO worth his salt" would have taken advantage of the 40-year-low rates to improve the REIT's balance sheet. Rexroad names Taubman Alexandria and Kilroy as companies with high levels of floating rate debt on their books. She said about 34% of Taubman's, more than 50% of Alexandria's and 45% of Kilroy's total debt is variable rate debt.
In Europe NAV discounts have contracted by at least 10% in 2003, driven by the French introduction of U.S.-style tax transparent Real Estate Investment Trusts, expectations the UK may also allow REITs and a wave of takeover activity in the property sector, which UBS expects to continue. Steinert said UBS expected the global REIT market to continue to grow at a rate of around 20% a year reflecting the demand from an ageing population for the predictable long-term income streams which real estate investments offer. A survey by the U.S. Pension Real Estate Association identified an allocation of around 5.3 percent by funds to real estate now, but also intentions to increase this to over eight percent, implying a 50-percent increase in allocations to the sector in the medium term, he added. Similarly in Europe, 92% of major pension funds are expecting to increase their weighting to property next year from an average seven percent of portfolios now. UBS global real estate strategist Scott Crowe said that, if these pension fund re-weightings came about, then between $200 billion to $300 billion in new investment could flow into global property. Keith Mills, senior U.S. REIT & lodging analyst, told the meeting UBS believed the REIT sector would trade down in 2004 after stellar returns of 24 percent so far this year. He highlighted the potential for higher U.S. interest rates, particularly in the second half of the year, earnings risk in some real estate sectors, a lag between U.S. economic growth and the office sector and a likely increase in real estate yield spreads to treasury bonds. Mills's top U.S. real estate equity picks were Marriott International and LaSalle Hotel in the lodging sector, Equity Residential and Home Properties in multi-family, Maguire (MPG) and Parkway in office-industrial and Simon and Kimco in retail.
The expiration of big leases, such as those of Cigna Corp. in Center City and TV Guide in Radnor, in 2005 and 2006 could spark a lot of activity next year. At this point, the commercial real estate recovery appears similar to the one after the last recession. "It took five years for the industry to recover from the last recession in the early 1990s, and it will take that long this time," said David Barnhart, a vice president in Grubb & Ellis' King of Prussia office. The overall vacancy rates for metropolitan Philadelphia, now 18%, could decline slightly in 2004, said Matthew Guerrieri, a Grubb & Ellis research manager. In late 2000, the region's office vacancy rate was only 8.4%. Even at that overall vacancy rate, there will be space shortages in some areas where companies need to be if they are to attract and retain top workers. This may create opportunities for new buildings, Barnhart said. In other areas, there will be a glut of space in 2004. The biggest glut will continue to be in Radnor, which is 46.6% vacant, mostly space vacated by pharmaceutical giant Wyeth's move to Upper Providence, Montgomery County. Conshohocken is 29.1% vacant, due to overbuilding, the Grubb & Ellis report said. In contrast, the Blue Bell-Plymouth Meeting area has a vacancy rate of only 16% and few large blocks of space for lease, Barnhart said. Center City's office vacancy rate is even lower, 12.5%, according to Grubb & Ellis reports, up from 7.2% in late 2000. The New Jersey suburbs will remain stable, said Anne Klein, a Grubb & Ellis vice president for South Jersey. "Landlords have been very successful in renewing tenants," she said. Some landlords there are offering larger-than-usual amounts of money for improvements sought by tenants to get longer-term leases, Klein said. The coming year could be good for those with commercial property to sell, said Carl Neilson, a Grubb & Ellis vice president and investment specialist. Because less property will be on the market here than elsewhere, what is available could fetch strong prices. Many recent transactions were unsolicited offers on property that was not listed for sale, he said. The scarcity of property for sale here is linked to the dominance of real estate investment trusts. These firms control nearly half the prime commercial real estate in Philadelphia area, compared with 7% nationwide. These large firms hold property longer than other investors who often have tax or other reasons to sell sooner, Neilson said.
Net absorption also was positive during the second and third quarters of this year. The vacancy rate only climbed two basis points during the entire third quarter, with 25 of 45 markets posting vacancy declines. Twenty markets experienced vacancy increases. There is a long-term demographic trend that could negatively impact the office market, according to Grubb & Ellis. The prime working-age population (defined as people between the ages of 25 and 54) will increase by only 2% this decade, which could cut the number of workers who occupy office buildings. As a result, Grubb & Ellis concludes that employees will have more leverage, possibly trading larger offices for more flexible work arrangements.
Last year, Dallas' average non-farm employment fell 2.8%. The local unemployment is a relatively high 6.9% - exceeding the 6.1% national average. The neighborhood and community center market's Q3 vacancy saw a 60-basis-point jump, to 9.1% - a 110-basis-point increase from one year earlier. Non-anchor vacancy rates by submarket range from a high of 12.3% in Far North Dallas, to 6.9% in Southwest Collin County. Active construction in the face of two consecutive quarters of negative net absorption has been this market's nemesis: Up substantially from the 330,000 square feet delivered over the first three quarters of 2002, this market received 550,000 square feet of new neighborhood and community center space for the year-to-date period ending September 2003 - an onerous volume given the 2003 year-to-date negative net absorption of 216,000 square feet. Consequently, rents for center space remain weak: As of Q3-03, Reis reports average asking and effective rents of $14.16 psf and $12.64 psf, up 0.5% and down 0.7%, respectively, from one year ago. In addition to the current oversupply of new center space, the Dallas/Ft. Worth Metroplex has also had to recover from the closure of nineteen Kmart stores in early 2003.
With so many owners failing to meet their obligations, one would think that the banking industry would tighten its belt, right? Guess again. Lending for all property types increased, according to the MBA. The money being doled out for industrial properties went up 64 percent over the end of 2002, 60 percent for retail and 58 percent for office stock. All told, in the third quarter of this year the lending industry wrote checks for $29.7 billion, up from the prior high of $29.5 billion, set the quarter before, and 45% higher than the end of last year. Perhaps most astonishing is that in the battered office market, with its skyrocketing delinquencies, mortgage volume for the sector was up 45% for the first nine months of 2003. With all the predicted softness coming for the sector, these numbers don't add up. Well, actually, they do add up to something: problems for the banking industry.
Tired of trekking the glass-and-steel behemoths, the first mall-rat generation is flocking to the urban-style outdoor shopping centers to recapture something their parents and grandparents took for granted: a more intimate shopping experience. In real estate jargon the new open-air malls are "lifestyle centers" or "town centers," but the idea behind them is simple: Take the tenants of the average regional mall and plop them down inside a center made to look like a small-town downtown. Such centers are better landscaped than the sometimes tatty strip shopping centers that crouch beside well-traveled thoroughfares, and bigger than the power centers built around "big-box" retailers such as Home Depot or Barnes & Noble found in the middle of most suburbs. They have been around since the late 1980s, but their number is expected to increase significantly in the coming decade. U.S. developers will open more than 30 of them through 2004, compared with only 13 enclosed malls, according to the International Council of Shopping Centers. To put that in perspective, developers opened 19 enclosed malls in 1990 alone, a year when they completed just three town centers. The open-air shopping centers possess that rare quality in retail -- "walkability." A regional mall often requires a 10-minute walk from one department store to the next. Open-air centers generally contain less than half the 1 million square feet of a regional mall. In its first survey of the outdoor malls last year, the International Council of Shopping Centers found that they produce better sales. Last year lifestyle centers reported median retail sales of $270 per square foot of total area; by comparison, enclosed malls reported $242. Retailers have thronged to these centers, which typically charge lower rents than enclosed malls, whose fees include the cost of food courts, security and air conditioning and heating. That is good news for retailers but bad for developers because malls remain bigger moneymakers, producing about twice as much revenue as upscale open-air centers. In a survey of 1,500 shoppers this year, the International Council of Shopping Centers found that two-thirds preferred the upscale open-air shopping centers. Shoppers spent an average of $84 an hour there, compared with $58 at a regional mall, thanks in part to the outdoor venue's efficient layout.
With the economy improving, landlords say retailers that were only holding steady a year ago are starting to look for more space. In August, sales tax receipts were up 6.4% over a year earlier in the District, 4.7%higher in Maryland and 3% higher in Virginia. In all three places, sales tax receipts so far this year are substantially higher than in 2001, when a nationwide recession began. More retailers want to open stores in the region than there is land to accommodate them, driving rents up. According to Marcus & Millichap, 2.1 million square feet of retail space will be completed in the region this year, compared with 3.4 million square feet in 2001 and 2.7 million in 2002. That, analysts say, is one of the reasons the average annual rent for grocery-anchored retail space in the Washington area rose to $24.27 per square foot this year, compared with $20.46 per square foot in 2002, according to Delta. The average price paid for shopping centers in the region rose to $147 per square foot in 2002 and slightly more in the first half of this year, said Marcus & Millichap, from $123 in 2001. "Retailers do extremely well in our market," said David A. Ward, president of local retail brokerage H&R Retail. "When the economy hits a pitfall, sometimes retailers reduce their overall expansion programs. But when they do that, they focus [on] stronger markets like Washington."
Fairfax County Fairfax County has the highest office vacancy rate in the Washington area at the moment, the legacy of rampant construction of new office buildings spawned before the dot-com corporate boom evaporated three years ago. At 17.5% at the beginning of November, the office vacancy rate dipped from 18.87% at the end of 2002, according to CoStar Group, a Bethesda provider of commercial real estate information. The Washington area rate in November was 11.2%, just a shade above the region's long-term average rate of 10%, and a mark that is the lowest metropolitan figure in the United States and substantially below the current national average of 16.3%. Across the area, he said the Northern Virginia rate is 14.4%, suburban Maryland, 11.6%, and the District, 6.7%. Montgomery County Montgomery County's commercial real estate market remains steady, but slowdown in the biotechnology and health research sector could harm the office market there, say real estate experts. Montgomery's vacancy rate is 12.3%, slightly down from last year's 12.42% for the same period. Vacancy rates are decreasing in Northern Virginia as defense spending increases. Prince George's County The 13.5% office vacancy rate in Prince George's County is the third highest among counties in the region. Corporate downsizing and a large federal agency relocation have pushed up the rate: Last year at this time the rate was 11.5%, according to CoStar Group. The two percentage point uptick in the vacancy rate is primarily due to movements by a few relatively large companies: by the IRS from 122,040 square feet in Oxon Hill to its new headquarters in New Carrollton, and downsizing by Raytheon, Intermedia Communications and Allegiance Telecom, which all put space on the market. "The vacancy rate is probably very localized in a few buildings," said Alan Goldman, spokesman for Knollwood Development - a Largo-based commercial real estate firm. "Most of buildings are pretty much full." Goldman, whose company is charging $22 per square foot to tenants in a class A office building in Largo near Upper Marlboro, said the market in that part of the county is in good shape. The average leasing rate Largo and the surrounding area is $17.67, according to CoStar Group. Howard County Howard's office vacancy rate fell to 15.9% at the beginning of November, with about 1.8 million square feet of vacant space available, according to CoStar Group. That is higher than neighboring Anne Arundel County's vacancy rate of 10%. Howard's office leasing activity has been percolating recently but to a lesser degree than in the District and Baltimore, where employment is growing faster. Randall Griffin, CEO of Corporate Office Properties Trust, said his firm recently shifted some tenants from its National Business Park in Anne Arundel County to Howard as the office park filled to capacity. Griffin said his company has room to build two new buildings in Columbia Gateway office park - Columbia's largest office complex - but has chosen to wait until next year to possibly start construction. The county's largest office market might have dodged a bullet when Columbia's developer, Rouse, agreed in October to purchase its headquarters for $11 million after the company failed to renew its lease on time with its landlord. District of Columbia As of Nov. 13, office vacancies were barely changed at 7.8% in the city, up from 7.6% a year ago, according to CoStar Group. Brokers and others in the market say the strong results reflect continued demand for space from law firms and, in contrast to parts of Northern Virginia, few tenants who went under as the nation shifted into recession. Tenants absorbed 197,000 square feet of net new space in the third quarter, according to Cassidy & Pinkard. The District, according to Labor Department data, added 1,000 legal jobs in the past year. Big law firms are thus signing leases that help account for new development that dots the city. The biggest risks to the D.C. office market in the years ahead may be less the chance of tenant demand for space as too much supply of office space coming onto the market. According to CoStar Group, 3.8 million square feet of office space are under construction, only 34% of it pre-leased. Already, some newly completed buildings have space sitting empty. Survey Says Tim Lemke, Washington Times 12-26 Real-estate professionals surveyed by Spaulding and Slye Colliers said they expect the availability of office space to decline next year in the Washington area. About 40% of respondents said they thought the District would show the largest drop in availability, compared with about 36% for Northern Virginia. Only 9% expected an increase in available office space in 2004.
"I don't see a rosy future for department stores at all," says Robert Blattberg, professor of retailing at Northwestern University's Kellogg School of Management. He suspects that a large number will quietly go out of business, just as many 'mom and pop' shops did when department stores first appeared. Two models for success are emerging. The first is what Joshua Chernoff of A.T. Kearney, a firm of consultants, describes as the 'strong retail brand' approach. This is a store in which in-house brands feature strongly and managers take an active role in choosing inventory. Such a store is far more interested in promoting itself as a brand than any individual brand within it. In Britain, Marks & Spencer is the classic example of this approach; in America, Kohl's fits the bill. Such stores tend to have high operating costs, but they can command high margins, assuming that their in-house brands are both fashionable and popular. The second model for success is the 'showcase'. This sort of department store not only sells other people's brands, but often gets the vendors of those brands to take responsibility for stock, staff and even selling-space, handing over a percentage of their sales to the department-store owner in return for their concession. For a store-owner, this can mean lower gross margins overall. But the compensation should be low operating costs. The trick for a showcase, typically a flagship store in a big city centre, is to keep the customers rolling in. Quick Facts, Stats & Opinions This year more than 2 million square feet of space was completed and added to Austin's retail inventory, according to The Weitzman Group. The city boasts about 27 million square feet of retail space not including malls. Austin is the tightest retail market in the Lone Star State and boasts an occupancy rate north of 95%, according to Weitzman. As a result, average rental rates in Austin are higher than in any other Texas city including Dallas, Fort Worth, San Antonio and Houston. Average rental rates for Class A retail space is more than $22 per square foot. Even less desirable space generates rental rates upwards of $15 per square foot, according to Weitzman. (Jennifer D. Duell, CPN 12-26) Equity REITs have had an average annual return of about 12.6% over the past 30 years, which beats the S&P 500's 12.2%. (Mathew Emmert, Motley Fool 12-23) Health-care real estate investment trusts have posted total returns of about 50% in 2003, and at least one analyst, Legg Mason's Jerry Doctrow, is predicting the group will deliver at least 12% returns in 2004. Doctrow expects health-care REITs to continue to benefit next year from improved Medicare reimbursement for nursing homes, higher occupancy and pricing for assisted living, and an improving outlook for acute care operators. His top picks are Health Care REIT (HCN), Ventas (VTR) and LTC Properties (LTC). (Janet Morrissey, Dow Jones Newswires 12-22) The office vacancy rate for Philadelphia's Center City west of Broad Street, which has 35.1 million square feet of office space, is only 12%, far below the region's overall average of 18.5%, according to data from CoStar Group. In contrast, CoStar reports that the 3.94 million-square-foot Conshohocken submarket is 27% vacant. Conshohocken and West Conshohocken became the region's hottest suburban office submarket in the early 1990s. (Henry J. Holcomb, Philadelphia Inquirer 12-16) At the end November 2002, according to Cushman & Wakefield, office sublease space [in New York City] was 35% of total availabilities; today it is 29%. But, while the sublease inventory has fallen, direct vacancies are up from last year. Cushman & Wakefield found the direct vacancy at the end of November to be 9.1%, with a total vacancy of 12.8%. Last year at this time, the direct vacancy was 7.8%, with a total vacancy of 12.1%. (Therese Fitzgerald, CPN 12-09) By the end of the third quarter, with the historically busy year-end still to come, $75.8 billion had already been invested in commercial real estate this year, according to Real Capital Analytics, versus $70.2 billion in the first three quarters of last year. (That excluded hotels and land and included only deals greater than $5 million.) The research firm anticipates this year's total will likewise surpass last year's $102 billion. (Suzann D. Silverman, CPN 12-08) In general, commercial-property owners should see moderate increases, no change or in some cases decreases in property coverage, says Robert Hartwig, chief economist of the Insurance Information Institute. But they're very likely to see increases on the liability side of up 20% to 30%, Mr. Hartwig says, though not as steep as last year, when the increases ranged from 40% to 50% last year. Rates for property insurance have fallen largely because there is more of that kind of insurance available in the marketplace, which has led to more competition among carriers. (Ray Smith, WSJ 12-03) McDonald Investments analyst Richard Moore raised his price targets on 10 names in the retail real-estate world on the belief that a strong holiday sales season could mean bigger demand for retail space and fewer bankruptcies among retailers. "As the economy continues to show signs of renewed strength, we expect the positive December momentum to translate into continued retail strength in 2004," he wrote. Moore boosted price targets on CBL, FRT, FCEA, KIM, MAC, MLS, PNP, RPT, SPG and WRI. (Janet Morrissey, Dow Jones Newswires 12-03) Apartment vacancies in the Minneapolis-St.Paul metro are about 6.5%, but if free space given in concessions is factored in, the vacancy rate would be about 10%. Until about two years ago, vacancy rates were 3 to 4%. The core cities have fared better than the outlying areas, with an average vacancy rate of about 5%. In outlying suburbs, average vacancy rates often are 15%. Keith Collins of CB Richard Ellis said rental rates usually are described as flat, but the reality is that the giveaways mean that prices have dropped significantly. Abe Appert, vice president of Fransen Appert Real Estate Group estimated that the average stated rent for a one-bedroom apartment in Minneapolis would be $760 in the first half of next year. In the suburbs, the range would be $710 to $760. He also estimated that two-bedroom rentals will cost an average of $865 in St. Paul, $1,040 in Minneapolis and between $830 and $950 in the suburbs. (Terry Fiedler, Minneapolis Star Tribune 12-1) Mall owners are encouraged by strong traffic and sales over the Thanksgiving weekend, and are predicting the trend will continue through the holiday season. The news bodes well for retail REITs, which have been outperforming the REIT sector throughout the economic downturn. Mall REITs have delivered total returns, which include dividends, of 50.3% on average so far in 2003, according to the National Association of Real Estate Investment Trusts. This outpaces equity REITs, whose returns are up only 32.5%. (Janet Morrissey, Dow Jones Newswires 12-01) Update: Second Experiment in Stock Picking 12-30-03 A sector balanced portfolio is summed and compared with the average of two REIT index ETF's: ICF [Cohen & Steers Realty Majors - the top 30 REITs by market cap] and RWR [the REIT Wilshire Index]. The first experiment went from Nov 02 to Oct 03 and this experiment began at the end of April of this year. NOTE: ICF and RWR dividends were added on 12-24, but one of these ETF's appears to be having a special dividend later this month. So their combined gains may still be slightly understated.
|