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Tenants occupied an additional 46.3 million square feet of industrial space in the second quarter, compared with a gain of 16 million square feet in Q1 and a loss of nine million square feet in the year-earlier quarter, according to Torto Wheaton Research. The increase in absorption reflects the improved economy in the second quarter, particularly in April and May. Riverside-San Bernardino, Calif., and Los Angeles County, strong markets to begin with, posted the highest absorption numbers, at seven million and 5.3 million square feet, respectively, according to Grubb & Ellis, which tracks 44 markets. Chicago and Dallas also posted strong gains. Meanwhile, absorption fell in Kansas City, Mo./Kan., while Atlanta, northern and central New Jersey, and Greenville, S.C., registered negative absorption, according to Grubb & Ellis. Markets like these -- plus older, less modern industrial buildings across the country that aren't attracting tenants -- are bogging the overall market down, helping explain why the national vacancy rate has tended to move little in recent years. The average vacancy rate for industrial properties in 51 major markets across the U.S. fell to 10.3% in the latest quarter from 10.4% in the first quarter and 10.5% in the year-earlier second quarter, according to Colliers International. With vacancy rates so stubborn, industrial landlords still lack the power to raise rents. Rents for warehouse space, for example, fell to $5.41 a square foot on average nationally from $5.43 in the first quarter and $5.55 in the year-earlier quarter, said Laura Stone, managing research economist at Torto Wheaton Research. One concern cited by almost all the firms was the amount of construction expected to come on line by the end of the year, especially as economic growth seems to have slowed. Research firm Reis forecasts total completions of industrial space will reach 54.8 million square feet this year, up 23% from 44.5 million in 2003. The fear is that demand won't be strong enough to absorb that new stock, much less all the existing space. As a result, "don't expect the vacancy rate to come down this year," said Lloyd Lynford, chief executive of Reis. However, John W. Seiple Jr., president of Aurora, Colo.-based industrial real-estate investment trust ProLogis, said that construction, while up, is still less than in the late '90s -- about 2% of total inventory now, compared with more than 3% in the peak years of 1997 to 1999. "It's increasing, but in a disciplined fashion," he said. Delinquencies on Industrial Properties Jump Sheila Muto, WSJ 7-28-04 Delinquencies on loans for industrial properties jumped sharply in the second quarter, according to a report by Standard & Poor's Corp. Loans on industrial properties posted the worst performance of the six property types -- apartments, hotels, health care, industrial, office and retail -- that S&P tracks. Of the more than $12 billion of industrial loans tracked by S&P, $220 million were delinquent. In Q1, $140 million of loans were delinquent. The delinquency rate on industrial loans has been on the rise since December 2000, but "the rate really accelerated in the second quarter," says Larry Kay, an S&P director. What's more, $225 million in industrial loans in Q2 were turned over to a special servicer -- which typically steps in when an underlying loan within a commercial mortgage-backed security goes bad -- up from $125 million in Q1.
Chief economist Mark Obrinsky was quick to point out that the index does not measure the amount of improvement in vacancy -- the high number only indicates that more markets are moving in a positive direction. Furthermore, market data was very mixed in the first quarter, which Obrinsky interpreted as a flat quarter. Now, though, he expects more steady improvement. By year-end the market should be well on its way to more normal vacancy rates: in the 4 to 5 percent range.
Landlords on the Westside, the county's largest market, grew more aggressive in luring tenants by cutting rents; the Westside average fell 9 cents to $2.58 a square foot. The vacancy rate also fell, to 16.1% from 17.6%. Although still leaning toward a tenant's market, Westside rents may have stabilized, said Chris Houge of Madison Partners, a tenant broker in West Los Angeles. Vacancies in downtown Los Angeles, the next-largest market after the Westside, came down slightly more than 2 percentage points to 17.7% as the average rent moved up 5 cents to $2.09 a square foot. Recent activity suggests that rents and leasing activity downtown may soon be headed upward, said Brett White, president of Los Angeles real estate brokerage CB Richard Ellis. Several office buildings and vacant parcels have traded hands in the last two years at increasingly higher prices as large investors bet that downtown will heat up again after more than a decade in the doldrums. Investors have been encouraged by the addition of Staples Center and Walt Disney Concert Hall, along with the burst of residential development. Several rail lines now serve the area. "There is a lot going on downtown that leads people to believe that finally the dynamics that must be in place to make this a good office market again are in place," White said. The county's weakest office hubs in the April-June period included downtown Burbank, with a 28.7% vacancy rate and average rent of $2.06 a square foot, and the commercial district around Los Angeles International Airport, with a vacancy rate of more than 30% and an average rent of $1.42. The South Bay market from the airport to Long Beach remained among the softest in the county, with an average vacancy of 18.9% and rent of $1.86. The South Bay, which suffered from business losses in its key industries of aerospace, defense and technology, is still trailing the region, Vargas said. Burbank's Media District was one of the strongest markets, with a 4.8% vacancy rate and average rent of $2.72. In the San Fernando Valley, vacancy in Woodland Hills was 8% and average rent was $1.89. In Westlake Village, vacancy was under 10% and average rent was $2.06. In Encino, the average vacancy was 11.2% and the average rent was $2.02.
By November 2005, Atofina will move into 150,000 square feet of space in 1201 Louisiana, Metro's headquarters building. Metro is vacating the property later this year. After the move, Atofina will be joined by parent company Total Holdings U.S., with headquarters in Philadelphia. Total has 20 employees. Although its current lease doesn't expire until 2010, Atofina has the right to cancel the agreement in 2007. But what happens between the move and the contract's expiration? A source familiar with the deal said Atofina is getting enough free rent in the new building that it won't have to make double payments. Indeed, some landlords are willing to offer enough incentives that make it feasible for a company to break a lease, Steve Burkett of Staubach Co. said. "If the economics work, they can move early," said Burkett, who represented Atofina along with Staubach's David Bale.
The vacancy rate for shopping malls fell to 5.6%, from 5.8% in the first quarter. Mall rents ticked up 0.4% to $37.61 a square foot, from $37.47. A rash of mall-retailer bankruptcies followed the 2003 holiday season, causing mall rents to fall and vacancies to rise in the first quarter, as companies like KB Toys. and Footstar closed down hundreds of stores. In strip malls, vacancies edged down to 6.9% in Q2, from 7% in Q1. Asking rents went up 0.6% to $17.45 a square foot per year, from $17.35 a square foot. Absorption increased to 6.4 million square feet in Q2, up from two million square feet in Q1 and 3.1 million square feet in the year-earlier period. Indeed, the strip-mall market is likely to weaken for the rest of the year, says Lloyd Lynford, chief executive of Reis. That's because developers are still building more space than the market can use. Reis projects construction of 28.5 million square feet this year. Retailers have absorbed just 8.4 million square feet through the first half of the year. Mr. Lynford says the excess supply will drive vacancies up to about 7.3% by the end of the year. That would be the highest vacancy rate in the strip-mall market since 1996, largely because investors are willing to build more space even with the lower returns that retail real-estate investments are providing these days.The Gap is considering a new store concept that would likely lead to new store openings. That, along with expansions by retailers Zara and H&M, could bode well for the retail market.
Downtown still has the highest availability rate in Manhattan. And in the next few years that market will take more space as planned projects -- the 1.7-million-square-foot 7 World Trade Center, the 2.6-million-square-foot Freedom Tower and the 2.3-million-square-foot Goldman Sachs headquarters -- get under way. Its absorption rate will have to pick up smartly to keep those projects, not to mention other potential new World Trade Center buildings, from diluting the market. In midtown Manhattan, New York City's largest market, the availability rate sank to 11.9% in July from 12.3% in June on strong leasing activity. Tenants snapped up 1.8 million square feet in June, 753,000 square feet of which was positive absorption. For Manhattan overall, the availability rate is 12.6%, down from 13.7% at the beginning of the year. Average asking rents are at $41.42 per square foot, down from $42.01 per square foot at the beginning of the year.
Absorption totaled 36,869 units in the second quarter, swinging from a negative 17,830 units in Q1. Absorption was 32,651 units in Q2-03. The second quarter is typically a strong leasing quarter, as weather turns warmer. Despite the uptick in absorption for the quarter, Reis sees challenges ahead amid the brisk pace of apartment construction. Indeed, Reis cited construction as one reason it expects the vacancy rate to rise to 7.1% by the end of the year, the highest level since 1986, when it was 7.9%. Reis expects 100,000 new units this year, less than the 110,745 last year, but still a lot, considering last year's supply hasn't been fully absorbed. Effective rents -- what landlords actually collect as opposed to what they hoped to collect -- rose to $868 a month in the second quarter from $862 a month in the first quarter and $857 in the year-earlier quarter. Markets with the biggest jumps in rent growth year over year included Norfolk, Va. (7.8%), Miami (3.2%), Las Vegas (1.4%), New York (4.2%) and suburban Virginia (3%). Reis bases its rent figures on a blended average of studios and one-, two- and three-bedroom apartments. Michael Cohen, a real-estate economist with research firm Property & Portfolio Research, also expressed concerns about the number of apartments planned for construction. The three-month rolling average of multifamily units entering the planning phase as of April totaled 80,000 units, according to the firm, compared with 40,000 units a year earlier.
The heaviest insider selling took place at Vornado, AvalonBay, and Archstone-Smith, where each saw sales of more than $10 million. Robert Smith, an Archstone shareholder and Vornado director, was responsible for a big chunk of the selling at both companies, the report said. Smith had co-founded two REITs that were later sold to Archstone and Vornado. His $27.3 million in sales accounted for about 55% of all non-options-related insider sales in the second quarter, the study said. Insider purchases surged to $23.7 million in the second quarter from $3 million in the first quarter. "Buying activity by insiders significantly outpaced any other quarter since we started tracking the data two years ago," the Lehman report said. Most of the buying took place in May after the REIT dropoff. Amli Residential, Cousins, General Growth Properties, Macerich, Rouse and Sun Communities saw the biggest insider purchases as executives appeared to believe their stocks were cheap.
"If rates move at a slow, gradual pace, earnings growth will pick up and REITs will do fine," said Darren Rabenou, a money manager J.P. Morgan Fleming Asset Management, meaning a rise over two years in the Fed's benchmark lending rate to about 4%. The New York-based firm has $1 billion in real estate stocks. The prospect of higher interest rates makes REITs unattractive, say some investors such as Andrew Engle, co- manager of the $485 million Leuthold Core Investment Fund. "Sentiment is working against them," said Andrew Engel, co-manager of the $485 million Leuthold Core Investment Fund. "It will take a long time to get the public to look at REITs again after they got smashed in April." Engel said he sold all his REIT holdings in January and will wait until they sell for a discount to the value of their real estate minus debt before adding them to the fund again. Merrill Lynch analyst Steve Sakwa thinks the Morgan Stanley index may fall to 549, a drop of 11%, if yields on the 10-year Treasury notes rise to 5.25 percent, he wrote. That would represent a loss of 4.3% including dividends. Property stocks have tended to drop this year when Treasury yields rise. The relationship between the Morgan Stanley index and the 10-year Treasury note has been -0.7 this year, where a correlation of -1 indicates the index falls whenever Treasury yields rise. J.P. Morgan's Rabenou said any drop in property stocks is likely to be short-lived as demand improves. The Morgan Stanley REIT index may return as much as 10 percent this year, he said. "The office sector is stabilizing and we're starting to see tenant demand in the apartment and warehouse sector," he said. "Over the long term, the fundamentals are going to take over." The companies in the Morgan Stanley REIT Index, which tracks 117 of the most actively traded property shares, have a combined market value of $213 billion. The industry accounts for 0.4 percent of the S&P 500. REIT stocks sell for an average of 9.9% more than the value of their property minus debt, according to Green Street Advisors, which tracks 56 companies. That's lower than the 22.3% premium at the end of March and close to the 7.1% average since 1993.
The vacancy rate held steady at 16.8% in the second quarter from the previous quarter, as new construction added nearly as much space to the market as companies took. Builders finished 5.94 million square feet of new office space in the second quarter, down 25% from the 7.93 million square feet added a year earlier. Developers have put a clamp on construction, slowing to a projected 31 million square feet of new space this year from 143 million square feet in 1999, according to Reis. Rents continued to decline for the 13th straight quarter, but the decreases are smaller. Effective rents -- or the actual rent paid, which takes into account inducements like free rent and office buildouts -- fell to $20.21 a square foot per year in the second quarter from $20.29 a square foot in the first. That was a 0.4% drop, compared with a 0.7% decline in the first quarter and a 1.9% fall in the second quarter of 2003. The U.S. economy added nearly a million jobs from March to May, so companies need more space for employees, said Lloyd Lynford, chief executive of Reis. "We still have a long way to go before the fundamentals are stabilized sufficiently so that landlords can push rents," Mr. Lynford said. Effective rents are down 20.2% since their peak in the first quarter of 2001. There's significant activity in most of our markets," said Mitchell Rudin, president of U.S. transactions for CB Richard Ellis, a commercial real-estate-services firm based in Los Angeles. "More people are looking at space...and not just because it's a great time to lock in low rents, but now it's based on anticipated growth needs." The Washington, D.C., market was the strongest in the nation, with a 7.7% vacancy rate, making it the only market below 10%. San Bernardino, Calif., was next at 10.2%. New York, the nation's biggest market, was third at 10.6% -- still a high number for New York, which typically has much lower vacancies than the national average. Dallas was the weakest market in Q2 with a 26.5% vacancy rate. San Jose, Calif., was next to last with 23.4% of its office space vacant. At 16.8%, the national vacancy rate still more than doubled the 7.5% rate in the third quarter of 2000, when the market began its precipitous slide.
As of the first quarter of this year, REITs far outperformed the stocks in the S&P 500 Index and Treasury bonds in the average annual returns posted over the short term --the last one-, two- and three-year periods -- and over the long term of 25 years, according to the report. In the last year, REITs posted an average annual return of 51.6%, compared to 35.1% for the S&P 500 and -4.9% for bonds. During the past 25 years, the average annual return offered by the REIT sector was 14.7%, compared to 13.4% for the S&P 500 and 10.1% for bonds. The suggestion that REITs performed better because the sector had more debt leverage than the average U.S. business and therefore benefited from historically low interest rates fails to hold, the report says, because data indicate that REITs had about the same leverage as other U.S. businesses. Instead, the report says, the difference can be explained by the fact that as the U.S. business sector expands, rents -- and thus the value of real estate -- grow at about the same rate over time. Based on data from the Internal Revenue Service, the ratio of company rent payments to company revenues has remained "steady" since 1985, the report says. During periods "when REIT earnings and corporate earnings diverge, long-term leases help cushion REIT earnings relative to business earnings." Since 1979, dividends have accounted for 37% of the total return of REITs, compared to 12% for stocks in the S&P 500. The report also found that the performance of REIT stocks has a low correlation with the performance of the broader stock market, as measured by the S&P 500 Index, and an even lower correlation with bonds. And finally, using the so-called Sharpe ratio, which indicates the amount of reward received per unit of risk assumed, the report concludes that REIT stocks have the lowest risk for the biggest reward when compared to the performance of stocks in the S&P 500 Index and Treasury bonds during the past 25 years. Taking things a step further, the report suggests an "ideal" portfolio would consist of about 46% allocated to REIT shares, 32% dedicated to an S&P 500 Index fund and 22% devoted to bonds.Global Real Analytics did the same analysis a few years ago. "The conclusion was the same," says Mr. Wollack, "but only it's stronger now." Quick Facts, Stats & Opinions On 7-1, UBS Cuts Essex Ppty To Reduce From Neutral, cuts AvalonBay To Reduce From Neutral, cuts BRE Properties To Reduce From Neutral, cuts Camden Ppty To Reduce From Neutral and cuts Apt Investment & Mgmt To Neutral From Buy. (WSJ 7-1) Financial troubles at teen clothing retailer Wet Seal could potentially have a material impact on a number of real estate investment trusts if the company winds up filing for Chapter 11 bankruptcy protection. In a 10-Q filing with the Securities and Exchange Commission, Wet Seal disclosed that it could be forced into a "potential reorganization under Chapter 11." According to Morgan Stanley analyst Matt Ostrower, Simon has 131 stores, which represents about 0.57% of its total stores. Rouse has 31 stores making up 0.56% of its total while Taubman has 17 stores representing 0.54%. General Growth Properties has 73 stores, but they represent a slightly smaller percentage of the company's store count - 0.5%. Other REITs with Wet Seal stores in their malls include: CBL with 31 stories, Macerich with 27, Glimcher with 10, Mills with 12, Federal Realty with two stores and Developers Diversified with one store. (Janet Morrissey, Dow Jones Newswires 6-29) Update: Third Experiment in Stock Picking 7-30-04 A less than sector balanced portfolio is 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 the second experiment went from May 03 to May 04. This experiment continues a shift towards being over weighted in retail and having two key holdings - MLS and VNO. Earnings Guidance: CARS expects 2004 FFO of $2.52 to $2.56 a share, up from its prior guidance range of $2.47 to $2.52 a share. Thomson First Call currently targets FFO of $2.51 a share for the year. On 1-21 CARS increased its quarterly dividend to $0.4165 from $0.4140. The new annual rate is $1.666 per share. CARS also reaffirmed its 2004 annual dividend guidance of $1.70 per share. The company expects 10% to 15% of that dividend to be a return of capital. CARS on 4-13 announced that it declared a quarterly dividend of $0.4200 per common share of beneficial interest for Q1 ending March 31, 2004. The dividend is payable on May 20, 2004 to shareholders of record as of May 10, 2004. RSE expects FFO of $4.10 to $4.20 per share in 2004. The forecast trails analysts' average expectations for FFO of $4.27 a share, with nine estimates ranging from $4.20 to $4.35. RSE increased its common stock dividend to 47 cents a share from 42 cents. RSE expects that only 30% of 2003's cash dividend will be subject to the standard income tax rates, while the rest will qualify for the lower 15% federal tax dividend rate instituted in mid-2003. -- On 4-19 RSE said it expects FFO to be in the range of $3.75 to $3.85 per share. The outlook includes a 35-cent-a-share charge for the termination of the company's pension plan. Analysts on average expect the company to post full-year FFO of $3.93 per share. [Yahoo has the average at $3.84] AMB gave 04 FFO guidance of $2.30 - $2.40/share in their Q4 conference call on 1-14-04. The current consensus estimate is $2.34. AMB declared a regular cash dividend for Q1-04, of $0.425 per common share. The dividend reflects an annual rate of $1.70 per share, an increase of 2.4% over the 2003 dividend of $1.66 per common share. The dividend will be payable on 4-15-04, to common stockholders of record at the close of business on 4-5-04. UDR estimates that recurring cap-exp for 04 will be $470 per apartment home, or $0.25 per share [and UDR increased the cap-ex estimate to $510 in the Q2 call - as they continued to get 15% plus ROI on the investment in upgrades]. UDR's guidance for 2004 FFO is a range from $1.48 to $1.60 per share; and guidance for Q1-04 FFO is a range from $.37 to $.38 per share. UDR announced a regular quarterly dividend on its common stock for Q1-04 in the amount of $.2925 per share, payable on April 30, 2004 to shareholders of 4-16-04. This represents a 2.6% increase over the same period last year. OFC gave 04 FFO guidance of $1.66 - $1.71/share in their Q4 conference call on 2-11-04. The current consensus estimate is $1.69. MLS increased the common stock cash dividend for Q1-04 by 5.3% to $0.595 per common share. The dividend will be payable 5-3-04 to shareholders of record on 4-23-04. MLS 2004 FFO Projection: $3.90 - $4.00. The current consensus estimate is $3.96. ARE on 3-17 declared a quarterly cash dividend of 60 cents per common share for Q1-04. The dividend is payable on April 15, 2004 to shareholders of record on April 2, 2004. The quarterly common share dividend represents a 3% increase to 60 cents per share from 58 cents per share paid for Q4-03. With one of the industry's lowest payout ratios, the Company announced this dividend increase after an aggregate dividend increase for 2003 of 16%. ARE on 6-21 declared a quarterly cash dividend of 62 cents per common share for Q2-04. The common share dividend represents a 3.3% increase in Alexandria's quarterly dividend. The dividend increase follows a 3.5% increase for the first quarter of 2004 for an aggregate 6.8% increase so far during 2004. The Company had an aggregate dividend increase of 16% during 2003. More REIT Links
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