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Approximately 25-35 strip shopping centers sell in New England every year, representing the transfer of ownership of around 4 million square feet valued at an average of $450 million. Traditionally, the institutional sector (real estate investment trusts, insurance companies and pension funds) has accounted for about 30 percent of the total equity capital placed into retail, while private-sector developers and investors have accounted for the other 70 percent. But almost none of the 30 percent of institutional interest was from REITs. As late as 2001, REITs had failed to purchase any strip centers in New England because they were consistently outbid by the private sector. However, as the office investment market started to weaken and interest rates dropped, retail REITs became more attractive, as they were invested in shopping centers that were offering investors growth in cash flow from long-term credit leases that would carry investors through the deepening recession. Compare this to the office market, which had short-term leases expiring into a weakening rental market. After failing to acquire any retail property in New England in 2001, the REIT market share of equity capital flowing into strip shopping centers increased to 18 percent in 2002. It then exploded to 71 percent in 2003, finally surpassing private investors that traditionally dominated our market. Through the first half of 2004, REITs have continued their torrid pace of acquisition activity. Is this a temporary phenomenon created by REITs flush with capital to invest and low interest rates, or a structural shift in the retail investment landscape? The answer is probably a little bit of both. As investor appetite increased for the relative safety of retail cash flow streams, retail REIT stock prices climbed, which lowered their cost of equity capital. As the cost of debt capital was dropping as well, they were able to make more aggressive offers and win a greater share of the retail pie. The wave of institutional capital flowing into retail property in 2003 is continuing through the first half of 2004, with buyers seeking to take advantage of what could be the end of a historic interest rate environment. A few examples of strip centers that were recently purchased by REITs include the Shops at the Pond, a 100,000-square-foot Best Buy-anchored center located in Marlborough that sold to Kimco for $26.5 million; Perkins Farm, a 212,000-square-foot Stop & Shop-anchored center located in Worcester that sold to Kramont for $19 million; and the Cor-West Plaza, a 115,000-square-foot Stop & Shop-anchored Center in New Britain, Conn., that sold for $33 million to Inland, a closed REIT out of the Midwest. Cap Rates Bottom Out This frenzied pace of retail activity has resulted in historically low cap rates for strip shopping centers. Cap rates -- a measure of a property's future profitability -- have bottomed out for the best single-tenant properties in the 5.5% to 6.0% range, and for stabilized strip centers in the 6.75% to 8.00% range. Buyers are anxious to invest and lock in at the historically low interest rates. Sellers who have been waiting to sell at the market peak are no longer waiting for higher prices. They are actively selling, believing that cap rates will eventually rise with interest rates. The result is an active market, on pace for 2004 to match or slightly improve upon last year's transaction volume of approximately 25 strip center sales. As in the office sector, where REITs became very active in the late 1990s, retail real estate has matured as an asset class and become more established as an institutional investment. Retail's credit tenancy and long lease terms provide cash flow stability that is particularly attractive for long-term public investors such as REITs. REIT acquisition activity will fluctuate with market cycles, but as an active investment group, retail REITs are here to stay.
The battle between Caruso and the Galleria has all the features of a heated political campaign, including a flood of dueling newspaper ads, direct-mail appeals, cable television commercials and signs on lawns and in storefront windows. The project bears the name Americana at Brand but is more casually referred to as the Town Center. The Town Center plan was approved by City Hall; the referendum was forced by opponents led by the Galleria's owners, General Growth Properties. Glendale voters will consider Caruso's proposed $264-million retail and residential development in a special election Sept. 14. They will cast ballots on three ordinances - known as A-B-C - that concern the project's planning and zoning and the development agreement between Caruso and the city. Both sides say they expect the vote to be close. GGP has spent more than $1 million trying to block the Town Center, portraying it as a multimillion-dollar public giveaway and conjuring images of traffic nightmares. For his part, Caruso, president of privately held Caruso Affiliated of Los Angeles, has written checks for more than $940,000 to defend his proposal as an opportunity to create nearly 4,300 permanent and temporary jobs and transform a blighted section of downtown Glendale into a community gathering spot. The clash between old and new retail in Glendale carries national implications as so-called lifestyle centers, the development style favored by Caruso, appear poised to eclipse their covered counterparts. Only two of the three large shopping centers scheduled to open this year around the country are enclosed, according to the International Council of Shopping Centers. But plans are underway for about two dozen lifestyle centers, which typically combine dining, entertainment, specialty stores — and sometimes housing — in relatively small, outdoor settings. Events unfolding in Glendale could help dictate whether open-air is the future of retail development. "It's one of the key battles in determining how U.S. shopping centers" evolve, said Burt Flickinger, who runs Strategic Resource Group, a retail consulting firm. GGP's concerns about the Town Center include parking for special events, the complex's layout and the closure of portions of two nearby streets. Caruso suggests that what GGP executives really feared was that Galleria rents may drop if tenants have a competing landlord with whom to negotiate. He insisted that adequate parking existed in nearby lots to handle special events at the Town Center and that the street closures were necessary to avoid a catastrophe similar to the fatal July 2003 crash at the Santa Monica Farmers' Market. The 1.5-million-square-foot Galleria, according to its representatives, is one of the top five malls in Southern California, based on gross sales of more than $500 million annually, and generates about $6.3 million a year in sales and property tax revenue for Glendale. As envisioned by Caruso, the 15.5-acre Town Center would consist of 100 condominiums, 238 rental units, a 16-screen movie theater and 407,000 square feet of retail and restaurant space surrounding a 2-acre park flanked by water fountains. Negotiations are underway, Caruso said, with P.F. Chang's China Bistro, Pottery Barn, Williams-Sonoma and Wood Ranch BBQ & Grill. He said deals had been inked with Anthropologie, Cheesecake Factory, Chico's, Fox Sports Grill, Pacific Theatres and Urban Outfitters. Caruso sued GGP this year, alleging that the company threatened the Cheesecake Factory with exclusion from other malls managed by GGP if the restaurant chain leased space in the Town Center — a charge GGP denied. A Cheesecake Factory spokesman did not return phone calls. GGP in turn challenged the Town Center's environmental review in a lawsuit against the city, taking issue with the document's assumptions about traffic and parking in addition to its treatment of an existing fire station on the proposed site. The public remains divided over the project. Some people in Glendale believe that the Town Center would revitalize the city by attracting new visitors and keeping local dollars from being spent in Pasadena, Burbank and other neighboring communities. Others contend that the project would merely squeeze existing shops, particularly those that line the downtown Brand Boulevard business district. A key issue for critics of the Town Center is the $77.1 million in public money earmarked to acquire the land and pay for sidewalks, traffic lights, a portion of the park and other improvements. An analysis of the project by Keyser Marston Associates, a real estate advisory firm, and the Glendale Redevelopment Agency said the city would be $6.7 million ahead on its investment after 30 years, based in part on anticipated sales and property tax revenue and the value of the city's share of the land and improvements. Not surprisingly, Caruso and GGP have offered widely divergent calculations. Caruso says the project would generate $109 million in gross tax revenue for the city over 30 years, not adjusting for inflation. GGP says the city will end up at least $30 million in the hole, adjusting for inflation and not counting the improvements or the value of the city-retained land, which it says is exaggerated. City officials estimate that when the Galleria was developed it received more than $22 million in public money, or $63 million in today's dollars.
And this is while the bean counters at City Hall are bent over their computer screens deciding how much to raise property taxes. Recently, it was reported that homeowners are now paying the largest share of the bill to keep Dallas running. More than half of property tax revenues now come from Dallas' residential base. An increase is certain - the only question is how big a bite. Sure, the moratorium will only affect the largest stores - the Super Targets and Wal-Marts, and even department stores such as the Nordstrom planned at NorthPark. These are some of the titans of the so-called big-box stores and the bane of many homeowners and traffic planners. Indeed, these super-size retailers have a downside. They run mom-and-pop stores out of business and can overpower the neighborhood with a sea of cars and storefronts that stretch like the Great Wall of China. But in case you haven't noticed, that's where consumers are spending a chunk of their retail dollars. Just drive by any Target or Wal-Mart on the weekend and count the cars in the parking lot. The City Council is eager to point out that retailers and developers can come to them while the building ban is in effect and plead and beg to get a building permit. A "hardship relief," they call it. But I wouldn't count on a long line of grovelers in the council chamber. Consumers have decided that the big boxes are their favorite shopping venues. And they'll drive for miles to get to them, even if that means - and it often does - that they have to go outside city limits. I'm sure the folks at city halls in Frisco and Allen and Cedar Hill were tickled to read about the retail moratorium in Dallas. They can start repaving their streets and hiring extra cops to get ready for the rush of shoppers headed their way. And they'll soon have the sales tax money to help pay for it.
This type of mortgage-REIT model of investing in mortgage-backed securities and funding those purchases at low short-term rates has been highly profitable. But it relies heavily on a single funding source: repurchase agreements with Wall Street firms. Repurchase agreements, or repos, involve a sale and simultaneous agreement to repurchase bonds. The temporary holder of the bonds pays the seller an interest rate in exchange for "borrowing" the securities. In the case of REITs, the securities being lent in the repo market are mortgage-backed securities. "Having the ability to finance mortgages or assets in a variety of ways is better," said Larry Goldstone, president and chief operating officer of Thornburg Mortgage. Thornburg is seeking to reduce its funding to 30% repo transactions from around 70%. With short-term rates near historical lows, the use of the repo market has increased sharply. According to the most recent Fed data, primary-dealer repo agreements have reached almost $3 trillion, up $446 billion, or 18%, over the past year. To shift some funding for its $23 billion mortgage-backed securities portfolio away from that market, Thornburg recently established a $5 billion asset-backed commercial-paper program, Thornburg Mortgage Capital Resources. Thornburg uses its mortgage assets as collateral to back its commercial-paper borrowing. That allows it to supplement its short-term funding in the repo market with short-term funding from a different group of investors, such as money-market funds. Thornburg also recently completed a fifth collateralized-debt obligation as an alternative to funding via repos. CDOs are a type of structured credit product backed by payments on numerous debt instruments. A CDO comprises multiple portions of debt, each with a different level of risk and different credit rating. In Thornburg's case, the CDO payments are backed by payments on pools of mortgages. But the CDO structure allows Thornburg to keep the mortgages on its books and treat the fund raising as a financing. If it securitized the loans into a traditional mortgage-backed security, the assets would be removed from its balance sheet. "CDOs have traditionally been used by lenders who have less-than-prime-quality mortgage collateral," Mr. Goldstone said. "That's because those loans could be hard to refinance in the repo market, especially if default rates went up." But the use of a CDO structure offers advantages for funding Thornburg's prime mortgages. It allows the REIT to tap into a different investor base and lock in funding for a longer period of time. In addition, Thornburg isn't required to post more collateral if the market value of its mortgage assets declines, something it is required to do in the repo market. The rating agencies see advantages to the wider funding approach by mortgage REITs. In a report earlier this year, Fitch Ratings had warned that Thornburg's reliance on the repo market was increasing the company's risk profile. "Fitch believes that the relatively short average reserve repurchase maturities of 6.4 months compared with much longer asset maturities leave the company exposed to meaningful rollover risk," according to a Fitch Report. But the asset-backed commercial paper and the CDO transactions have lessened that risk. "It opens up a different range of borrowers," said Matthew Gallino, a director in the financial-institutions group at Fitch Ratings in New York. "At the end of the day, we are generally dealing with a very liquid asset class. However, any moves that improve funding diversity help to make the balance sheet more flexible and resilient." In recent years, large corporate debt issuers such as Ford Motor and General Electric have faced similar concerns about over-reliance on a single market to raise funding and have diversified their funding sources. Friedman, Billings, Ramsey Group Inc., a financial-services firm that also is in the REIT business, has stepped up efforts to raise funds outside the repo market. It recently increased its asset-backed commercial paper program, Georgetown Funding, to $12 billion from $5 billion, according to a Moody's Investors Service report. The program finances triple-A-rated securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, according to the report. At the end of the second quarter, Friedman Billings reported a mortgage-backed securities portfolio of $12.3 billion. Friedman Billings declined to comment. While the large, established mortgage-backed securities REITs are scaling back their repo exposure, the newer funds continue to rely almost exclusively on Wall Street, either through the repo market or through warehouse lines of credit, according to Fitch's Mr. Gallino. These types of mortgage REITs are expanding rapidly, with the 12 publicly listed mortgage-backed securities REITs posting an average compound annual growth rate for their portfolios of 45% since 1998, according to SNL Financial, a data provider based in Charlottesville, Va. The combined companies held $74 billion in mortgage-backed securities at the end of June, also according to SNL.
Short sellers were most prominent among the manufactured housing, industrial, apartment and lodging segments of the REIT universe. Defensive property types, such as factory outlet, shopping center and self-storage REITs had the fewest shorts. The property types that saw the biggest increase in short sellers over the past month were healthcare, triple net lease, lodging and manufactured-housing REITs, the report said. The study found that FelCor Lodging (FCH), Bedford Property (BED), Essex (ESS), First Industrial Realty (FR), LTC (LTC), Glimcher (GRT), and Gables Residential (GBP) had the highest percentage of short interest in their floats. Shorts represented more than 6% of their floats. The companies that saw the biggest increase in short interest over the past month were LTC, American Financial Realty (AFR), Pennsylvania REIT (PEI), CarrAmerica (CRE), Acadia Realty (AKR), FelCor, Taubman (TCO), and Brandywine (BDN). JP Morgan analyst Tony Paolone said a company's liquidity appeared to play a role in attracting some short sellers. He said REITs have been luring a broader base of investors in recent months, which include hedge funds and long-short investors. This has increased the liquidity and volatility in the stocks. Market experts speculate that investors may be shorting stocks over concerns about rising interest rates or uncertainty about when the economic rebound will translate into demand for more real-estate space.
The average value of an office building edged up 0.1% in Q2 to $132.52 a square foot from $132.33 in Q1, according to the survey of the top 50 U.S. markets prepared by Reis. In the apartment market, values jumped 2.5% in Q2 to $69,601 a unit from $67,884 in Q1. That's the biggest increase in nearly two years. Office values stabilized in the second quarter as tenants absorbed more than six million square feet of space, the most in more than three years. Effective rents were down just 0.4%, signaling the office market may be nearing a turning point after three years of plummeting rents. But turning the corner will depend on the economy creating the jobs that fill up office space. "The sector is not out of the woods," said Lloyd Lynford, chief executive of Reis. The average price of office buildings sold in Q2 was $164.58 per square foot -- 24% more than the value of an average building. As capital keeps pouring into real estate and capitalization rates continue to fall, investors are now placing riskier bets on lower-quality buildings. Capitalization rates are the estimated rate of return at the time of purchase. They fell to an average 8.3% in the second quarter for office buildings from 8.4% in the first quarter. "Cap rates can't go down much further," said Nicholas G. Buss, vice president for research at PNC Real Estate Finance in Pittsburgh. "It would concern me if they did." Meanwhile, the average price of apartment units sold in the second quarter was $79,135, a 14% premium over what Reis estimates as the average value. Capitalization rates for apartments fell to 7.2% in Q2 from 7.4% in the first.
For many energy companies, the initial response to rising profits is not a lot more oil and gas exploration. Instead, companies are buying back stock, paring debt, handing out dividends and improving balance sheets, said Federal Reserve economist Bill Gilmer. With the threat of terrorism and instability in Iraq, there's lingering uncertainty about prices long term. "Producers are afraid," analyst Dale Steffes said. "Consumers don't know what to do either, whether to start conserving." The result: "Anybody, for example, in the oil service industry is going to be very reluctant to expand," Mr. Gilmer said. Houston's status as an energy capital continues to solidify as companies consolidate operations in Texas' biggest city to be closer to the center of the action. Citgo recently decided to move its headquarters from Tulsa. Other moves are believed to be in the works. Even as more companies move to Houston, it's important to remember that there are fewer companies around following consolidation forced by the 1980s bust, and they employ fewer people and operate with greater fiscal discipline, Mr. Gilmer said. "It's a smaller pie." There are positives. Downtown Houston, despite the office vacancy rate, has a new vibrancy, partly due to public investment in a new baseball stadium, a new basketball arena, a rail transit line and expanded convention facilities. And optimists say there's at least one more energy surge in Houston's future, that high energy prices eventually translate into accelerated growth, especially if the push for American energy independence overcomes political resistance to drilling in environmentally sensitive areas. "You're still going to see a lot of money in Houston," said Amy Jaffe, energy analyst at the Baker Institute at Rice University. One leading indicator of possible better times ahead: An optimistic report from Doug Miller of the National Association of Purchasing Managers-Houston. His purchasing managers' index hit 64.4 in July, "the third highest reading since this report began in 1995." His headline: "Economy booming."
Northern Virginia's vacancy rate is usually lower than suburban Maryland's. Even though it was 14% in Q2, Virginia's vacancy rate is dropping just as fast. And Virginia's office market seems more likely to boom in the next year, brokers and developers said. In Northern Virginia the tech crash that began in 2001 wreaked havoc on information technology companies, and the telecom bust put thousands of people out of work at phone companies such as WorldCom, sucking tenants from buildings all over the area. But with the boom in defense spending after the Sept. 11, 2001, terrorist attacks, many Northern Virginia defense contractors, which did less well after the Cold War, are prospering again. Some, such as General Dynamics, are among the biggest defense contractors in the world. In Maryland's Howard and Anne Arundel counties, contractors for the government's National Security Agency have taken lots of space. "Howard's story this year is that it's a comeback kid," said Peter S. Briskman, vice president at Staubach. "The vacancy rate has gone down by 25% since last year." Prince George's County has benefited from out-of-town investors wanting to buy cheaper buildings as places like Bethesda in neighboring Montgomery County get more crowded and expensive, said John M. Germano, senior managing director for the Washington and Baltimore region for CB Richard Ellis. "Prince George's has a great location to D.C.," Germano said. "It's been sleepy lately and it hasn't had a stellar reputation, but savvy real estate investors who are looking for where things are headed are looking there with interest." One market that's hurting, brokers said, is Germantown along the Interstate 270 corridor. An 18% vacancy rate is fueled by companies like Acterna Corp., a telecommunications company, which is consolidating and putting space back on the market. The glut is forcing landlords to pay more for improvements before choosy tenants move in. Things are tough for landlords in Virginia, too. But many people expect the market to roar back within a few years as it works off its empty buildings. The number of jobs is increasing all over the region, but disproportionately in Northern Virginia, said economist Stephen Fuller at Virginia's George Mason University. The Labor Department reported recently that the region added 82,000 jobs in the year ended in June, compared with the average 44,000 new jobs added in each of the nine other largest U.S. metropolitan areas, Fuller said. About half the new local jobs require office space; the rest are retail or construction jobs. About 70% of those new jobs are in Northern Virginia, compared with 22 percent in suburban Maryland and 8 percent in the District. The disparity between the two suburban areas shows a big shift from the 1990s. Back then, Fuller said, Northern Virginia created 2.15 jobs for every one in suburban Maryland; now that ratio has widened to 3 to 1. Of the 40 largest lease deals in the region this year, only three were in suburban Maryland, including No. 35 and No. 39, CoStar said. On the other hand, suburban Maryland's vacancy rates are generally improving. The rate in Montgomery County, with the third-largest office inventory in the region after the District and Fairfax County, fell slightly to 11.8% in Q2, from 12% a year earlier. And despite the attractions of Northern Virginia, several developers said they are working on major suburban Maryland office projects or planning them. Even with a higher vacancy rate, Northern Virginia landlords charged on average $1.50 more a square foot for rent -- $25 -- than those in suburban Maryland during the second quarter. And developers were putting up 6 million square feet of space in Northern Virginia in the quarter, three times what they were building in suburban Maryland. Tenants are gobbling up space in Virginia, CoStar said. In Q2 tenants filled a net 2.2 million square feet of space in Northern Virginia. The net was 260,000 square feet in the District and less than 200,000 in suburban Maryland. Delta Associates predicted a continuing decline in the vacancy rate in both places in the next two years, and that Maryland will continue to have a lower vacancy rate -- 9.5% -- than Northern Virginia with 11%, largely because of all the construction in Northern Virginia. The District's rate may rise slightly to 9% because of only moderate pre-leasing of new buildings by developers and only moderate job growth, Delta said. That means the net space leased each year is now on track to match the long-term annual average of 8.1 million square feet, the research company said. That is substantially better than any of the past three years, when the average was less than half that. The District Law firms, associations, government agencies and the companies who do business with them continued to sign the biggest office leases in the District during Q2. But they did little to change the city's vacancy rate of 8.4% because so many new buildings came on the market. About 2.5 million square feet of office space, much of it in the District's growing East End near the Washington Convention Center, is expected to open this year. That's up almost 40 percent from last year. "It took a number of years for projects in the East End to get going, and they all came on line at the same time," said Margarita Foster, vice president and director of research at Cassidy & Pinkard, a major brokerage firm. Buildings like the 500,000-square-foot renovated Woodward & Lothrop building, which was finished this year, is only 24% leased; and 900 7th Street NW, a 350,000 square foot building finished in Q2, is only 40% leased. Montgomery County The office vacancy rate in Montgomery County dropped only slightly during the second quarter from a year ago, to 11.8% from 12%. But retail real estate was strong throughout the county, said Lawrence Hoffman, a principal at H&R Retail, a retail real estate brokerage in Chevy Chase. The average rent for office space in the county fell to $25.82 per square foot in Q2, from $26.71 in Q2-03. The average retail rent in Silver Spring is as high as $40 a square foot, brokers said. Fifteen years ago, before Silver Spring started sprucing up its downtown, it was only $12. Retail and restaurant sales are strong, encouraging others to move in. Many leases in the City Place area are expiring and some low-end retailers are being pushed out to make way for more upscale shops and restaurants. It's the same story in the more upscale neighborhoods of Chevy Chase and Bethesda, said James G. Cahill, Sr VP at CB Richard Ellis. Office rent has flattened out at $30 to $35 per square foot for top-of-the-line space. But brokers are asking as much as $100 a square foot for retail space, up from the usual $40 to $50. Cahill predicts the office vacancy rate in Montgomery will fall to less than 10 percent by this time next year. Loudoun County Loudoun is the smallest commercial real estate market in the region with 9.8 million square feet of office space, up from 9.7 million last year. Loudoun County has one of the highest office vacancy rates in the Washington area, but it's coming down as more businesses move into one of the fastest-growing counties in the nation. Last year 21.1 percent of the office space in this once-rural country was vacant, highest in the region. This year it's 15.6 percent. Much bigger next-door neighbor Fairfax County had a 15.8 percent rate. Loudoun has the fastest-growing population in the nation, the Census Bureau said. So there's greater demand for service-oriented businesses such as doctors' offices, real estate brokers said. Office space under construction in Loudoun increased by 22% over the past year, to 1 million feet this year from 780,000 square feet in the second quarter of 2003, CoStar Group said. Prince George's County Prince George's County's office vacancy rate dropped to 10.9% in Q2 from 13% in Q2-03. More than 275,000 square feet of office space is under construction, double that of a year earlier. The average rent rose to $19.45 per square foot, from $18.66. Arlingon and Alexandria In Arlington, the Rosslyn-Ballston corridor, which has added new offices, expensive condos and shops in the past few years, continued its high level of development in the first half of the year, brokers and developers said. The vacancy rate for the Arlington-Alexandria area is 10.5%. The demand for space is giving some developers and investors enough confidence to proceed with plans to build. The stability of the region's economy has attracted national investors that have cash and are willing to pay high prices for buildings. Potomac Tower, a 300,000-square-foot building in Rosslyn, has investment bank Friedman, Billings, Ramsey Group Inc. as its largest tenant. It is being offered for sale at $410 a square foot, Stouffer said. If it goes for that much, it is "reaching prices comparable to some of the best buildings in downtown D.C.," he said. Maryland - Howard County Howard County's office vacancy rate dropped to 13.8% in Q2-04 from 16.3% in Q2-03, nudged down by growth in the defense industry, brokers said. With demand rising, landlords were comfortable raising rents -- the average rose to $20.98 per square foot from $20.66. But office construction jumped to 395,000 square feet from 59,000 square feet, which could push up vacancy rates.
Most of the construction is expansions by national companies, including Home Depot, Wal-Mart, Target and other big-box retailers. The NorthPark Center expansion and Firewheel Town Center mall construction in Garland will also add to the area's abundant shopping. Overall occupancy in the retail market was just under 90 percent at the end of June. The number would have been higher but for a few lingering vacant discount stores and such on the market. Average retail rents range from more than $30 per square foot in malls to less than $5 per square foot in scruffy neighborhood centers. Most deals are in the $18 to $22 range.
During the second quarter, new construction totaled 12.4 million square feet, up from 9.0 million in the first quarter. Another 42.8 million square foot is under construction and anticipated to be completed within 18 months. Construction activity remains slow as markets in most areas have plenty of available supply.
Why the tepid response to such promising job growth numbers? [1] the reduction of workspace allocated per employee and [2] the rotational use of shared office space (or 'hoteling'). Reis estimates that nationally the workspace allocated per employee has fallen from an average of 227 square feet in the 1980s to between 180 and 200 square feet over the last five years. This reduction has been a silent but significant factor in undercutting the demand for office space in the new millennium. Competition for new leases from shadow space may begin to dissipate over the next several quarters if recent trends in the sublet market are a reasonable parallel indicator. As a percentage of total available space, sublease availabilities declined from 20.0% in the first quarter to 17.0% in the second quarter. As recently as second quarter 2002, sublease space had accounted for almost 30.0% of total vacant stock. We can infer from this trend that either sublet space is being absorbed in the open market and/or that tenants are reversing course and have decided to retain this space to accommodate future growth plans. In 37 markets accounting for 69% of the national inventory, effective rents fell, with Boston (-2.0%), Hartford (-2.0%), St. Louis (-1.5%), Seattle (-1.3%), and Columbus (-1.0%) earning the dubious distinction of being leaders of the pack. The news is better on the absorption front, with 44 markets accounting for 72.6% of inventory recording positive results. Leaders in this category tended to be major markets, with New York recording 1,004,000 square feet, and the large Washington D.C. suburbs of Maryland and Virginia recording 753,000 and 608,000 square feet, respectively. The big Southern California markets of Los Angeles and Orange County each logged absorption in excess of 500,000 square feet. Among the 41 markets that recorded flat or falling vacancy rates, standouts included Suburban Maryland (-1.0%), San Antonio (-0.8%), Raleigh-Durham (-0.7%), New Orleans (-0.7%), and Palm Beach (-0.7%). The Reis Suffering Meter - Office Markets Experiencing Painful Symptoms
Perhaps the most hopeful sign for the office market, besides the job growth numbers if they turn out to be sustainable, is the evidence that developers, perhaps having decided that a dream deferred is better than a nightmare fulfilled, continue for the most part to practice the discipline that eludes their brethren in the apartment industry. Currently, Reis is tracking a growing backlog, already totaling in excess of 65 million square feet, of projects whose original completion dates have past and still appear to be on hold. Prior Q2 Office Updates: LA Office Q2 Update - Roger Vincent, LA Times , NYC Office Q2 Update - Ryan Chittum, WSJ, National Office Q2 Update - Ryan Chittum, WSJ Quick Facts, Stats & Opinions The total free market capitalisation of the REITs is $262 billion, of which 72 percent is for U.S. firms, 13 percent for Australia, 4 percent each for France and Japan and 3 percent for the Netherlands. (Reuters 8-3) Without the burden of having to subsidize traditional department stores and the cost of common-area maintenance, lifestyle malls have lower occupancy costs than regional malls, according to a report by Steve Sakwa, an analyst at Merrill Lynch & Co. Retailers typically pay $40 to $50 a square foot in occupancy costs at a lifestyle center, compared with $70 to $90 a square foot at a regional mall, the report says. Meantime, the average sales per square foot for retailers at lifestyle centers are not that far off from regional malls -- about $400 a square foot for lifestyle centers, compared with $480 at a mall.(Sheila Muto, WSJ 8-04) Corporations have sold off $3.9 billion of office and industrial properties so far this year, according to Real Capital Analytics Inc., a real-estate research firm in New York. And there's currently another nearly $2.5 billion worth under contract.(Sheila Muto, WSJ 8-04) Update: Third Experiment in Stock Picking 8-31-04 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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