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Marketing experts and even some developers are skeptical about whether shoppers care who owns the mall. But mall proprietors are pursuing a variety of strategies designed to raise their profile among retailers and consumers alike. Westfield America adds its name to newly acquired properties and hopes to distinguish them with consistent features and customer service. Simon Property Group doesn't rename its malls, but aims to build brand equity nationwide through star-studded events and creative programming and, locally, by promoting individual malls. And Mills has developed its branded centers around inventive shopping and entertainment concepts. Not every big mall operator is on the branding bandwagon. For General Growth Properties, which owns more than 210 malls, branding is mostly a business-to-business message, says Wally Brewster, senior vice president of corporate marketing. Except for gift cards and some national programming, the company focuses on promoting each property in its own market. “Consumers are proud of their mall and their community.” Brewster says. “They don't care if it's a General Growth mall, a Simon mall or a Westfield mall.” Jean-Pierre Dube, associate professor of marketing at the University of Chicago Graduate School of Business, agrees. For example, he says, when Westfield moved into the Chicago market in 2002, one of its acquisitions was the Old Orchard Mall, a mainstay of the city' near northern suburbs. Now, to the dismay of many locals, the quaint old signs are gone, replaced by new ones bearing the Westfield Shoppingtown Old Orchard name. “Suddenly it's part of a chain, and we don't think of chains as being luxury,” Dube says. “Why would you want to rebrand anyhow when you've got a well-known and distinctive brand to begin with? It's a dangerous strategy.” The retail industry is grappling with similar questions. As Federated Department Stores expands Macy's to 730 stores nationwide, a process that will eliminate at least 11 regional names, including Filene's, Strawbridge's, Hecht's and Marshall Fields — another brand to which Chicagoans are attached. Westfield doesn't expect immediate acceptance. “We almost always find a backlash, to be truthful and honest,” says Todd Putman. Westfield executive vice president of marketing. “People are quite emotional about the mall they grew up with.” But once shoppers see improvements, acceptance of the new name usually grows, he says. In Australia, the Westfield name is synonymous with shopping, in the way Americans equate Xerox with copying and Kleenex with sneezing. First opened in the 1950s, Westfield Shoppingtowns quickly penetrated the largest markets Down Under while making use of economies of scale in everything from advertising to maintenance. The company exported this clustering strategy, along with its name, to the U. S. in the mid-1990s. Putman, who has worked at Princess Cruises, Walt Disney and Procter & Gamble, was hired to help take Westfield's U.S. branding effort to the next level in 2002. The way he sees it, it's not too big a mental leap between cruise ships and malls. “A ship is a ship, a mall is a mall,” he says. “Unless you fill it with great people who provide exceptional service and offerings, you're just a ship going from one place to the next.” Simon, the nation's largest mall operator with 295 shopping centers, including 172 enclosed malls, also recruited its top marketing executive from the world of consumer products and services. Stewart Stockdale, president of Simon Brand Ventures, the company's business-to-consumer arm, held positions with P&G, Mastercard and Conseco before assuming his current post in 2002. Rather than giving all its properties a corporate label, Simon uses its name as an umbrella brand for national efforts, such as the Simon Visa gift card, which was sold to 6.3 million people last year, and events held in cooperation with retailers and corporate partners. “Consumers are exposed to a lot of brands when they come to a shopping center,” Stockdale says. “When we formulated our strategy, part of the analogy I quoted from Mastercard was, in the world of Mastercard, the Mastercard brand coexists with many banks. Simon can coexist with all of our mall brands and all of our retail brands very well.” Still, the branding of malls remains a relatively new idea in the United States, and one that may need time to evolve, says retail consultant Stan Eichelbaum, president of Marketing Developments. If customer satisfaction is not consistent in all the entities involved, attempts at branding could be “a catalyst for disappointment,” he says. “There have been admirable efforts at branding around the world. Westfield's efforts in Australia were of great maturity,” Eichelbaum says, noting Westfield mostly built their shopping centers in Australia, while their U.S. portfolio has been largely acquired. “In the United States, branding came in late and I think it's not a yes or no answer, but it's a matter of it's got to move to a new maturity plane.” And while some individual properties — such as the massive Mall of America in Bloomington, Minn. — or a collection of similar properties may lend themselves to branding because they are unusual, it doesn't necessarily make sense to plunk a diverse group of sites under the same name, he says. “You can be a product or a media. Products have branding potential. Media, which I think is more what a mall is, are a matter of programming,” Eichelbaum says. “There is nobody who can tell me what the last Random House book is that they read, or the last EMI disc they listened to. People come to shop our stores. Our stores are our brands.” If mall operators can bridge that divide and distinguish themselves enough to formulate brands, it would be “the ultimate coup,” he says. Hoping to do just that, mall marketers are using more subtle strategies to further refine their brands for consumers. Westfield offers services to make the shopping experience easier, like distinctive “kiddie kruzzer” strollers, free balloons for children, family-friendly restrooms, a concierge center and complimentary package carryout. “Most malls in America are very homogeneous, with national tenants everyone recognizes,” says Randall Smith, Westfield's executive vice president of new business development. “We want to put a personality in that center, so people recognize it as a Westfield, just as you might recognize a Marriott or a Westin hotel.” For Simon, the focus has been on special programming efforts at its malls across the country, such as Simon's Kidgits Club for children, the DTour Live music series targeted at teens and the Super Chefs Live tour, featuring celebrity chefs. Other national events may be sponsored by corporate partners. One recent example: Coca-Cola's presentation of past American Idol finalists, appearing at a Simon-owned mall near you. The company's brand and massive national footprint play to its advantage when dealing with partners and advertisers, Stockdale says. To underscore the potential impact, Simon commissioned a study by marketing researcher Arbitron, which found 2.2 billion visits to its properties annually. With memorable programming, Stockdale says, “We're building loyalty, and we're differentiating ourselves on the marketing side.” The efforts have proven the validity of Simon's network, Eichelbaum says, but whether they'll help build the brand remains to be seen. “They're trying to transfer that media into a brand and I think the verdict is still out on that,” he says. Of U.S. mall operators, Eichelbaum says, Mills has been reasonably successful in developing a distinctive product, in part by incorporating more entertainment. They've also made a point to give each center an identity that allowed the Mills brand to “become part of the industry and consumer vernacular,” he says. In addition to traditional retailers, Mills properties are often home to unusual stores and businesses that may be destinations in themselves, such as Bass Pro Shops, a NASCAR retail store with auto racing simulators, Medieval Times restaurants or a Wannado City theme park for children. A Mills development in Madrid has a Snowdome indoor ski area. This has helped the company stand out as it developed its 17 Mills-brand properties over the last two decades. “We bring concepts that quite frankly are unexpected, that are consumer experiences, that allow shoppers to come not just to shop,” says Ken Volk, Mills' senior vice president of marketing. “We have done a tremendous amount of research, not only with consumers but also with retailers, to really put a bull's eye on what this brand represents.” Consistency in experience is so important when it comes to the branding of malls, it helps if the portfolio has been developed with the brand in mind. That the new push to brand is happening at a time of industry consolidation and mega-portfolios further complicates things for marketers, particularly as mall companies create segmented ownership rosters, with everything from basic to platinum properties. Another challenge traditional mall operators face is breathing life into their properties amid a broader trend toward open-air lifestyle centers. With elaborate landscaping, artwork, seating that inspires lingering and easy parking often directly outside retailers, lifestyle centers are designed to accommodate a mix of activities; some even incorporate dwellings. In many ways, they more closely resemble the idealized Main Street America that enclosed malls first sought to emulate.
Already, rental vacancies have been creeping lower, according to the latest Census Bureau data, which puts the nationwide rate for buildings with five or more units at 10.2% in Q2 versus 11.8% a year earlier. And the National Apartment Association reports that owners are increasing rents in some regions because of a stronger job market. All this augurs well for publicly traded apartment REIT's, whose stocks have risen in the last two years despite the growing trend toward homeownership. Still, market analysts are split over the investment prospects for the sector over all. A recent report by Friedman Billings Ramsey paints a somewhat favorable picture for landlords, forecasting that "the next round of interest rate increases by the Federal Reserve will put a damper on housing affordability and, hence, sales growth and pricing power." Standard & Poor's remains more cautious, noting that weakness in the home-selling market "could dramatically improve the REIT outlook," but an oversupply of housing in general could have a negative impact as well. Comparing new construction with household formation, it estimated that 630,000 excess units would be built this year. Many money managers are not making any big moves for now. "We're a tad lower," Samuel Lieber, the chief executive of Alpine Management and Research, said of his funds' exposure to the apartment sector. The Alpine U.S. Real Estate Equity Fund has around 2% of its portfolio holdings in apartments, and the Alpine Realty Income and Growth Fund has 10.1%. Mr. Lieber says he thinks any changes in the coming months will be incremental, "not dramatic." Besides, he said, "the stocks are not cheap." Ralph L. Block, a senior portfolio manager for the Phocas Financial Corporation, an asset management company, agreed. "This is one of the few sectors of real estate that could benefit from rising interest rates," he said. But he added that investors seemed to have already factored that into apartment REIT stock prices, as more economists contend that a housing bubble exists in many parts of the country, especially around big cities on the East and West Coasts. Apartment REIT's have been outpacing REIT's in general. For the first nine months of this year, the sector returned 9.54%, although by last week it was up only 2.54%, after a 34.72% return in 2004, according to the National Association of Real Estate Investment Trusts. The average return on the trade association's composite index of all REIT's, by contrast, was 6.94% for the three quarters and 30.41% for 2004. By last week, it was minus 1.36%. Despite the economic pressures working against apartment REIT's, some companies, like AvalonBay Communities and Archstone-Smith Trust, have managed to profit handsomely from the red-hot home-buying market by selling rental properties to developers for condominium conversions. Others, like Equity Residential, have even formed units to convert their own apartments into condos. In the first nine months of this year, 108,181 existing rental units were sold to developers for condo conversions, according to Real Capital Analytics. In 2004, there were 75,606, and in the previous year, 22,078. Market analysts expect more condo conversions in 2006, though not at the same frenetic pace as this year. "It wasn't widespread in all markets," said Bryce Blair, chairman and chief executive of AvalonBay, "just in higher-cost markets, like Washington, D.C.; New York; California; and South Florida." Of AvalonBay's $500 million in asset sales expected for this year, he said, 90% are to condo developers. Archstone-Smith meanwhile, sold more than $2 billion in apartments over the last two years or so, and a large portion went to developers, according to the company's chairman and chief executive, R. Scot Sellers. "Every year, we look at our portfolio and identify the buildings that we think will pay us a price that allows us to improve our portfolio and obtain better long-term returns," he said. "With the money that we've raised, we have bought other apartment buildings." But Raymond Mathis, who covers REIT's for Standard & Poor's Equity Research, calls condo conversions a temporary blip on the earnings radar screen that does not really change the fundamental problem that many apartment REIT's face: supply and demand. (Analysts say the mass evacuation in the hurricane-ravaged gulf area isn't expected to have a significant impact on the apartment REIT market because the cities that evacuees are moving to in large numbers tended to have vacancy rates that were already high.) Conversions can benefit owners of multifamily projects by shrinking the supply of rental apartments, though some of the converted units could end up as rentals again and compete once more in that sector. Market watchers think that some REIT's are better positioned than others, pointing, in particular, to companies like AvalonBay, Archstone-Smith and BRE Properties, that build luxury rentals in pricey housing markets like California and the Northeast. "They develop primarily in markets where housing affordability is the most constrained right now," said Craig Kucera, the senior multifamily REIT analyst for Friedman Billings Ramsey. One potential problem, though, could be rising expenses. Higher construction and labor costs may cut into profits, analysts say. But Mr. Sellers of Archstone-Smith says he is confident that his company has chosen wisely in deciding where to do business. "You have to have job growth, plus expensive single-family homes, plus a low supply of new apartment rentals," he said. "That's been the formula that we followed for many years, and it has worked well."
One such opportunity arises from the dual nature of the real estate market. Real estate is actively bought and sold in two parallel markets--the private market (for trading individual properties directly) and the public market for REIT shares. When private markets value properties more highly than the public markets, REITs can earn excess returns simply by selling properties to private investors. Alternately, when public real estate is priced too high --through lofty REIT share prices -- REITs can add value to shareholders by issuing shares to the public and using the proceeds to snap up private properties. Few individual investors, though, can play this game. Besides, the dueling markets typically adjust to new price information in just a year or two, erasing any arbitrage opportunities. A more intriguing and persistent mispricing arises when the real estate market intersects with corporate debt through the commercial net lease property market. What Is a Commercial Net Lease? A lease is a contract between a property owner (landlord) and a user (tenant). Leases generally come in three flavors: gross, hybrid, and net. A gross lease requires the landlord to pay all property operating expenses, which include utilities, maintenance, property taxes, and insurance. In a hybrid lease, the landlord typically pays fixed expenses, such as property taxes and insurance, while the tenant picks up the tab for variable expenses such as utilities. Finally, the net lease makes the tenant responsible for all or almost all operating expenses. The strong version of the net lease, the triple net lease, in effect gives full control of the property to the tenant, making the landlord a mere coupon clipper. The most sought-after triple net leases will typically have a single tenant (such as a freestanding drugstore or auto-parts retailer) with investment-grade credit ratings on a long-term lease. The lure of hassle-free property ownership is not the only attraction for investors, though. Many are also taking advantage of a gift from Uncle Sam: the IRS 1031 tax code. Net Leases and Taxes In a 1031 exchange, a property owner can swap one property for another (of a "like kind"), and defer capital gains on the transaction until the property is eventually sold. Landlords can switch from long-held, management-intensive buildings to hassle-free, single-tenant properties without paying taxes on realized gains. Corporations are using this favorable tax code to monetize, or cash out, of their real estate while maintaining full control of the property through a net lease/sale-leaseback transaction. In such a transaction, a company sells its real estate to an investor (such as a REIT specializing in net lease properties), then immediately signs a long-term lease with the new landlord on a triple net lease basis. The company gets cash that it could use to expand or pay down debt, and the investor gets a predictable cash flow stream. And, corporations are willing to pay a premium over their corporate borrowing rate for this privilege, giving rise to an arbitrage opportunity that has been exploited by commercial net lease property investors. The Economics of Commercial Net Leases In commercial net leases, the investment yields (the return an investor expects from renting out the property) are primarily based on the credit of the tenant. Other factors such as location and rental trends in the tenant's markets are important, but relatively minor. Yet, investment yields have historically been higher than yields on comparatively rated unsecured corporate bonds. In a typical transaction, a company with a BBB credit rating may enter into a net lease/sale-leaseback transaction that yields 8% to the investor. But, the same company would pay about 5.75% in interest for unsecured corporate debt based on its BBB rating. For many companies, the ability to monetize their real estate assets is worth the price. A cash-strapped retailer that owns its own stores may use a net lease/sale-leaseback to cash out, reinvesting the proceeds in its core, and generally higher-return, retail business. Additionally, such transactions receive favorable accounting treatment: A net lease/sale-leaseback effectively treats a big portion of a company's assets -- its real estate -- as an off-balance-sheet item. Almost magically, a company can show higher returns on its invested capital. The Case for Investing in Net Lease Property REITs Investors can take advantage of the numerous 1031 exchanges to swap a high-maintenance property for a hassle-free, single-tenant net leased property. However, this would still leave the landlord vulnerable to the fortunes of the single tenant; a bankruptcy could negatively affect the investor's cash flow. A better option is to swap a property for shares in a public REIT, such as Realty Income, Getty Realty Trust, or iStar Financial, that specialize in triple net leased properties. Through the 1031-721 tax code, property owners can swap into a replacement property and exchange it for units in a partnership controlled by the REIT; these units enjoy the same dividend as the common shares and can later be converted into and traded just like shares. Net leased property REITs are a cross between a real estate and finance company; they effectively provide funds to corporations using their real estate as collateral. Such REITs are typically specialists in both real estate and corporate credit analysis. Publicly quoted commercial net lease REITs typically own geographically diversified properties leased to multiple tenants, reducing the impact of any single tenant on the company's cash flows. For example, a share of Realty Income yields 6% and is a claim on the rental stream of more than 1,500 properties in 48 states and 30 different retail sectors. A high dividend is not the only attraction for investing in net lease REITs, however. The REIT can also generate capital gains by issuing additional shares at a premium over its book value. For instance, in fiscal 2004, Realty income earned about $1.20 per share on its nearly $10 book value per share; this yields an average return on equity of almost 12%. However, the company's shares currently trade at more than 2 times book value--the average price/book value in the past five years has been about 2 times. Realty Income could double its equity by issuing new shares at this higher price, boosting both book value and earnings per share by more than one third. Not surprisingly, Realty Income shareholders have enjoyed 4% capital gains annually--in addition to 3% dividend per share growth--in the past five years, despite the fact that the company pays out all its earnings as dividends. Earn Excess Returns By enabling a corporation monetize its real estate, commercial net leased REITs exploit a unique, and so far persistent, arbitrage opportunity. Companies are happy to pay up for the privilege of cash and favorable accounting. Investors can earn 5.75% on a BBB-rated company's unsecured debt. Or a 6% dividend yield, growing at 3% annually, with a 4% capital gains sweetener from a REIT that owns a collection of properties leased to BBB-rated tenants on long-term, triple net leases. And all this, at comparatively similar risk to the investor.
The results mark the biggest decline in large blocks of available class A space in Manhattan since the late 1990s, said Sammons. "It's kind of shocking that suddenly there's the realization that - Oh my God, there isn't as much space left as we might have thought there was," said Sammons. Financial-services firms appear to be driving the tighter market conditions, which is different from late 2003 and 2004, when law firms were the major force in the leasing market. "Financial-services firms are the hot ticket again," said Sammons, who noted that they've been most active in the market - either leasing new space or withdrawing space that they had previously placed on the market. Sammons cited JP Morgan Chase (JPM) and Citigroup (C) as companies that have been particularly active. JP Morgan Chase pulled two blocks, encompassing about 850,000 feet of space, off the market while Citigroup has signed or is in negotiations to sign leases amounting to about a million square feet of space, he said. This is a big change from the past few years when financial-services firms were consolidating, laying off workers, and placing some of their existing space on the market. This is an indication that they're getting ready to hire again. "A lot of these deals appear to be taking space ahead of hiring," Sammons said. "They seem to be jumping into the market and taking space before prices increase too much." Sammons sees the surge in leasing activity as a good sign - but not a definitive one. "My only problem is that they haven't actually hired all the people to fill up the space yet," he said. "But I think a lot of this hiring will take place." The vacancy rate for class A space in Manhattan fell to 9% in September from 9.4% in August and 10.1% a year ago. In Midtown, the vacancy rate was 8.8% in September, down from 9.3% both in August and a year earlier. The vacancy rate in Midtown South slipped to 6.4% from 6.8% in August and 7.8% a year ago, while the rate in downtown Manhattan dropped to 10.2% from 10.4% in August and 13.2% a year earlier.
Notably, the rise in demand at the national level does not correlate with construction: the 4.5 million square feet of completions during second quarter amounted to only 57% of the total absorbed net, apparent strong testimony on behalf of demand. Vacancy, as a result, dropped sharply, shedding 30 basis points during the quarter to close the year’s first half at 6.5%. A year earlier the rate was 6.9%. Again, all regions participated in the improvement. Vacancy in the South, above the national average at 7.1%, was down from 7.4%. The West, with the lowest rate, 4.3%, shed 20 basis points during the quarter. Here, chronically low vacancy in most of the markets of California and the markets of the Pacific Northwest, due in part to issues regarding new development, result in the low regional average. Indeed, at 7.5%, only Denver, with its robust development profile and still-sluggish economy, has a vacancy rate above the national average. At 8.3%, down from 8.6%, the Midwest still suffers the nation’s highest rate. Here, by contrast, only one market, Cleveland at 5.8%, had a retail vacancy rate below the U.S. average. Still, some Midwestern markets–Chicago in particular–have enjoyed strong absorption over the past six months. Meanwhile, the Northeast enjoyed the largest vacancy decline, a 40-basis-point drop to 6.6%. Although Pittsburgh’s 10.9% was fourth highest in the nation, sub-4% rates in Boston and Fairfield County, CT, pulled down the regional average. At $16.67 psf, the nation’s average effective rent was up 0.8% over first quarter and 3.1% from mid-year 2004. The West’s 3.7% twelve-month gain, to $20.37 psf, the nation’s highest rate, was the nation’s best performance. At the low end, effective rents in the Northeast increased 0.2% on average during the latest quarter and 1.5% over the latest four, resulting in a mid-year mean of $17.59. According to Real Capital Analytics (RCA), sales of retail properties valued at $5 million or more set another record during second quarter with a total volume of $13.5 billion, with the increase driven by “a surge in portfolio activity.” Year-to-date sales of strip centers, meanwhile, were reckoned at $14.3 billion, up 9% from the comparable period of 2004. A 20% increase in price from the prior year, to $162 psf, contributed to the rise. Accompanying this increase was a decline by more than 35 basis points in the average capitalization rate, cited by RCA as 7.3% per second quarter. “However,” explains this source, “the averages belie the growing disparity in pricing based largely on the deal size and market.” While the “frenzied” pace of retail investment may now be slowing, reports this source, “cap rates are still falling and prices are rising at an even faster pace.” 2005 Forecast: Vacancy is expected to slip to 5.8% by year-end for a 100-basis-point decline year-over-year. The average asking rent will increase 2.1%, to $18.41 psf
Significantly, the 8.0 million square feet absorbed net in the West during second quarter were accompanied by only 1.1 million square feet of new supply arriving on line. The same favorable imbalance, moreover, is seen on the national level: the completion of 5.8 million square feet nationwide during second quarter trailed net absorption by more than 12.0 million square feet. This is precisely the kind of disproportion of demand and supply needed to hasten the market’s recovery. In passing, it is interesting to note as well the sharp reversal seen in the Midwest. Second quarter net absorption here is recorded at 3.5 million square feet—after negative 1.3 million the quarter preceding. Strong performances in Chicago, Columbus, Minneapolis and St. Louis led that region’s turnaround. There has been a turnaround in rents, too, as the pace of price growth, sluggish through recent quarters, has increased. Although rents remain 2.8% below the rate recorded three years ago, recovery clearly is underway. At $20.67 psf, the average effective rent nationwide was up 0.8% from first quarter and 1.3% from second quarter 2004. Only in the Midwest, where the effective mean increased 0.5% during second quarter, does the current average remain below the average recorded four quarters earlier. Meanwhile, the Northeast and West are the strongest performers, recording respective second quarter increases of 1.0% and 0.9%, to $29.43 psf (the nation’s highest) and $20.02 psf. Both record 1.5% increases over the past 12 months. RCA reports office investment sales running at “record levels, with prices reaching new highs and cap rates new lows.” Total sales for the latest quarter are reported at $25 billion, up from first period’s $16 billion. For suburban properties, sales year-to-date through mid-year totaled $24 billion, up 75% from first half 2004. CBD properties, meanwhile, recorded a 22% increase to $19 billion. “Despite the sharp increase in supply, competition among buyers remains fierce,” notes the firm. Accordingly, record high prices are reported for 18 markets. Average suburban and CBD prices nationwide are reported at $256 and $165 psf. The average cap rate for suburban assets, at 7.5%, is down 30 basis points for the quarter; a 7.1% average is reported for CBD transactions. At 5.9%, Washington DC, where $2.0 billion in sales were recorded for the quarter, claims the nation’s lowest cap rate. 2005 Forecast: Vacancy will decrease to 14.7% by year-end as the average asking rent grows 1.5% to $24.84 psf.
The South, meanwhile, continues to dominate construction activity, adding 8,710 units during second quarter on the heels of 10,515 the quarter preceding. The 19,225 units delivered to this region during the past six months amount to 59.4% of the total completed nationwide. The West takes second place, adding 8,095 units during first half 2005 in roughly equal quarterly installments while development remains characteristically sluggish in the Northeast and Midwest. All regions saw increases in average effective rental rates during the past quarter, led by the 0.7% rise in the West. Over the past year, however, the Northeast’s 3.4% increase was the nation’s largest. The strong showing in the West is led by robust performances in Southern California. Over the past year, New York and Riverside-San Bernardino represented their regions well, leading the nation with respective increases of 6.2% and 5.9%. Interestingly, the Norfolk-Hampton Roads area of southeastern Virginia, a dark horse market until recently, enjoyed the nation’s third largest gain at 5.0%. For the U.S. as a whole, the mid-year average effective rent, at $886 per month, was up 0.5% over three months and 2.4% over 12. Investment remains vigorous. As reported by RCA for second quarter, capitalization rates “dropped by at least 25 basis points, driving asset prices to new heights,” with 30 of the nation’s markets reporting record high prices. However, states RCA in a cautionary note, “The supply/demand dynamics are changing more rapidly [in apartments] than in other sectors. New apartment offerings in second quarter alone nearly equal total offerings in all of 2004.” Moreover, “the market is becoming increasingly dependent on condo converters” (properties acquired for the purpose of conversion). According to this source, $5.5 billion—35% of all apartment community acquisitions—were by converters. Such demand, of course, has been an _expression of low mortgage interest rates and, therefore, has an uncertain future. 2005 Forecast: Vacancy will shed 80 basis points year-over-year to close 2005 at 6.0%. The average asking rent, meanwhile, will increase 2.0%, to $955 per month.
With the market and economy on the mend, investment demand for industrial property has accelerated. According to RCA, second quarter sales activity exceeded the total recorded for the last half of 2004. Sales of general industrial/warehouse property year-to-date through mid-2005, at $9.3 billion, were up 94% over the comparable period of last year. At $4.8 billion, meanwhile, sales of flex product were up 85%. All told, the number of actual projects sold was up 65%. Not surprisingly, offerings are up as well: the $6.5 billion in property on the market during the latest quarter set a new quarterly record, reports RCA. With such heated activity, capitalization rates for both warehouse and flex properties “plummeted,” dropping 50 basis points to close the period at 7.4% and 8.0%, respectively. With these decreases, the industrial market, which has lagged other property types in cap rate compression and sales volume and prices, quickly is catching up. The 10% price across-the-board industrial price increase now exceeds the price increase in the office segment and has pulled even with other sectors. 2005 Forecast: Vacancy will lose 140 basis points during the year all told, ending 2005 at 9.5%. The average asking rent is expected to grow by 0.3%, to $4.55 psf.
While the office market is clearly in recovery after three harsh years, Hurricane Katrina has clouded an economic outlook already weighed down by high energy prices. U.S. payrolls shrank in September for the first time in more than two years due to the disruptions from the hurricane, and the unemployment rate hit 5.1% last month, compared with 4.9% in August. The health of the office market is directly related to employment. "There's still some risk that these three quarters of positive effective rent growth is tentative," says Lloyd Lynford, Reis' chief executive. "There are new risks that have recently emerged." The absorption rate -- the net change in occupied space -- was 12.1 million square feet in Q3, down from 20.2 million in Q2. Still, by all accounts the office market is in much better shape than it has been. Vacancies are down 1.8 percentage point from their peak of 16.9% in Q1-04. Rents are up 2.2% from the beginning of this year and construction is restrained. Just 6.5 million square feet of new office buildings were completed in Q3, down from 8.3 million square feet a year ago. For 2005, Reis projects 36.7 million square feet of new offices will be completed, up from the 30.4 million completed last year, but well below the cyclical peak of 121.8 million square feet in 2001. Next year, Reis projects 43.2 million square feet of new office buildings. If the economic rough patch is just that and job growth picks up in Q4 and on into next year, Reis projects 82 million square feet will be absorbed in 2006, enough to drop the vacancy rate to 13.8% and raise rents significantly.
Ms. Gardiner and a growing number of shoppers like her are the supermarket industry's worst nightmare. Faced with a seemingly endless array of food shopping choices, consumers are increasingly shunning the neighborhood supermarket and going to Wal-Mart, Costco or other discounters for rock-bottom prices or to places like Whole Foods and Wild Oats for specialized quality and service. Traditional supermarkets, caught in the middle, are struggling to survive. And the pressures on them may only intensify: Wal-Mart and Whole Foods have ambitious expansion plans, and Target says it wants to become a big player, too. Now, the traditional supermarkets are trying everything they can think of to win back customers. In a nod to Whole Foods, they are adding more organic and natural food items and selling more prepared foods for quick lunches and dinners. And they are cutting prices. The nation's 56,000 supermarkets remain dominant in food shopping, but their share of the business has been steadily declining. Americans are making fewer trips down their aisles and spending less each visit. The average American household made 95 trips a year to the supermarket in 1996; in 2004 it was 70, according to a study by UBS. In that eight-year span, annual trips to stores like Wal-Mart jumped to 26 from 13, and trips to club stores like Costco increased to 11 from 8. In the last five years, Wal-Mart has emerged as a dominant force in the grocery business, selling almost twice the amount of food and grocery items as Kroger, the country's largest supermarket chain. Wal-Mart undercuts supermarket prices by as much as 20% but is still able to generate considerable grocery profits because of its enormous volume and huge buying power. Wal-Mart's labor costs are also lower because, unlike workers at most supermarkets, its employees are not unionized. "Wal-Mart just keeps growing," said David Dillon, chief executive of Kroger, which regularly compares the performance of its stores against Wal-Mart Supercenters. "And I don't see any signs of a slowdown in the number of stores." Wal-Mart, with 1,866 supercenters in the United States, all with grocery stores, does not break out food sales, but Retail Forward, a research firm in Columbus, Ohio, estimates that in 2004 the company sold $109 billion in groceries, taking a 19% share of the market. Retail Forward has projected that the number of Wal-Mart supercenters may triple by 2010 and that its share of the grocery business may rise to 35%. Supermarkets are feeling the squeeze. In February, Winn-Dixie Stores filed for bankruptcy; at 92% of its stores, a Wal-Mart Supercenter is within a 20-mile radius. Last month, Albertsons, whose market share has declined in Wal-Mart strongholds like Dallas and Fort Worth, announced it had hired investment bankers to explore strategic alternatives, including a possible sale. Other chains are faring only slightly better. Over the last five years, sales at Kroger, Albertsons and Safeway, the country's three largest supermarket chains, have stagnated and profits have been dismal. With 177 stores and less than 1% of the market, Whole Foods is not yet much of a financial threat. But analysts say that supermarket executives are anxiously watching the company, the fastest-growing grocery chain in the United States, because of how its success has pressured supermarkets to improve their offerings. "Whole Foods has redefined the landscape of what a grocery store is," Mr. Hartman said. "That means more fresh items, bigger produce sections, more selection for natural and organic foods and more prepared foods. It also means creating an enjoyable experience for shoppers." Neil Currie, an analyst at UBS, said the situation for supermarkets is dire. For years, supermarkets failed to respond to consumers' migration toward restaurants and their increased desire for natural foods. Today, 46.9% of all food dollars are spent at restaurants and similar establishments, compared with 41.3% in 1985, according to the Agriculture Department. "If nothing changes, the format could die a slow death as Wal-Mart and other nontraditional formats continue to take market share," Mr. Currie predicted in a report last year. Mr. Dillon of Kroger said supermarkets must provide a variety of shopping experiences and products. To that end, Kroger is building three alternative formats. One is Fresh Fare stores, which operate inside Ralphs stores, and offer a higher level of service and carry many of the products found at Whole Foods, like organic produce, sushi, an olive bar, hundreds of cheeses and 2,000 wines. Another, Kroger's Marketplace, offers stores that are twice the size of a typical grocery store and sell everything from electronics and kitchen appliances to home office furniture and dishes. The product selection resembles that of Wal-Mart, though prices are not as low. Kroger's third format is its 142 Food 4 Less stores, which are no-frills warehouse operations seeking to compete with Wal-Mart on price. Mr. Dillon said Kroger's standard supermarkets would also be increasingly customized, with some carrying more organic and natural food and others offering a specialty cheese section or products catering to Hispanic customers. "There will be as many kinds of supermarkets," Mr. Dillon said, "as there are variations in the neighborhoods across America." Food Lion, a 1,220-store chain owned by the Delhaize Group of Brussels, is making changes. Robin Johnson, director for marketing and brand development at Food Lion, said that when her team started working on a new store concept called Bloom three years ago, they took a red pen to every aspect of supermarket design. "For the past several decades, stores have been run in a way that benefits the store and the company's bottom line," Ms. Johnson said. By contrast, she said, the new store concept "was born from what the customer wants: to take the hassle out of grocery shopping." Bloom stores - there are now five, all in North Carolina - feature a quick-stop area in front for shoppers who just want eggs and milk or something for dinner. Traditionally, supermarkets have placed such high-volume items at the back of the store in hopes that the journey may inspire other purchases. "Why have we played these games with customers?" Ms. Johnson asked. The new stores also have wider aisles, lower shelves and no candy at the checkout aisles, to cut down on temptations for children. Ice cream is at the front so it is less likely to melt before reaching home. Ms. Johnson and her team have also banned promotional displays from the aisles, saying that they generate nice fees from vendors, but clog cart traffic. "Taking them out is a scary thing for a retailer to do," she said, "because it's revenue and they're designed to drive impulse sales." Many stores are experimenting with slashing prices - a tactic that can be equally terrifying. "In the 90's, supermarkets focused on raising their gross margins and were obsessed with short-term needs of shareholders," Mr. Currie said. "That allowed Wal-Mart to come in and easily take market share." In an attempt to appeal to time-starved consumers who do not want to cook, Kroger and Safeway are also making a big push to sell more prepared foods - an area that has been enormously successful for Whole Foods, representing 10% of a store's sales. Safeway's remodeled Lifestyle stores have an expanded deli, a full line of soups, a meat-carving station and "take and bake" pizza. Brian Cornell, executive vice president for marketing at Safeway, said these stores, which also have softer lighting and wood-simulated floors in parts of the store, are meant to feel more upscale. "We offer more items now that would appeal to customers who might be migrating to Whole Foods," he said. "But we're also trying to differentiate ourselves among our core competitors." Christina Minardi, head of the New York-New Jersey-Connecticut region for Whole Foods, said she doubted large chains would be able to replicate the appeal of her company's stores. "It's a lot more than paint and new lighting," she said. "We have developed a whole culture here." Indeed, despite their efforts, many analysts expect supermarkets to continue to lose out to their competitors. Darrell Rigby, who leads the retail consulting team at Bain & Company, said some chains, probably smaller ones, will either go out of business or be acquired. Nick McCoy, a senior consultant at Retail Forward, said, "Supermarkets have got to offer a compelling reason for people to go there."
Some sectors, such as office, industrial and retail REITs, will be insulated to some extent as many have leases that require their tenants either pay for utility costs directly or face additional operating expenses to cover the costs. However, apartment REITs will likely get squeezed the hardest since this sector is unable to pass on all of the higher energy costs to residents. "Apartments face the highest exposure to rising energy prices since these properties contain large common areas and most REITs have at least some units where the rent includes all utility expenses," said Sakwa. Clubhouses, fitness centers and hallways all require heating and lighting, which are covered by the landlord. Even in cases where tenants pay their own utility costs inside their apartment units through sub-meters, the higher energy expense will affect a tenant's total occupancy cost and ability to pay the rent. As a result, this could affect a landlord's ability to raise rents. Sakwa sees Apartment Investment & Management and Camden taking the biggest hits, as he lowered projected 2006 FFO for both companies by 2%. Mall REITs will face higher energy costs related to the heating and cooling of common areas of the mall. However, most of the energy costs they incur when supplying energy to retailers' individual spaces within the mall are passed on to the tenants through higher operating costs. The risk rises though if higher energy prices continue over a prolonged period of time, making the space less affordable for the retailer. Sakwa expects the overall impact on office REITs to be "relatively subdued." He sees office owners passing on the higher energy costs to tenants for the most part, although office companies with big vacancy rates would likely have a tougher time passing on these costs. Industrial properties will likely be least impacted - if at all - as most leases are written on a "triple net lease" basis. This means the tenants are responsible for paying utility costs, real estate taxes and other operating expenses in addition to rent.
The national vacancy rate fell to 5.9% compared with 6.4% in the second quarter and 6.6% a year earlier. Effective rents, meaning the rents minus concessions, rose by 1.2%. That is up from a 0.6% rise in the second quarter. Concessions -- which include tenant lures such as one month of free rent -- also dropped in some markets. Fewer concessions indicate a market is moving in favor of landlords and away from renters. "It's a good picture," says Lloyd Lynford, chief executive officer of REIS. The summer is traditionally a strong time in the apartment market and researchers say the market could slow during the fall and winter months. Nonetheless, the improvements in the past three quarters are signs that the market has emerged from its roughly four-year slump. The market was helped by two major factors. Job growth is driving up demand and the conversion of apartments to condominiums is curtailing supply. But, Mr. Lynford says, "I don't want to overstate it." Historically low home mortgage rates continue to siphon would-be renters away from apartments and job growth tends to be limited to certain markets. Barring a grave downturn in the economy, researchers say the positive trends in the apartment sector are likely to continue. "I am pretty comfortable saying that the apartment recovery has taken hold," says Michael Cohen, a senior real-estate economist at Property & Portfolio Research in Boston. It has been a good year for apartments in the stock market as well. Apartment real-estate investment trusts are up nearly 21% in the past 12 months, slightly ahead of the average REIT return and well ahead of the overall stock market, according to SNL Financial. Hurricane Katrina blew new life into Houston's sluggish market. O'Connor & Associates Research & Consulting Services, a Houston firm, estimates that the city's monthly absorption -- the net change in occupied apartments -- was 10 times its normal amount last month. The city's apartment vacancy rate was 13.7% before the hurricane, according to Property & Portfolio Research. The firm estimates the rate will improve to at least 10.7% in the third quarter, largely because of the hurricane. On 10-13 AG Edwards upped Liberty Property to Buy from Hold. On 10-12 Freidman Billings started Maguire Properties at Market Perform. On 10-11 Goldman raised Kite Realty to Outperform from In-Line. On 10-11 Banc Of America upped Camden Property to Buy from Neutral. On 10-10 Citigroup raised Home Properties to Hold from Sell. On 10-07 Bear Stearns upped Archstone-Smith to Outperform from Peer Perform, Cut Boston Properties to Peer Perform from Outperform, upped Camden Prpperty to Outperform from Peer Perform, and Cut Equity Residential to Peer Perform from Outperform. On 10-07 Wachovia started Medical Properties at Outperform. On 10-04 Bear Stearns Starts Highland Hospitality At Outperform. On 10-03 Citigroup started Highland Hospitality at hold. BDN to Buy PP Janet Morrissey, Dow Jones Newswires 10-03 A plan by Brandywine Realty Trust (BDN) to acquire Prentiss Properties Trust (PP) in a $3.3 billion deal will create one of the largest office real estate investment trusts in the country and add 4 cents to 6 cents a share to Brandywine's funds from operations in 2006. However, during a conference call Monday, some investors and analysts expressed concerns that the premium being offered to Prentiss shareholders is small and that the deal conjures up memories of Prentiss' failed bid to merge with Mack-Cali back in 2000. During the call, Brandywine President and Chief Executive Gerry Sweeney described the merger as a "transformational event for both organizations." He noted that key management executives from Prentiss, including Chairman Michael Prentiss and President Thomas August, will join the Brandywine board. He said the larger combined company, deeper management team, and development pipeline will offer far more growth potential to the new company than each of the standalone companies had on their own. Until now, Brandywine has been primarily a regional player, building up a dominant position in the greater Philadelphia market. Sweeney said his company has been mulling how to replicate its dominance in other markets and saw the Prentiss merger as the best way to accomplish this. However, another regional player, Mack-Cali, came under enormous criticism on Wall Street five years ago when it unveiled similar plans to transform itself into a national player through a $2.3 billion merger with the same company - Prentiss. At the time, angry shareholders, fund managers and analyst blasted Mack-Cali for trying to abandon its regional focus in favor of a national platform, and Mack-Cali eventually walked away from the deal. On 10-04 Wachovia cut Brandywine Realty To Market Perforn from Outperform. On 10-04 Harris Nesbitt cut Brandywine Realty to Neutral. On 10-04 Raymond James cut Prentiss Properties to Underperform from Market Perform. On 10-04 Wachovia raised Post Properties to Market Perform from Underperform. On 10-04 AG Edwards cut Prentiss Properties to Sell from Hold. On 10-04 Banc Of America cut Prentiss Properties to Neutral from Buy. On 9-28 Legg Mason cut Education Realty to Hold from Buy. On 9-29 JP Morgan raised Mills to Overweight from Neutral. On 9-27 Merrill Lynch reinstates Colonial Ppties at Neutral. On 9-27 Wachovia starts Global Signal at Outperform. On 9-23 R James ups Biomed Realty To Strong Buy From Outperform and raises SL Green to Outperform from Mkt Perform. On 9-23 Lehman raises Reckson Assoc to Overweight from Equal. On 9-22 Morgan Stanley resumes ProLogis at Overweight. On 9-19 RBC cuts Pan Pacific Retail to Sector Perform from Outperform and raises Boston Ppties to Outperform from Sector Perform. On 9-13 Morgan Stanley starts Camden Property Trust at Equal-Weight. On 9-13 Harris Nesbitt starts Apartment REITs Apt Invest & Mgmt at Underperform, Archstone-Smith at neutral, AvalonBay at Outperform, BRE Properties at neutral, Camden Property at Outperform, Equity Residential at neutral, Home Properties at Underperform,T own & Country at neutral, United Dominion Realty at neutral, Sun Communities at Underperform, Affordable Residential at Outperform, Healthe Care REITs: Windrose Medical at neutral, Nationwide Health at neutral, Health Care Ppty at neutral, Healthcare Realty at Underperform, Ventas at Outperform, Office REITs: Arden Realty at neutral, Brandywine Realty at Outperform, Corporate Office Properties at Outperform, Parkway Properties at underperform, PS Business Parks at neutral, Kite Realty Group at neutral, Storeage RETIs: Public Storage at neutral, Sovran Self Storage at neutral, Shurgard Storage at Underperform, Extra Space Storage at neutral, Industrial REITs: EastGroup Properties at neutral, First Industrial at neutral, First Potomac at neutral, Liberty Property at neutral, Colonial Properties at neutral, Duke Realty at neutral, Retail REITs: Heritage Property at neutral, Entertain Ppties at neutral, Equity Lifestyle at neutral, Equity One at neutral, Cedar Shopping at neutral, Amer Land Lease At Neutral, and Acadia Realty at Outperform. On 9-08 Legg Mason started Boston Properties at hold and Mack-Cali Realty at hold. On 9-06 R James raises Realty Income to Outperform from market perform. On 8-31 Stifel Nicolaus starts Kite Realty at market outperform. On 08-30 CSFB starts General Growth Properties at neutral and Simon Property Group at neutral. On 8-30 Banc Of America ups Glimcher Realty to neutral from sell. On 9-07 S&P Puts Capital Automotive REIT Rtgs On Watch. On 9-08 Moody's Affirms Rtgs Of Developers Diversified (Sr DEBT AT Baa3); Rtg Outlook Now Positive. On 9-28 Moody's upgraded Simon Property Group's Sr Debt To Baa1; Stable Outlook. Quick Facts The case for real-estate funds is still strong. With the economy on reasonably sound footing, demand for the sorts of income-producing properties that fuel REITs, like hotels, retail stores and office space, is solid. Ken Heebner, manager of the CGM Realty fund, makes an especially convincing case for hotels, which are benefiting not only from renewed business spending and travel, but also from the shrinking supply resulting from rampant hotel-to-condo conversions in many big cites. "This is the strongest cycle in hotels in the post-war period," he says. Moreover, when rates were scraping bottom, many commercial property owners refinanced their mortgages at favorable long-term fixed rates. That has left them in the advantageous position of allocating less of their lease income to mortgage payments. Finally, there's also a residential case to be made. Even if the residential home buying market continues to sour, that should buoy demand for apartment rentals, a key source of income for many REITs. (Joshua Albertson, SmartMoney 10-07) The recent pullback in the world of real estate investment trusts represents a buying opportunity for investors, KeyBanc analyst Richard Moore said Thursday. Although the Morgan Stanley REIT index remains positive for the year and ahead of the S&P 500, Nasdaq and Russell 5000, the 10% drop off since Sept. 6 has brought valuations down. The pullback was "much sharper than that of the other major indices," said Moore, in a note. Despite the correction, he said, REIT fundamentals remain healthy. "Given the sharpness of the pullback, several of our buy-rated names have been hit exceptionally hard and represent what we believe is compelling value at these levels," he said. His top picks of stocks that he believes offer the biggest near-term outperformance include CBL, Glimcher, Mills, Reckson Associates, United Dominion Realty, and Weingarten Realty. (Janet Morrissey, Dow Jones Newswires 10-13) Although share prices have climbed, Ted Bigman, manager of the Morgan Stanley Real Estate fund, says he still likes hotel stocks because demand for hotel rooms is growing faster than supply. This year, the supply of rooms shrank in 11 of the top 20 markets in the United States because hotels were being converted to condominium apartments. (Alex Tarquinio, NY Times 10-09) BRE Properties cut its Q3 earnings and funds from operations forecasts, saying "certain one-time revenue items" are now unlikely to be recognized until Q4. BRE trimmed its Q3 earnings projection to the range of 13 cents to 15 cents a share from its July forecast of 16 cents to 20 cents. The new range is below the prior year's profit of 23 cents a share. The FFO forecast was lowered to 50 cents to 52 cents a share from 52 cents to 56 cents. A poll of 13 analysts by Thomson First Call projects 54 cents a share. A year earlier, the company posted FFO of 57 cents a share. (Ian Salisbury; Dow Jones Newswires 10-06) More REIT Links News Links
Update: Fourth Experiment in Stock Picking 10-20-05 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]. This is part of a continuing experiment to see if an individual investor can find some benefit in buying individual stocks. Four of the stocks below [MLS at 50.72%, DDR at 38.25%, VNO at 44.24% and OFC at 44.62%] notably out-performed the REIT sector average of 32% for the full year of 2004. This portfolio beat the sector average in 2004 by 300 basis points - so some regression to the mean is to be expected. Note that this portfolio, while being weighted toward higher growth and lowering yielding REITs, still pays a higher dividends per quarter than RWR and ICF. Earnings Guidance & Dividend Changes: OFC gave 05 FFO guidance of $1.78 - $1.85 per diluted share in their Q4 conference call on 2-10-05. The current consensus estimate is $1.84. OFC on 5-19 declared a quarterly dividend of $0.255 per Common Share of beneficial interest [an increase from 24 cents/share]. The dividend will be paid on 7-15 to shareholders of record on 6-30. UDR on 2-16 announced a 2.6% increase in its dividend for 05 to $1.20 per share. ARE on 2-14 updated its 2005 earnings guidance to an FFO of $4.78 [vs a current consensus of $4.80]. On 5-11, ARE announced expected 05 FFO/share to be $4.79. On 6-20 ARE raised dividend 3% To 68 cents per share. ARE announced 8-02 that expected 05 FFO/share to be $4.81. AMB on 3-01 declared a regular cash dividend for Q1 of $0.44 per common share. The dividend reflects an annual indicated rate of $1.76 per common share, an increase of 3.5% over the 2004 annual dividend. On 4-12 CARS announced that it raised the company's quarterly dividend to 43.8 cents per share, payable on May 20 to shareholders of record as of May 10. On 7-12, CARS increased its dividend 2% to 44.6 cents per share from a prior level of 43.8 cents. The company also reaffirmed its guidance for an annual common share dividend of $1.80 per share in 2005. HR on 4-26 announced its 47th consecutive dividend increase to $0.655 per share. At this rate, quarterly dividends approximate an annualized dividend payment of $2.62 per share. Update: Fifth Experiment in Stock Picking 10-20-05 Given the amount my portfolio has changed, I started a new 'experiment'. Or maybe I got tired of seeing my results trail the ETFs - and wanted to have something on this page that stroked my ego. I really should have bitten the bullet and bought VTR and a Hospitality REIT or two - but after buying a third MLP [XTEX added to existing holdings EPD and ETP] - I did not have the funds. Or maybe I just wanted the security of holding a bit of cash. So I am starting this experiment with a portfolio balance that is a bit off. But I do like the additions I made from the 05 starting portfolio [by adding CNT and GGP, and on 9-09, more shares of DDR when I sold CARS, which is being bought out and going private].
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