Despite some moderate and shifting variations among certain sectors, real estate investment trusts (REITs) are generally strong across the board and, based on current commercial real estate conditions, likely to enjoy future growth. "I don't think there's a REIT sector where the fundamentals are weak," says Brad Case, vice president of research and industry information at the National Association of Real Estate Investment Trusts.
Â Â Â Following a recent period of relative deficiency, "fundamentals are now back up to normal" in the office sector, he adds. The hospitality market, in contrast, has already been excelling since the beginning of the year and may be able to sustain its momentum in the months to come. Case is cautiously optimistic. "I don't see any sign to indicate any sort of peak," he says, "but that's not the same as predicting that it will continue."
Â Â Â At the same time, the apartment market, while no longer positioned significantly above all other commercial real estate sectors simply because of other markets' growth, remains solid. Though REITs' role in the apartment market has decreased slightly in recent months, the conditions that drove apartment REITs in 2006 persist this year.
Â Â Â Additionally, "Apartment REITs can be thought of a substitute for single-family housing," Case remarks. With many would-be homebuyers discouraged by uncertain housing market conditions instead opting to rent, the slowdown in single-family housing "drives up demand for apartment REITs and makes their returns strong," he explains.
Â Â Â The most important contributor to overall REIT health, however, has been the steady influx of capital from institutional investors, pension funds and private equity funds into all sectors, Case stresses. The current disequilibrium situation will encourage further capital flow as the market approaches equilibrium.
Â Â Â Surveys of pension funds over the past six years have revealed three encouraging statistics: average pension fund allocations to real estate have increased every year, target allocations are also rising, and actual allocations remain below target levels. "That means that there's been a large flow of institutional money into this industry, and it's likely to continue," he says, because these types of investors' long-term projections and behaviors tend to be unaffected by any short-term market fluctuations.
Â Â Â "It's very clear that you cannot have a diversified portfolio that does not include real estate investments," states Case. And for many institutional investors, REITs offer the most powerful and lucrative mode of inclusion. Involvement in even a single REIT not only gives investors access to the commercial real estate market, but also provides immediate diversification across many types of properties.
Â Â Â Though much attention has recently been focused on cross-border real estate investments, the U.S. may still offer the most promising and stable REIT market. "People sometimes forget that "global' means U.S. and foreign," Case says, adding that the U.S. REIT market features a mix of performance and low volatility that other countries' real estate investment vehicles have not matched.
Â Â Â Recent research has suggested that an ideal global real estate allocation should heavily favor U.S. REITs, according to Case. "In a market like Asia, for example, there has been a lot of volatility there historically. And although it's possible that the volatility will decline, we haven't seen it yet," he says.
Â Â Â Exploring various markets and methods both domestically and internationally nevertheless remains a popular and often profitable REIT strategy. Some investors have been "very active and very successful making investments in commercial real estate in other countries," Case reports, yet others that have taken the first steps with global REIT activity subsequently decided to "either not go any further or possibly even pull out."
Â Â Â Within the U.S. REIT sphere, "It's really a question of which types of property investing have the best fit with the capabilities," says Case. Joint ventures, one common option, can place several assets under REIT management quickly, he notes, but may not be an appropriate fit for many investors.
Â Â Â While no regional trends distinct enough to guarantee REIT success or failure in any given area have emerged, says Case, geography remains a crucial consideration. For instance, an urban location's likelihood of commanding higher rent must be considered in combination with its increased cost of space and possible high barriers to entry if REITs already devoted to the city impede competition.
Â Â Â Depending on an investor's goals and abilities, all locations and geographies offer a potentially high return, he says, as long as the strong fundamentals continue – and such fortune seems likely. "There are no warning signs," Case points out. "Generally, when there's a downtrend in the commercial real estate market, it's because of fundamentals – it's because of over-construction, things like that. And we're not seeing that."
6,100 Units To Portfolio
NeighborWorks America says 2006 was the network's most successful year for multifamily development and ownership, with more than 6,100 new units added to its portfolio. That number is up sharply from more than 4,563 units in 2005 and a 400% increase from the 1,187 units added in 2002.
Â Â Â At Dec. 30, 2006, there were more than 63,000 apartment units owned or managed within the NeighborWorks network – which comprises more than 200 nonprofit organizations – up from 59,581 apartment units at the end of 2005.
Â Â Â "The NeighborWorks Multifamily Initiative is now in its tenth year and is going stronger than ever," says Frances Ferguson, national director for NeighborWorks America. "Members coast-to-coast are finding ways to bring decent, attractive and low-cost housing to thousands of families."
Â Â Â Ferguson notes that NeighborWorks organizations use a variety of development tools to make their projects work, including aggressively bidding for tax credit projects, mixing market-rate units with below-market rate units, and even mixing light commercial use within residential projects.
Â Â Â "Affordable housing cannot be cookie cutter," he adds. "Developers and managers in the NeighborWorks network know this and are among the leaders in applying new financial approaches to keep costs down, rents low and families in great affordable housing."
Trigild, Burnham Create
Affiliation For Nonperforming Loans
Trigild and Burnham Real Estate ONCOR International, both headquartered in San Diego, have created an affiliation that joins receivership, project management and brokerage services to offer a one-stop-shop to lenders with nonperforming commercial and condominium construction loans.
Â Â Â Under the new arrangement, Trigild will provide receivership services for Burnham and its lender clients with problem projects. Burnham will provide project management, real estate management and brokerage services of traditional commercial real estate for Trigild and its clients.
Â Â Â This new affiliation will give both companies' clients one source for every aspect of nonperforming commercial and condominium construction loans – from consulting and workout strategies, through receivership, bankruptcy and management, to disposition and loan recovery, the companies say.
Â Â Â "This teaming is a logical step in assuring that clients benefit from the most effective services in loan recovery," comments Bill Hoffman, Trigild's president and co-founder. "We look forward to combining both companies' strengths to produce optimal results for all of our clients."
NY: 123 WEST 44TH STREET, NEW YORK
WHAT: 123 West 44th Street consists of 110 luxury condominium units that will be converted into fully furnished, extended-stay apartments.
Â Â Â Â WHO: The Philadelphia office of NorthMarq Capital arranged the financing for the borrower, Korman Communities, through JP Morgan Investment Management.
Â Â Â Â $$$: $57.5 million.
Â Â Â Â TERMS: The first mortgage bridge loan was based on a five-year term with an IO amortization schedule.
Â Â Â Â NorthMarq Capital: (215) 496-3045.
GA: HUNTING CREEK, CONYERS
WHAT: Hunting Creek is a 136,871 square-foot retail center that was built in 1988. The property is undergoing significant rehabilitation and was 92% leased at the time of closing.
Â Â Â Â WHO: The Atlanta office of iCap Realty Advisors arranged the financing for Hunting Creek through Prudential Mortgage Capital.
Â Â Â Â $$$: $13.6 million.
Â Â Â Â TERMS: The fixed-rate permanent loan has a 30-year amortization period.
Â Â Â Â iCap Realty Advisors: (770) 676-1000.