FEATURE ARTICLE, NOVEMBER 2004
THE REIT WAY
REITs face stiff competition in strong Northeast markets.
REITs are becoming an increasingly popular investment option,
providing returns that are currently more reliable than those
of the stock market. In contrast to the stock markets
stagnant investment returns, REITs continue to provide investors
with steady, reliably growing investments.
REITs have become an increasingly attractive investment
for individual investors, especially after the collapse of
many technology-related stocks, says Tom Garesché,
Rockville, Maryland-based Federal Realty Investment Trusts
Northeast region senior director for acquisitions. There
have been a number of studies showing that real estate holdings
in an individual investors portfolio increase the return
and decrease the risk.
Equity Office recently acquired
717 Fifth Avenue in Midtown Manhattan.
James Aries, vice president of acquisitions and leasing for
Greenwich, Connecticut-based Urstadt Biddle Properties, agrees.
REIT stocks have generally been a very good investment
over the last few years. REITs are gaining greater acceptance
and investors now recognize the importance of diversification.
This bodes well for REITs, as real estate will likely continue
to appreciate as an investment vehicle over the long term.
However, as the demand for the reliability of real estate
grows, REITs and their investors face steadily increasing
competition for property acquisition from private investors.
Northeast Real Estate Business recently spoke with several
of the regions prominent office, hotel and retail real
estate investment trusts to gauge how these companies are
dealing with increased competition and rising interest rates
and what they predict for the future of REITs.
REITs are looking forward to an imminent recovery in the Northeasts
The Northeast hotel market is showing signs of a strong
recovery and values have increased, as more capital is available
to purchase hotels, says Joseph Green, president and
chief financial officer of Raleigh, North Carolina-based Winston
We believe that we are in the first year of a multi-year
recovery and that there is continued upside in performance,
agrees Jay Shah, president and chief operating officer of
Philadelphia-based Hersha Hospitality Trust. Our experience,
as well as that of our market peers, is that average daily
rates are increasing more quickly than expected, allowing
for stronger operating leverage, resulting in better earnings
earlier in the cycle.
Hospitality in New York City is especially promising and primed
for growth, says David Bulger, executive vice president, chief
financial officer and treasurer for Palm Beach, Florida-based
Innkeepers USA Trust. He notes that competition for acquisitions
of full-service hotels in most Northeast markets is keen right
Bulger says that Northern New Jersey is particularly promising
for hotel development and investment right now, while Philadelphia
is holding steady and the Boston area is still struggling.
Equity Office is redeveloping
Russia Wharf in Boston.
With this rebounding in the value of Northeast hotel properties
comes a healthy amount of competition.
Competition to buy quality hotel assets is very strong,
not only from public companies but also from the private sector,
notes Green. There is a significant amount of private
equity capital from opportunity funds and one-off
buyers to invest in the hospitality industry. Moreover, when
that capital is joined with the increasing availability of
low cost debt capital, it creates a highly competitive acquisition
environment, he says.
To stay ahead of the competition, Innkeepers has been branching
out to acquire properties catering to the leisure traveler
rather than those that cater to the business customer. Innkeepers,
which currently owns hotels in Connecticut, Maine, Massachusetts,
New Jersey and New York, is also hoping to acquire additional
properties in the hot hotel market of Northern New Jersey.
Shah notes that upscale premium limited-service and full-service
hotels in the Northeast are affording strong margin growth,
yields on cost and limited downside exposure right now.
Winston Hotels has put its focus on suburban markets in the
mid-service, upper-end extended stay and premium limited-service
hotels segments, such as Courtyard by Marriott, Hilton Garden
Inn, Residence Inn, Homewood Suites, Staybridge Suites, Hampton
Inn, Hampton Inn & Suites and Holiday Inn Express. We
believe that, in general, these brands do not have the propensity
to be as volatile as full-service, resort and convention hotels,
says Green. They also require fewer employees to operate
and tend to produce higher operating profit margins.
In addition to properties with good operating track records,
Winston is also investing in hotels that require substantial
renovation or repositioning.
Consolidation could have some effect on the keen competition
for hospitality acquisitions. The recent proliferation of
new REITs in the public market could create opportunities
for consolidation, as the substantial increase in public capital
is invested, says Green. Certainly, consolidation reduces
the number of competitors for product in the market place,
which might put less stress on pricing, he says.
Shah says that the trend toward consolidation makes sense.
Consolidations allow for more efficiency in management,
pricing power and succession to stronger management teams,
So what does the future hold for hotel investment in the Northeast?
Hotel REITs in particular are faring well due to recovering
fundamentals, says Shah. I believe lodging stock
values will increase by 20 percent over the next couple of
I think that hotel REITs in general have done well in
the current environment, agrees Green. The hospitality
industry has improved each quarter this year after coming
off 3 years of poor results. It is expected to continue to
improve next year, he says. We intend to continue
investing in the northeastern markets and believe that the
growth in those markets will be strong in 2005 and beyond.
Bulger agrees, saying that he sees a bright outlook
for the next 3 years for REITs in the current investment
Chicago-based Equity Office is focusing its efforts on acquiring
Class A properties in its top strategic markets, while disposing
of properties in non-core markets.
We have a focused effort in acquiring properties in
the markets that meet our investment strategy, says
Shobi Khan, Equitys senior vice president for investments.
We will wait for the right opportunities on the buy
side and continue to recycle capital from our non-strategic
assets and markets into the top strategic markets.
In line with this strategy, Equity recently acquired more
than 380,000 square feet of high-rise, Class A office space
in Midtown Manhattan at 717 Fifth Avenue. Built in 1959, the
building features one of the citys first glass curtain
wall structures, which allows expansive views along Fifth
Avenue, Grand Army Plaza and Central Park. Current tenants
include Merrill Lynch, European Investors, Cornerstone Equities,
Sketchers USA and William Jones.
Equity Office is also redeveloping Russia Wharf in Boston.
These three mercantile buildings in the downtown Fort Point
Channel district will undergo a redevelopment that will weave
together the edge of Bostons financial district with
the historic Fort Point Channel and will open up access to
the waterfront with links to public open space and cultural
resources, says Maryann Gilligan-Suydam, senior vice
president of Equity Offices Boston region. When complete,
the project will include approximately 500,000 square feet
of office space in a 22-story tower, 300 hotel suites, several
restaurants and more than 500 underground parking spaces,
as well as a large waterfront plaza on the Fort Point Channel,
designed to encourage pedestrian access to the waterfront.
Currently, Khan says, Equitys strategic Northeast markets
include New York, where Equity owns more than 5 million square
feet of office space; Boston, where it has more than 13 million
square feet; and Stamford, Connecticut, with more than 1.6
million square feet.
Many factors play into choosing the most favorable locations
for office properties, he says, including submarket dynamics
(such as occupancy trends and the level of construction activity),
potential office market and rental rate growth, and the ability
to generate net operating income and cash flow growth.
All of our decisions are made on an asset-by-asset basis,
says Khan. We are a value investor that waits for the
right opportunities at the right time.
The acquisitions market for Northeast retail properties is
particularly strong right now.
REITs are performing well, and shopping center REITs
are doing especially well, both as a business and as an investment,
says Tom Garesché of Federal Realty Investment Trust.
REITs are enabling individual investors to participate
in the valuation of real estate for the long term.
Federal Realty is renovating
the 260,000-square-foot Andorra Shopping Center
in the Roxborough section of Philadelphia. The
center is anchored by Acme Markets, Kohls,
The Northeast is the last frontier for major retailers
because of the limited sites to locate, due to overall density
and high barriers to entry, says Sandeep Mathrani of
New York-based Vornado Realty Trust, which is currently redeveloping
the 1 million-square-foot Bergen Mall in Paramus, New Jersey.
With the current health of the Northeasts retail market,
REITs are finding competition keen, amongst themselves and
with private investors.
It is extremely competitive finding good neighborhood
and community shopping centers right now, and we dont
foresee that changing in the near future, says Garesché,
noting that REITs are particularly popular right now due to
low interest rates and the questionability of alternative
investments, such as stocks and bonds.
Competition from private buyers, who tend to be backed
by institutions in joint venture arrangements, and by private
REITs is intense, agrees Urstadt Biddles James
Aries, noting the difference in strategies between public
REITs and private investors. These buyers appear to
have different pricing criteria than we do. We always tell
ourselves that size is vanity and profits are sanity. We scratch
our heads to understand why an institution would wish to invest
in a property with little upside at a yield of 7 percent.
This is the sort of buyer you dont want to compete with
and there are many such buyers in the market now. There is
also a great deal of competition from 1031 exchange money
that we do not want to compete against because they have different
Aries says of Urstadt Biddle, We are long-term holders
of real estate. We buy for capital appreciation and rising
cash flow over the long term.
Garesché notes that private investors are strong competitors
to REITs because they know their target markets well and are
generally focused only on small market areas. Secondly,
with the historically low interest rates we have currently,
capital is relatively inexpensive, and since they are usually
leveraged buyers, they can pay aggressive prices, he
says. Despite predictions that rates would rise this
year and choke off the market at a peak, rates have fallen
In the current market, grocery-anchored neighborhood shopping
centers have proven to be a popular commodity.
More than 70 percent of Federal Realtys 16.8 million-square-foot
shopping center portfolio is anchored by grocery stores and
Garesché says that the REIT feels that grocery-anchored
centers in major metropolitan areas with high population densities,
above-average household incomes, and barriers to entry for
new competition have a strong potential for rental growth
and limited downside risk.
Recently, Federal Realty formed a joint venture with Clarion
Lion Properties Fund, a discretionary fund created by ING
Clarion Partners to acquire up to $350 million of stabilized,
supermarket-anchored, shopping centers in the Federal Realtys
strategic East Coast and California markets.
This partnership gives us the ability to acquire high
quality, stabilized shopping centers that may not otherwise
meet our property operating income growth targets, says
Garesché. Through the joint venture, Federal Realty
recently acquired two supermarket-anchored shopping centers
in the Boston area for $38 million Campus Plaza in
Bridgewater, Massachusetts, and Pleasant Shops in Weymouth,
Massachusetts. And, in keeping with its view that risk-adjusted
returns are better from acquisitions and redevelopments than
from new, ground-up developments, Federal also acquired Mercer
Mall, a 477,829-square-foot regional shopping center, in Lawrenceville,
New Jersey, in October 2003.
Using our own capital for redevelopment is part of our
acquisition strategy, notes Garesché. Mercer
Mall provided a very solid initial return upon acquisition
that we expect to grow through additional re-leasing, remerchandising
Urstadt Biddle has also been concentrating on Northeast grocery-anchored
shopping centers, particularly in Northern New Jersey and
New Yorks Westchester, Putnam, Fairfield and Rockland
There are greater barriers to entry in these markets
and, consequently, no significant penetration of Wal-Marts
and Targets extracting business away from the traditional
grocers, says Aries. Demographically, our core
markets tend to be less susceptible to some of the difficult
economic cycles that we have seen.
Urstadt Biddle is also focusing on redevelopment of retail
centers, rather than ground-up construction. The REIT is currently
redeveloping centers in Ossining, New York, and Darien, Connecticut,
which will involve expansions of existing supermarkets and
Urstadt Biddle has also redeveloped the 312,000-square-foot
Townline Square, in Meriden, Connecticut, which involved recapturing
a closed Bradlees Department Store and adding retailers
such as Burlington Coat Factory, Linens N Things, Old
Navy, Michaels and Panera Bread. Urstadt Biddle also recently
acquired, and is in the process of converting, the largest
open-air shopping center in Fairfield County, Connecticut
the 370,000-square-foot Ridgeway Shopping Center in
Stamford. In White Plains, New York, a market that Aries says
is booming due to increased residential development and pro-business
sentiment, Urstadt Biddle recently acquired The Westchester
Aries is quick to note, however, that this retail boom might
not last forever. There appears to be a general perception
by many that rates and inflation will remain at the current
historically low levels for the foreseeable future,
he says. This perception and the relative health of
the retail business are creating a you cant lose
attitude amongst some investors. This has driven cap rates
down to unprecedented levels. This is a dangerous sand box
to play in, as history surely will repeat itself, rates will
rise and other property sectors will come back into favor
and siphon capital away from the retail market, he continues.
This is a sellers market and if you want to make
money rather than just buy for the sake of buying you must
be very flexible and creative.
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