Posted on Thursday, March 17, 2011
Confident that a long-anticipated meltdown won't happen, real estate investors are aggressively returning to the commercial real estate market.
Some of the region's biggest deals since the nation went into a recession closed in the last six months. In most cases, the transactions were not properties involved in foreclosures or bankruptcies.
"There is not much distressed real estate out there," said broker Ed Mitchell, senior vice president of Duke Realty's South Florida operations,
"That's the issue. Everybody keeps saying, 'it's gonna be coming, it's gonna be coming.' But we really haven't seen distressed real estate. You see some foreclosures but you don't see a massive problem and you are not going to."
Mitchell said investors — including Duke — arrived at that conclusion last year and decided to jump back into buying. His company recently closed on more than one-third of its previously announced $450 million industrial acquisition from Premier Commercial Realty of Fort Lauderdale. Duke purchased 24 industrial properties for $157.9 million. The real estate investment trust agreed in December to buy Premier's entire South Florida portfolio of 51 industrial buildings, five office buildings and four ground leases totaling 4.9 million square feet in Broward and Palm Beach counties.
Mitchell said none of the properties were distressed.
His firm was motivated to seal the deal, in part, because vacancies are beginning to fall and rental rates are starting to go up in the industrial market.
"We are seeing a V-shape recovery in rents, and we are going to see a landlord's market come back pretty quickly," he said.
In September, Duke acquired Royal Palm I and II at Southpointe in Plantation for $100.4 million. Mitchell said his company liked the Class A, two-tower office complex because of its location.
"It is the nicest office property in West Broward and in a great location," he said, adding that it wasn't a distressed deal.
Jeremy Larkin, president of NAI Miami Commercial Real Estate Services Worldwide, said investors' interest for South Florida real estate has "tremendously" increased since a year ago. He said most buyers are going after trophy properties and less prestigious properties that are considered "solid assets" and are "priced properly." The appetite for Class A properties is so fierce that some deals are fetching cap rates below 6 percent, a figures typical of the real estate boom.
The lower a cap rate, the higher the property's price. Cap rates are the ratio between the net operating income produced by an asset and the price paid for the asset.
For example, a fund affiliated with California-based CB Richard Ellis Investors paid $193 million for the 1,520-unit Resort at Pembroke Pines six months ago, delivering a cap rate in the 5 percent range.
"But you see that only in trophy properties," said Larkin, who wasn't involved in the deal.
Another bellwether deal is the $105.5 million sale of the 47-story, 600,000-square-foot Miami Tower in downtown Miami. LaSalle Investment Management, a Chicago affiliate of Jones Lang LaSalle, paid about $175 per square foot.
Also signaling a strengthening market was the $95.25 million purchase of the London Square retail and office complex in Miami-Dade's West Kendall neighborhood. BVK London Square, an affiliate of Chicago-based RREEF, paid about $318 per square foot.
Howard Taft, senior managing director with the Aztec Group in Miami, said he wasn't surprised to see several investors compete for a three-property retail portfolio in Miami Beach's Lincoln Road a few months ago. He began marketing the property on behalf of Dacra Development in October and by November, he had received multiple bids within a 5 percent price range, Taft said.
Miami Beach-based Terranova Corp. submitted the $51.9 million winning bid and closed the deal last month. Taft, who worked on the deal with colleagues Ezra Katz and Charles Penan, said he expects to the number of similar deals will jump in 2011. He credits new sources of financing.
"In December, we had four major securitized lenders," he said. "As of February, there are 26 securitized lenders making [commercial mortgage-backed] loans for A, B and C type of properties."
CMB issuance in the U.S. rose to $10.9 billion in 2010 compared with $2.1 billion in 2009, according to a Jones Lang LaSalle report on Feb. 2. Issuance is estimated to be over $40 billion in 2011, "providing added liquidity to owners with maturing loans to refinance," the report said.
Nationally, Blackstone Group's planned $9.4 billion purchase of 588 shopping centers and Ventas's proposed $5.7 billion buyout of a health care real estate investment trust this week also provided evidence that a wave of deals is coming.
"Both these deals are a great signal that liquidity has returned to the commercial real estate space," said Dan Fasulo, managing director of Real Capital Analytics. "It certainly will have ripple effects on the entire industry."
Transactions surged over the past year as the economy began to recover and low interest rates made it cheaper for REITs and private-equity buyers to acquire office, retail, industrial, apartment and health-care properties. Completed acquisitions by U.S. REITs more than tripled to $24 billion in the 12 months through the end of February compared with the previous year, according to data compiled by Bloomberg. Fasulo said he "wouldn't be surprised" if U.S. commercial property purchases double in 2011 from almost $140 billion in 2010.
Demand for commercial real estate plunged during the credit crisis and recession as property values fell and investors had difficulty securing financing for new purchases or refinancing short-term debt from earlier deals. Commercial property transactions fell 89 percent to $66 billion in 2009 from the peak of $579 billion in 2007, according to New York-based Real Capital.
Confidence is Critical
An increase in takeovers shows that investors have confidence in the market and "all the smaller players will look to that," said Christopher Macke, senior real estate strategist at Washington-based CoStar Group. "That confidence level is just critical," he said.
Blackstone, the world's largest private-equity firm, agreed to buy Centro Properties Group's U.S. shopping centers — including the Mall at 163rd Street in North Miami Beach and eight other South Florida properties — for about $9.4 billion.
The 588 strip malls and related properties, anchored mainly by discount stores and supermarket chains, add to Blackstone's $500 million investment in mall owner General Growth Properties and a March 2010 venture with Glimcher Realty Trust to look for retail acquisitions. Blackstone also has been buying hotel and warehouse assets.
Ventas's deal to buy Nationwide Health Properties is the biggest ever among health care real estate investment trusts and will create the largest health-care REIT. HCP is currently the biggest health-care REIT by market value.
Ventas announced almost $4 billion in acquisitions in 2010, Ventas chairman and chief executive officer Debra Cafaro said in a conference call with investors on Feb. 17. Those deals, which included the purchase of almost all the real estate assets of Atria Senior Living, made Ventas the largest U.S. owner of senior housing in the U.S., Cafaro said.
Health Care REIT, the third-largest health care real estate investment trust, agreed to buy substantially all the property assets of closely held Genesis HealthCare for $2.4 billion, in a deal announced Monday.
In January, ProLogis, the world's largest warehouse operator, agreed to merge with rival AMB Property, creating a real estate company that will own or manage $46 billion in assets.
Prices of commercial properties sold by institutional investors surged 19 percent in 2010, the second-biggest gain on record, according to an index developed by the MIT Center for Real Estate in Cambridge, Massachusetts. Investments in office properties, the largest part of the market, more than doubled last year to $42.8 billion, according to Real Capital.
REITs may lead deals because of their access to capital for funding, Macke of CoStar said. Global private-equity real estate fund-raising fell to a seven-year low in 2010, according to Preqin Ltd.
"The public market is raising money hand over fist and the other group is not," CoStar's Macke said.
Some of the region's biggest deals since the nation went into a recession closed recently and, in most cases, the transactions did not involve properties in foreclosures or bankruptcies.
The appetite for Class A properties is so fierce that some deals are fetching prices typical of the real estate boom.
An awaited foreclosure boom among commercial properties hasn't materialized. Investors took note and some started buying, including Duke Realty in South Florida. The REIT has snatched up prime offices and industrial properties in some of the region's most notable deals since the crash.
Paola Iuspa-Abbott, DAILY BUSINESS REVIEW