Wednesday, December 15, 2010

The Hard to Read State of Commercial Real Estate

Bloomberg News

Real Estate Avoids 'Catastrophe' as Yields Drop: Credit Markets

Dec. 15 (Bloomberg) -- Investor confidence in U.S. commercial property is the highest since the 2007 market peak, a sentiment reflected in bonds of real-estate companies that own everything from New York skyscrapers to California strip malls.

Yields on debt issued by real-estate investment trusts average 210 basis points more than Treasuries, the least since Nov. 12, 2007, according to Bank of America Merrill Lynch index data. The debt has returned 13.2 percent this year, trumping a 8 percent gain by investment-grade bonds.

The debt of companies that own offices, shopping centers, apartments and warehouses has rallied as a dearth of new development spurs demand "little by little," according to billionaire investor Sam Zell, chairman of Chicago-based apartment owner Equity Residential. The Moody's/REAL Commercial Property Price Index has been little changed since October 2009 after plunging 45 percent in two years.

"If there is no new supply, then the catastrophe that everybody was expecting isn't going to happen," Zell, 69, said in a telephone interview. "Commercial real estate is not suffering and is in fact getting better," said Zell, the founder of Equity Office Properties Trust, the biggest U.S. office owner before Blackstone LP bought it in a record-breaking leveraged buyout in 2007.

REITs have issued $17.7 billion of bonds this year, the most since 2006, Bloomberg data show. The sales helped refinance existing debt and bolster balance sheets as rents and occupancies stabilize, debt-research firm CreditSights Inc. said in a report last month.

Nothing Built

"Real estate is all about supply and demand," said Zell. "We haven't built anything in this country since July '07. We're not building anything right now."

Rally Over

The improvement belies predictions by investors including Inland Real Estate Group Inc. Vice Chairman Joe Cosenza that the commercial property market had further to fall.


In an interview at Bloomberg LP's Chicago office in July, Cosenza said a "double-dip" in the commercial real estate market could have come as soon as September.

The turnaround is being driven in part by the relatively slim list of distressed properties coming up for sale and quicker-than-expected rebound in fundamentals such as rents and vacancy rates, according to Newport Beach, California-based Green Street Advisors, an independent real estate research firm.

HCP Inc., the biggest U.S. health-care REIT by market value, said late Dec. 13 it would pay $6.1 billion for 338 nursing homes from Carlyle Group's HCR ManorCare Inc. in the largest REIT deal in three years.
The acquisition is "a good example of public REITs buying from private-equity firms looking to monetize investments from a few years ago," said Craig Guttenplan, a London-based analyst at CreditSights, which recommends buying REIT debt.

Boston Properties

Boston Properties Inc., the U.S. office REIT led by Mortimer Zuckerman; and Toledo, Ohio-based Health Care REIT Inc. led $2.63 billion of bond sales for the industry in November, the most since March, Bloomberg data show.

Sales of bonds linked to commercial real estate loans are beginning to recover as well. About $10.6 billion of the debt has been issued this year, up from $3.4 billion in 2009, according to data compiled by Bloomberg. Issuance may reach $45 billion in 2011, according to a Nov. 24 report from JPMorgan.

Americold Realty Trust, the warehouse operator owned by Ron Burkle's Yucaipa Cos., sold $600 million of bonds backed by commercial-mortgage debt, a person familiar with the transaction said Dec. 9. The offering was secured by refrigerated warehouses, compared with recent transactions that have been backed primarily by shopping malls and office buildings.

U.S. apartment vacancies dropped for the first time in almost three years in the third quarter, suggesting the trend of people moving in with family or friends might be abating, New York-based research firm Reis Inc. said.

Fewer Vacancies

Office vacancies in U.S. central business districts declined for a second consecutive time in the third quarter, reaching 14.7 percent compared with 14.8 percent in the previous three months, as tenants signed leases for additional space, according to broker Cushman & Wakefield Inc.

The average rent per square foot of REITs operating in central business districts, including Boston Properties and Vornado Realty Trust, increased in the third-quarter, while declining for REITs focused on suburban area properties, like Highwoods Properties Inc. and Mack-Cali Realty Corp., according to CreditSights' Nov. 22 report.

"Those non-urban office buildings might be quite a way from ever being rented again, but everything in New York and the other 24/7 cities continues to get better every day," Zell said.

To contact the reporters on this story: Sapna Maheshwari in New York John Detrixhe in New York at

To contact the editor responsible for this story: Alan Goldstein at