REITs Agree It's a Seller's Market

Despite soft market fundamentals, buyers are putting upward pressure on the price of available assets, says First Industrial president and chief executive officer Michael Brennan in the largest US industrial REIT's first-quarter earnings conference call. Prices of industrial properties are remaining firm or even rising even though the overall vacancy rate across the US for the sector has risen to 10.3%, Brennan says, while plant utilization is down to 75%.

Meanwhile, Duke Realty chairman and chief executive officer Tom Hefner agrees there is a "small amount of acquisition opportunities" available in his Indianapolis-based REIT's office and industrial markets in the Midwest and Southeast US despite six consecutive quarters of negative absorption. "That activity could accelerate," he adds.

The REIT's $10.7-million first-quarter acquisition was at "a favorable yield," reports Duke Realty executive vice president of real estate operations Howard Feinsand. "We have seen a pick-up in things available, some things known to the market and some things not known to the market," he says, adding some properties taken off the market last year have quietly re-emerged.

The flip side is it's a good time to be a seller, but Duke Realty reports it is quickly approaching its 2002 target of $175 million to $200 million in dispositions. The REIT sold $144 million worth of properties in the first quarter at an average capitalization rate of 8.7%.

Likewise, Brennan says First Industrial will likely be a net seller of property this year to the tune of $50 million to $100 million, producing a drag on earnings of up to $0.10 per share.

So far, institutional buyers have been the most active customers, says First Industrial chief financial officer Michael Havala, accounting for 35% of the sales and buying in at an 8.5% capitalization rate. Close behind are private investors, making up 34% of the market but acquiring First Industrial property at an average 10.5% capitalization rate, he adds. While making up just 1% of its market, buyers involved in Section 1031 exchanges paid the lowest cap rates at an average of 8.1%. Users made up the rest of the market at 30%, with Havala reporting their purchases coming in at 8.5%.