Focused Investment Strategies Put Certain Markets into Play

With that JV in hand, Lexington is now looking toward other buying opportunities -- at least some of which will occur under the auspices of another JV. Eglin says that the REIT is hopeful that it will put together a new JV with slightly different investment objectives than its partnership with Inland. "The property types in the Inland JV were call centers, data centers," he says. "For the next JV we might look at single tenant real estate with shorter term leases. We like that as an investment strategy, as it provides diversification across a broader base of assets, and allows us to earn higher returns without taking on more risk."

Lexington would likely kick in between 20% to 25% in equity in this partnership, he speculates. Now is a good time to buy, Elgin adds – a growing sentiment among many real estate investors. JVs among REITs, in particularly, are likely to be a favored vehicle as REIT share prices have traded down during the last quarter.

It's not a secret that billions of potential investment dollars are sitting on the sidelines waiting for the real estate markets to reach some kind of equilibrium. Sellers are loath to let go of properties at prices that are markedly lower than 2007 valuations. Buyers, meanwhile, cannot ignore the numbers – current cap rates and valuations do not allow them to stretch beyond a certain offer.

That stand-off appears to be melting a bit now that Q2 is underway; anecdotally, it appears as though more deals are closing in several markets compared to last quarter's activities. In some cases the price per sf is a reflection of the new industry realties. In other markets -- particularly cities such as Washington, DC and New York -- there hasn't been that much downward movement.

Still, though, buyers -- not to mention lenders -- remain cautious, investing in certain assets for very specific reasons as Lexington's plans illustrate. This attitude is also mirrored in equity investors' decision-making.

For instance, says Geoff Dancey, a principal from Worcester, MA-based Cutler Capital Management, there has been move toward more defense real estate sectors by some investors -- including Cutler. "Health care REITs, for instance, have been a big beneficiary of this thinking because of the type of tenants they have." Dancey happens to like Lexington as well for various reasons, including its business strategies. Ramco-Gershenson Properties Trust is another REIT he likes, he adds.

Another example of real estate investors and developers following specific strategies is the Canyon-Johnson Urban Fund, which along with Donatelli Development recently secured $53 million in construction financing from Citi Community Capital for a $71 million residential-retail building in Washington, DC. One of the reasons the lender liked the project, Quincy Allen, Canyon-Johnson's senior director of Acquisitions, tells GlobeSt.com, is because it is a transit-oriented development, located at a city metro stop. Also, he adds, "there has been a tremendous amount of public investment in that submarket already, including several residential and mixed-use developments."

Montecito Medical Investment Co. CEO Edward Conk, for his part, says medical real estate will be a key focus for investors in 2008. "We see a big opportunity coming for the right type and the right markets for this asset class," he tells GlobeSt.com. For instance, Santa Barbara, Calf.-based Montecito expects to have either broken ground on or purchased about $450 million of medical real estate this year. "We have a great pipeline for 2008," Conk says, almost a third larger than the $280 million worth of transactions it closed in 2007.