REITs: Planning the Slope of a Recovery

CHICAGO-It’s started to happen – the initial success in 2010 has enabled commercial real estate executives to adjust--and clear the fog-over of--their rear-view mirrors on the recent recession, at least according to the executives at the National Association of Real Estate Investment Trusts’ REITWeek 2010 conference here. The event, with presentations from more than 100 trusts, continues through Friday.

Everyone in the industry has heard, or given, the “at least it’s not 2009” speech. Now, the trusts said Wednesday, there is proof emerging of this comparison. “A year ago, retailers were cautious, making concessions and shrinking space,” said David Henry, president and CEO of New Hyde Park, NY-based Kimco Realty Corp. “Today, these retailers are ready to expand stores – we’re seeing this at the different conferences we go to, including at ICSC. There’s a lot of institutional money looking to acquire buildings. We’ve recently signed partnerships with three pension funds, they have an appetite for high-quality assets.”

Strategic Hotels president and CEO Laurence Geller said his company implemented a planned three-phase response to the recession months before it hit, to the consternation of investors and analysts. His firm cut heavily, including from the labor force, to prepare for the recession. “Well, we were right, thank god we did,” Geller said Wednesday.

He said his firm has discovered a lot of myths about the current state of the market. “One myth is that there was a perceived drop in the luxury hotel market. The reality is that the luxury market last year had a better year than in 2007. The second myth is about luxury rates – they didn’t need to plummet like they did. We did some research and learned that we undercharged as an industry. We have raised our rates, and people are still coming.”

One market segment that has seen a recent major change is medical office. As companies gear up to serve what is expected to be many more patients, James Flaherty III, chairman, president and CEO of Long Beach, CA-based HCP Inc., said that in a post-health-care-reform environment, certain business models are going to have an advantage over others. “The companies that have these three characteristics are going to be winners, including measurable quality, a critical mass in a certain region, and an efficient operating system. From the companies that don’t have these three things, we may see consolidation in the market,” he said.

Foreign investment, worried about the global instability, has actually been rewarding the United States by pumping up US debt and seeking out property here. However, it seems right now that the only trust, by those in and outside the country, is on established markets on the coasts, and especially New York City and Washington, DC. One of the top firms for this investment is Vornado Realty Trust, based in the Manhattan.

Michael Fascitelli said he’s not interested in other markets than the big two – after all, he’s in the business to make money. “We like mixed-use properties, retail and office, in New York City and Washington, DC. The model has worked well for us so far. That’s not to say we are definitely going to focus on growing or expansion. We have no desire to get bigger, we just want to get richer. But even though there’s good news flowing, it’s hard to extract value today from good news."

Even in New York, development has stalled with the increase in vacancy and drop in rents. However, Fascitelli said he thinks a turnaround is coming. “I think we’ll see development return to New York City when rents return. We have 11% to 12% vacancy right now, but that will go down, I think, soon. Then someone will take a risk and others will follow.”