There is perhaps not another sector in the commercial real estate market that is sitting on more money right now than real estate investment trusts. And this year, access to capital will separate the active deal-makers from those who are sitting on the sidelines in commercial real estate. So, if you are looking for sectors to focus your business development efforts on, do not overlook REITs.
Since the financial crisis first took hold, REITs have been actively deleveraging and cleaning up their balance sheets. This gives them a distinct—and significant—advantage over other types of investors in terms of being able to refinance debt and raise capital for deals. Public REITs have been the largest net buyers of assets by a significant margin over the past two years. In 2011, REITs raised a record $51 billion of equity and debt, according to NAREIT, the bulk of which is expected to be used for the purchase of commercial real estate. Property deals by REITs last year fell short of expectations due to the anxiety created by the downgrade of the U.S. credit rating and fears surrounding Europe’s debt crisis last summer. Now that economic barometers are improving, cash-heavy investors like REITs are more willing to invest in multifamily properties, shopping malls and office buildings. Confidence has since improved, partly due to more promising job growth data, easing fears of a double-dip recession.
As this year’s wave of $363 billion in real estate debt maturities hits, REITs are expected to dominate headlines as they take advantage of the troubled office, apartment, shopping center, hotel and industrial properties that are going to hit the market. In the first two months of 2012 alone, public REITs accounted for a solid one-third of total investment sales activity, according to Real Capital Analytics.
Few other sectors in commercial real estate can boast significant transaction growth over the past two years like REITs can. Access to capital allowed many key players to acquire trophy properties in desirable metros while the rest of commercial real estate struggled. Some REITs are taking advantage of the changing market conditions and aggressively buying portfolios of underperforming loans at a discount. Others have built up significant revolving credit facilities so they can be agile enough to close deals as opportunities arrive. Vornado Realty Trust, for instance, has two unsecured facilities with access to capital of nearly $3 billion. Simon Property Group Inc, the nation’s largest REIT, Blackstone Group, Boston Properties Inc. and Kimco Realty Corp. are the market leaders, but there are hundreds of other smaller regional or local REITs that specialize in apartments, hotels, offices or industrial properties.
REITs in 2012
While the market has not yet been flooded with distressed properties, the U.S. market is headed into a period of significant deleveraging of property debt as banks stop extending loans and record amounts of debt come due. Demand for commercial real estate, which includes shopping malls, office buildings and storage facilities, is showing steady growth. Not only are REITs buying properties, they are also actively selling properties, especially trophy properties in markets where values have appreciated, then using proceeds to close property deals in other metros where they see stronger buying opportunities. This is an extremely favorable development for the market because it suggests investors are starting to move properties for the sole purpose of reinvesting capital—momentum that has been sorely missed over the past few years.
With forecasts calling for deal-making activity in 2012 to be up moderately over 2011, REITs are well-positioned to compete for attractive investments along with pension funds, institutional equity funds and foreign buyers, provided that improvement in the broader economy continues. What this adds up to is significant deal making momentum and strong reasons why environmental due diligence firms who want a piece of the action this year would do well to identify active REITs in their areas of operation.