REITs still have a profound impact on the NJ market - Focus On: Commercial Sales & Leasing - real estate investment trusts; New Jersey

The commercial real estate industry has been forever changed by the impact of public debt and equity capital markets. While only 8 percent of U.S. commercial real estate assets are owned by equity REITs, the public side of the business is still in its infancy. Although public PElTs currently own a small percentage of property, their impact on the industry is considerably greater than that, and their role is sure to grow, as is the aggregate value of these companies.

The capital and operating issues that affect other public industries such as growth, consolidation, technology, cost of capital and increased productivity are now challenging commercial real estate. The management discipline required by the capital markets is sure to have a positive effect in making publicly-owned commercial real estate more accountable and profitable.

An example would be the "corrective" action of the commercial mortgage backed securities market last summer, when financing (mostly excess, high leverage debt) became scarce. There may have been an overreaction as investors suddenly demanded higher interest rates, but this caused a healthy cooling effect on the market.

Although the relatively poor performance of REIT shares during 1998 has made raising capital difficult, the commercial real estate market has reached a healthier balance. REITs are now entering a digestive phase where they will be tested as operators of real estate on their ability to increase profits from better internal management of their assets, versus growing by acquiring more and more property.

Management's motivation will be geared toward increasing earnings per share each quarter, and opportunities include refinancing, sales and joint ventures. Some will increase revenue by offering expanded services to their client base of tenants such as technology and communication, office suites and hoteling operations, and by bringing more management and leasing work in-house.

By understanding the structure and motivation of equity REITs, their tenants/clients can improve their relationships, leading to better performance for both sides.

With that in mind, CRESA developed several issues for discussion involving service, stability and costs.

For example, should tenants be able to benefit from the lower costs REITs enjoy from the economies of scale and lower capital costs? As REITs develop strategic relationships with their larger tenants, offering them greater leasing and occupancy flexibility and efficiency, will smaller regional companies also be able to benefit? Or are smaller companies better off targeting smaller private owners with whom they can develop value-added relationships?

Also, as more commercial real estate becomes publicly owned and more companies look to outside service providers for real estate advice, how does the form of compensation for advisors and brokers change with the times? As REITs look to lower their costs to improve earnings, there will be more pressure for flat fees, reduced renewal commissions and fee sharing by and among owners, tenants and their advisors. As before, the better the working relationship and understanding of each party's needs and roles, the better the opportunity for everyone to improve their performance. No doubt, all three groups will be around for the long haul, as they all adjust to the industry changes.

The demands of the capital markets have changed the way publicly traded real estate companies manage real estate in order to satisfy shareholders. Examples include issues of geographic diversification, increased risk management programs and more emphasis on short-term quarterly earnings per share vs. the more traditional long-term investment view of real estate.

Top-level management decisions based on portfolio-wide needs might have an unintended effect on a specific property in a specific market. In some cases, many properties are recent acquisitions in unfamiliar markets which the new owners do not fully understand or may not yet be fully staffed for fast and accurate responses to proposals.

In addition, properties in non-core markets could be candidates for sale as a way to raise capital when the public markets are as difficult as they are now. Or, as consolidation in the industry continues, entire portfolios may change hands again, leading to the need to re-establish good working relationships between owners, tenants and advisors.

As 1999 unfolds, REITs will be much more focused on their existing portfolios for earnings improvements in the form of increased occupancy, higher rents, and lower operating and capital costs.

Portfolios will also be reviewed for attractive property sale opportunities, with reinvestment geared toward upgrading property quality and achieving higher returns.

COPYRIGHT 1999 Hagedorn Publication
COPYRIGHT 2004 Gale Group