Category: REITs

REITs taking it on the chin

As Bloomberg reported, Blackstone’s purchase of Sam Zell’s office REIT appears to have rung the bell for the commercial property bubble:

The 128-member Bloomberg REIT Index returned 78 percent with dividends in the two years prior to its Feb. 8 peak, the day before New York-based Blackstone Group LP bought Equity Office Properties Trust for $23 billion, or $39 billion including debt, the real estate industry’s biggest leveraged buyout.

Since then, the index has fallen 16.5 percent after dividends as commercial mortgage rates climbed as much as 2 percentage points above the 10-year Treasury note. The last time the REIT index declined more than 10 percent in total return was in 1998 when investors were diverting funds to high-flying Internet stocks.

REITs outside the U.S. also declined. The 40-company Tokyo Stock Exchange REIT Index, led by Nippon Building Fund Inc. and Japan Real Estate Investment Corp., is down 28 percent from its high last May. The 14-member Bloomberg Europe Real Estate Index, led by Unibail-Rodamco SA, is down 33 percent from its February peak.

Even red-hot markets like SF and NYC are beginning to cool:

The U.S. office vacancy rate increased to 9.8 percent at the end of September from 9.7 percent in the second quarter, and rents in Manhattan and San Francisco climbed at the slowest pace in more than a year in the third quarter, according to real estate brokers Cushman & Wakefield Inc. and Studley Inc. in New York and Chicago-based Grubb & Ellis Co.

And the prop from takeovers is being pulled away:

Takeovers fell 72 percent in the third quarter from the prior quarter, data compiled by Bloomberg show. While the pace of deals slowed, the value of U.S. REIT acquisitions totaled $59 billion in 2007, up from $7 billion in 2005, according to New York-based industry research firm Real Capital Analytics Inc.

This year’s transactions include the buyout of Chicago- based Equity Office; the $22.2 billion purchase of apartment REIT Archstone-Smith Trust of Englewood, Colorado, by Tishman Speyer Properties LP and Lehman Brothers Holdings Inc.; and Morgan Stanley’s $6.5 billion takeover of Crescent Real Estate Equities Co., the Fort Worth, Texas-based office, residential and resort REIT.

My comments:
  1. Interesting how Wall Street – Blackstone, Lehman, and Morgan Stanley – bought at the top. Shades of buying subprime lenders a year ago?
  2. If commercial real estate is going down the same path as residential, the banks are in serious trouble.

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