Wednesday, September 22, 2010

REITs ponder future for private developers

"To listen to the top executives from the region’s three top commercial real estate investment trusts — Brandywine Realty Trust, Liberty Property Trust and Pennsylvania Real Estate Investment Trust — the commercial real estate world made a dramatic and perhaps permanent change during the Great Recession. As publicly traded REITs successfully weathered the financial crisis, shoring up debt and securing equity, the entrepreneurial private developer has been left behind.

“I believe the private guys are spending more time talking to bankers than tenants,” said Bill Hankowsky, president and CEO of Liberty Property (NYSE:LRY), at a panel discussion Friday at St. Joseph’s University and arranged by the local chapter of the Urban Land Institute. Hankowsky later added: “I think it will be tougher to be the private, entrepreneurial real estate developer that we had 20 years ago. I think there’s a permanent shift in the marketplace.”

REITs are in a stronger position than their private peers, said Jerry Sweeney, CEO of Brandywine Realty (NYSE:BDN). Even so, he said, “We still face the same issues.”

Those issues include getting space leased, retaining tenants and striking good deals. During the recession, REITs have proved to be resilient and stable, creating a competitive advantage over some private developers who were highly leveraged, facing court judgments or foreclosure on properties or experiencing difficulty in renegotiating debt. Tenants now routinely want to review their landlord or a perspective landlord’s balance sheet. They want to know the landlord will easily have access to capital to fund tenant improvements and commissions, aren’t overly leveraged and can adequately maintain a building and respond to tenants’ needs.

Of course not all private developers have fallen into dire straits, but what REITs have shown, to Hankowsky’s point, is that the REIT platform has shown a competitive advantage during the last two to three years and he expects REITs to get bigger and own more.

It’s certainly something to watch as the recovery gains momentum to see which private developers will survive and in what condition.

One other notable take from the meeting was that the No. 1 near-term goal of each of the companies is to lease space.

For PREIT that has meant coaxing local and regional tenants into the mall, using mall space for alternative uses such as for health-care and education, and seeing more growth in malls with mixed-uses.

In spite of a decline in consumer spending, PREIT (NYSE:PEI) has seen sales increase year-to-date by 3 percent and close to 5 percent at malls where it completed major redevelopments. The Cherry Hill Mall, which saw Nordstrom’s move in, has had sales increase by 17 percent year to date. The Philadelphia company expects occupancy at the end of the year to hit 88 percent. “Not so bad is the new good,” said Joe Coradino, executive vice president at PREIT."

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