Investors’ Retreat to ‘Value’ Shares May Spur Acquisitions and Developments
After waiting patiently on the sidelines for years, Los Angeles-based real estate investment trusts have been jumping back into the game.
Emboldening their moves has been Wall Street’s return to REIT stocks and other “value” equities, which have low price-to-earnings ratios and pay generous dividends.
“It’s amazing what happens when value stocks make a comeback,” said Jim de Bree, a partner in Deloitte & Touche’s real estate services group. “Late in the third quarter of 1998, REITs were in a serious bear market and continued to take a hit until about six to eight weeks ago. Now you’re seeing value and bricks-and-mortar being viewed as safe harbors.”
That’s lifting the boats of most REITs. For example, Newport Beach-based Health Care Property Investors has risen from less than 22 in December to more than 29 last week. Similarly, Newport Beach-based Pacific Gulf Properties had risen from the high teens to more than 25 in the same period.
“We’re going to see a lot of REITs actively developing and investing during this resurgence,” De Bree said. “It won’t be a huge buying frenzy like we saw in 1996 through 1998, but we’re definitely going to see some selective development opportunities, particularly in the hot office and industrial sectors.”
Craig Silvers, a real estate analyst with financial services firm Sutro & Co., agreed. “It’s looking extremely good for REITs right now,” he said. “There’s a ton of demand and not enough supply. Construction starts are up, but not enough,especially in the office and industrial sectors. So I expect to see growth in REIT development activity because the economy still has room to grow.”
“The buzzword for 1999 was service. This year, the catch phrase is technology and lower costs to tenants,” said Arden Realty president Victor J. Coleman. “Today, tenants need more than space,they need to run their businesses effectively.”
As a result, forward-thinking landlords, including REITS, are beginning to look beyond traditional tenant services and amenities and realizing the revenue potential in value-added services like Internet access, Web hosting, office furniture and supplies.
Smart landlords will unite their tenants to increase buying power for goods and services critical to conducting business. In e-commerce, exchanges or e-marketplaces create a single source for everything related to conducting business in certain vertical markets or by similar buyers. For instance, Arden has taken an equity stake in Eureka Broadband, the leading broadband service provider in New York and Southern California, to provide access to leading-edge technology, especially for small- to medium-size tenants.
Tenants in Arden-owned facilities can choose from a menu of broadband services such as high-speed Internet access, co-location, Web hosting and firewall protection. Eureka currently is wired into more than 300 buildings across the country.
So in the end, it appears REITs are experiencing a double bonus from technology. The exodus of shell-shocked investors from tech stocks has fueled a revival in more-conservative investments, like REITs, and simultaneously, tenants’ reliance on the very same technology is creating a potential new revenue stream for REITs.
Lester is a contributing reporter for the Los Angeles Business Journal. n
