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The U.S. office market showed some signs of improvement in 2011. The office vacancy rate fell in the third quarter to 17.4%, while average asking rents grew by 0.4 % to $27.85 per square foot per year, registering an increase for the fourth straight quarter. Effective rents were up 1.6 % from a year earlier.

Overall, real estate investment trusts (REITs) continued to outperform the major markets in 2011. According to Deloitte’s recently-published report on commercial real estate’s outlook for 2012. REITs remain well-positioned amid the economic uncertainty, primarily due to access to capital, improving underlying property fundamentals, and favorable market dynamics. Many REITs have used these market conditions to bolster their portfolios by deploying available capital for opportunistic and strategic acquisitions.

Deloitte’s Bob O’Brien notes that “Improved access to capital drove significant transaction growth and REITs were able to acquire prime properties within major markets at favorable prices due to the overall market distress”. However, he also added that unlike pre-recession times, growth prospects for REITs today are now heavily dependent on mergers and acquisitions and increases in rents.

New construction activity in 2011 has decreased dramatically amid tighter underwriting standards for commercial development. Delinquencies also remain a concern as debt incurred at the height of the market is now coming due. Over $1.8 trillion in commercial real estate debt will mature by 2015, which may present problems for non-prime properties in a slower recovery.

Acquisitions

Assuming that market conditions continue to improve and rents continue to rise, it seems logical that those REITs that made the most acquisitions at distressed prices will start to reap the benefits in 2012 and beyond. Let’s look at the major acquisitions and sales by the largest office REITs in 2011:

  • Commonwealth REIT (CWH) recently announced that it has agreed to sell 13 suburban properties for $167 million. The properties being sold contain 1.3 million sq. ft. and are currently 95% occupied on a combined basis. This transaction should be completed by year end 2011.
  • Boston Properties, Inc. (BXP) acquired the Bay Colony Corporate Center in Waltham, MA for an aggregate purchase price of approximately $185.0 million. Bay Colony Corporate Center is an approximately 1,000,000 rentable square foot Class A office park located in the suburban Boston office market of Waltham. The purchase price consisted of approximately $41.1 million of cash and the assumption of approximately $143.9 million of indebtedness. The assumed debt is a securitized senior mortgage loan that bears interest at a fixed rate of 6.53% per annum and matures in June 2012.
  • Vornado Realty Trust (VNO) sold 350 West Mart Center, a 1.2 million square foot office building located in Chicago for approximately $228 million. 350 West Mart Center is a former apparel mart that was converted into a modern office building. Separately, Vornado has entered into an agreement to sell four small retail/mixed-use properties in Manhattan for approx. $78 million.
  • Vornado Realty Trust also sold two mid-block office buildings located on Connecticut Avenue and 25th Street in Washington, D.C. The two buildings contain 319,000 square feet and sold for $127 million.
  • Liberty Property Trust (LRY) acquired three Minnesota industrial properties from KBS Industrial Portfolio LLC, for approximately $25 million as part of a larger $91.35 million transaction. Liberty Property Trust also acquired a 1.08 million-square-foot industrial complex in Charlotte, NC, for $60.75 million or $56 per square foot.
  • Liberty Property Trust sold four office buildings, totaling 338,424 square feet of Class A office space, in Brookfield and Waukesha for $40.8 million, or approximately $120 per square foot.
  • Piedmont Office Realty Trust (PDM) acquired 400 Town Park in Lake Mary, Florida, a Class-A property at 400 Colonial Center Parkway. Piedmont acquired the five-story, 175,674 square-foot office building from Colonial Properties Trust for approximately $23.8 million.
  • Piedmont Office Realty Trust, Inc. sold 111 Sylvan Avenue in Englewood Cliffs, NJ for $55 million. LG Electronics U.S.A., Inc., purchased the five building, 410,000+ square foot office property.
  • Piedmont Office Realty Trust, Inc. acquired three Class A office buildings, located at One & Two Meridian Crossings in Minneapolis, MN and Suwanee Gateway One in Atlanta, GA.
  • Government Properties Income Trust (GOV), which invests only in government-leased properties, acquired the South Bradshaw Business Park building at 9815 Goethe Road in Sacramento, CA. KBS Real Estate Investment Trust Inc., also a REIT, sold the property for $13.6 million or $155 per square foot.
  • Government Properties Income Trust acquired 305 E. 46th Street in New York City from Extell Development Company for $114 million, or approximately $742 per square foot.
  • Government Properties Income Trust also bought One Georgia Center in Atlanta for $48.6 million or about $130 per square foot. The 375,000-square-foot office tower is 78% leased by the Georgia Department of Transportation.
  • Alexandria Real Estate Equities, Inc. (ARE) has started the first phase of Alexandria Center at Kendall Square, a $500 million, 1.73-million-square-foot build-to-suit science and technology campus on 11 acres in Cambridge, MA. At build out, the Alexandria Center at Kendall Square will comprise five buildings with flexible laboratory and office space designed for easy collaboration between disciplines.
Source: Office REITs Appear Well-Positioned for 2012