Changing the landscape
REITs in Virginia continue to buy and develop properties and push green construction
- January 28, 2012
The past year has been a busy one for real estate investment trusts (REITs). They have been on the move in Virginia, developing properties in hot sectors and buying — rather than building — in others.
The state is seeing investments in apartment projects, particularly in Northern Virginia. Plus, REITs are buying and selling office properties and pushing for more sustainable and mixed-use urban construction.
Industrywide, REITs outperformed the broader stock market in 2011, drawing solid returns, which are helping to fuel investments. According to the National Association of Real Estate Investment Trusts (NAREIT) in Washington, D.C., the total return for its All Equity REITs index was up 8.3 percent for the year, compared with a 2.1 percent gain for the S&P 500.
In some sectors, REITs saw double-digit returns. Leading the overall industry was the self-storage sector, which drew a total return of 35.2 percent in 2011. The apartment sector also was hot, with a 15.1 percent gain.
Ron Kuykendall, a vice president for communications with NAREIT, says REITs are benefiting from the slow single-family, residential market. “When people are not buying houses … they put things into storage. And apartments have been one of the hottest sectors in the market for a couple of years now for exactly the same reasons.”
Several new apartment buildings are under way in Virginia, and some of them are REIT projects. Trammell Crow Co. in Washington recently teamed up with Rockville, Md.-based Washington Real Estate Investment Trust to develop the first phase of Braddock Gateway. Work is scheduled to begin on the $95 million, 15-story, 270-unit complex in Alexandria by the fourth quarter. In another deal, a Tennessee REIT bought a 232-unit apartment project in Fredericksburg.
Still, a number of the REITs with sizeable portfolios in Virginia are sticking with sectors they know. “Within the industry, there are a lot of specialties. So companies that are good at office may not be as good at multifamily or hotels or storage or retail,” says Gerard Sweeney, president and CEO of Brandywine Property Trust, which is based in Pennsylvania. Brandywine owns and manages suburban and urban office properties in Northern Virginia and the Richmond region. “You tend to see companies stick with their core competencies.”
Most still see growth potential in Virginia’s urban and suburban regions, despite flat rents and anemic absorption levels. However, lately, there’s more buying than building going on. First Potomac Realty Trust out of Bethesda, Md., recently bought a majority share in two Class A office buildings in Merrifield in Northern Virginia, with a total of 325,000 square feet. It also bought a pair of office buildings in Chesapeake last summer.
Meanwhile, Liberty Property Trust — a Malvern, Pa.-based REIT with a big suburban office portfolio in the Innsbrook area of Henrico County — sold it last May for nearly $100 million. It wanted to redeploy the capital from the sale into more industrial and flex space. Lingerfelt Development in Richmond bought the assets — 14 buildings totaling 919,000 square feet. “We’re seeing that REITs want to harvest capital and invest it in new projects,” says Brian F. Witthoefft, a company principal.
According to NAREIT, the country’s public REITS raised a record amount of capital over the past year — $51.3 billion in public equity and debt in 2011, more than the $49 billion raised in the previous record year of 2006. Much of their performance advantage comes from stock dividend payouts, since REITs are required to distribute nearly all of their taxable income to shareholders as dividends.
NAREIT President and CEO Steven Wechsler said in a recent statement that REITs are “well positioned” for 2012. “They are positioned to be strategic acquirers of properties from less-well-capitalized private real estate owners, as they have been over the past two years,” he said.
Nevertheless, there are negative market pressures in Northern Virginia and Hampton Roads, with potential spending cuts to defense and federal spending expected to impact these markets. Anthony Beck, the First Potomac Realty Trust vice president in charge of the company’s 3.8-million-square-foot portfolio in Hampton Roads, says the threat of losing federal tenants and private-sector contractors is keen. However, the recession already thinned out many of the weaker companies, he notes.
“Two years ago when things were very, very challenging, if [companies] didn’t make it through that period they were going out of business or downsizing significantly.” What’s left, says Beck, is mostly contractors too essential to military functions to be cut. “They’re still going to have to maintain and repair the ships … the chance of them losing a contract when they’ve designed the system is very unlikely.”
Still, First Potomac is not where it wants to be in either Hampton Roads or in the Richmond region, where it has about 1.75 million square feet of space. The company’s goal is 90 percent occupancy. For now the Hampton Roads properties are at 85 percent, while Richmond is at 87.5 percent. “Our focus … is keeping a focus on our core business,” says Beck.
Liberty Property Trust works in the same Richmond and Hampton Roads markets and is making some changes, leaning toward industrial parks and flex space. It tries to stand out from the rest of the market by developing energy-efficient “high-performance” buildings. It won a national “Leader in the Light” award from NAREIT in November for its efforts.
The company says it has invested $1.5 billion in sustainable development since 2002. Craig Cope, vice president for the Hampton Roads and Richmond locations, says there are tangible and intangible benefits. “When you look at it from an overall perspective, the buildings are cheaper to own and operate, and that ultimately benefits our tenants. If we get a savings, they get a savings,” he says.
Since 2008, Liberty says it has measured energy usage in a dozen buildings and cut overall energy costs by 23 percent. Plus, a sustainable building can be a nicer place to work. “Things like natural sunlight, more fresh air lead to happier, less sick tenants,” says Cope.
North Carolina-based Highwoods Properties is trying to create a different product in Virginia by transforming the Innsbrook Corporate Center from a suburban office park to an urban-style, mixed-use location. Paul Kreckman, a vice president at Highwoods’ Richmond office, says that kind of space isn’t available in the region, and tenants want it.
Highwoods owns about a third of the Innsbrook center. Right now, he says, companies have to choose between downtown Richmond or a suburban office. If Highwoods gains approval for a rezoning, now under review by Henrico County, Innsbrook will become much more urban with an additional 3.5 million square feet of office space in taller buildings, along with more retail, residential and 1,000 hotel rooms. The county permitting process could take all of 2012, says Kreckman, who hopes that construction can begin in 2013.
A few years ago things looked bleak in the Richmond region’s commercial real estate market, in large part because of huge vacancies created by the exits of major employers such as Circuit City and LandAmerica Financial Corp. Kreckman says the Innsbrook area’s vacancy rate was at its worst in 2010 when it reached 25 percent. By the third quarter of 2011, it had dropped to 19 percent, he says. Overall, the corporate center itself has a 9 percent vacancy rate, down from 16 percent at the start of 2010.
Sweeney of Brandywine says the company’s portfolio in the Richmond region — about 2.5 million square feet — has reliably stayed at around 90 percent occupancy. The firm bought two properties in Innsbrook last year, and is looking for more. “We continue to be very bullish on Richmond,” he says.
It wants to expand in Northern Virginia, too. In December it launched a joint venture with Allstate Insurance, with each company committing $75 million toward future acquisitions in the Washington region. “There’s no secret that market demand generally for office space continues to be somewhat anemic,” he says. Still, “We have a big investment in Virginia,” Sweeney says. “As the economy continues to improve, we’ll continue to expand our footprint.”