The rise of REITs boosts commercial real estate

October 30, 1994|By Kevin L. McQuaid | Kevin L. McQuaid,Sun Staff Writer

Abraham Rosenthal remembers a time not long ago when he could name virtually all of the nation's real estate investment trusts off the top of his head.

"Now, I can barely keep track of the ones in our business, much less all the others," said the chief executive officer of Prime Retail Inc., a Baltimore-based REIT that specializes in the ownership and development of outlet center malls. "It's mind boggling."

Indeed, over the past four years, more than 250 publicly-traded REITs have altered the nation's commercial real estate landscape: They have tapped into capital markets to retire excessive debt amassed in the 1980s, and fueled an ever-growing acquisitions machine. Last year, for instance, 141 offerings generated record proceeds of $18.3 billion and pushed the industry's market capitalization above $42 billion, according to statistics compiled by the National Association of Real Estate Investment Trusts (NAREIT), a Washington, D.C.-based trade group.

The proliferation of REITs and the shift toward public ownership of real estate has affected Baltimore and the rest of the state as well.

Over the past 14 months, four locally based privately held concerns have converted to equity REITs -- Town & Country Trust, Mid-Atlantic Realty Trust, Prime Retail and Storage USA Inc.

In addition, more than two dozen companies have acquired significant holdings or folded properties here into converting trusts.

REITs active in the Baltimore metropolitan area control no fewer than 40 major apartment complexes, six regional malls, 35 community retail centers and 25 office and industrial properties totaling more than 17 million square feet, according to a survey of company annual reports. At that figure, REITs collectively own more space than exists in all of downtown's 140 office buildings.

In all, 45 equity REITs own more than $1.4 billion worth of property in Maryland, with an emphasis on retail and apartments, according to NAREIT figures.

"Our market has been discovered as a stable area, and as a result, more and more REITs are looking at it," said Harvey Schulweis, president of Town & Country, which became the area's first equity REIT when it went public in August 1993 through a $341 million initial offering.

Moreover, many analysts contend that REITs will soon come to dominate ownership of local commercial and multifamily real estate.

"What REITs do is provide a platform for access to capital," said Robert A. Frank, an Alex. Brown managing director and one of the nation's foremost REIT authorities. "And the major factor of production in the real estate business is capital. Like most industries, the ones that have the lowest cost of capital are the most successful."

Furthermore, Mr. Frank said, "REITs create a platform for real estate to be run as a business, because it provides for better, more disciplined management."

Since January 1985, Alex. Brown has been the primary underwriter on 72 REIT offerings that raised $4.8 billion, second only to Merrill Lynch, the nation's largest investment house.

For developers, trusts represent a vehicle to generate working capital and retire debt at a time when traditional sources such as banks and insurers have disappeared from the lending arena. It was access to capital that prompted Prime Retail to go public last March.

"We're developing between $100 million and $150 million worth of new centers annually," Mr. Rosenthal said. "For that kind of sustained growth, we needed a predictable and sustained source of funds that we could only get through public capital markets."

Liberty Property Trust, the Philadelphia-based successor corporation to Rouse & Associates Inc. and owner of 19 office and industrial buildings in Maryland, used its initial public offering to pay off more than $461 million in outstanding mortgages.

REITs also provide a mechanism to avoid corporate income tax, contingent on the distribution of 95 percent of their taxable income to shareholders through dividends.

Conversely, REITs offer shareholders a relatively liquid form of real estate ownership through securities, generating average yields between 7 and 10 percent. Trusts also offer diversification, a key to institutional investors and pension funds which are increasingly devoting funds to REITs.

"For those who want to diversify their portfolios and want to buy real estate, there is nowhere else where one can get a liquid investment with expert management in place," said F. Patrick Hughes, chief executive of Mid-Atlantic Realty Trust, a Linthicum-based REIT which concentrates on community shopping centers.

By the year 2000, Mr. Frank expects REITs to evolve into a $200 billion industry, a figure equal to roughly 10 percent of all the commercial real estate in the United States.

That anticipated growth is likely to increase interest by REITs in Maryland. Although the majority of REIT-owned property here is in the hands of the locally based companies, out-of-state firms are increasingly considering Maryland when searching for property.

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