Today, the story is different. U.S. investors have fallen in love with Internet stocks and their intangible assets, at the expense of real estate and its fundamental value. In Florida, economic factors are also at work: Job-creation appears to be slowing, and new construction has caught up to demand in many markets. Growth-management restrictions are limiting new projects in areas like Collier and Martin counties. "Florida is still a very attractive investment," says Ron Weaver, a senior partner in the Tampa law firm of Stearns Weaver Miller Weissler Alhadeff & Sitterson. "But the need for certain real estate products is slowing down."
As a result, REIT activity within Florida has slowed in the past year. Overall REIT investment in Florida -- including more than a dozen "home-grown" Florida-based trusts -- now totals $13 billion, but it's unclear how much larger that figure might grow, according to Weaver.
Industry observers expect pension funds, investment banks and other sources of capital to play a greater role than REITs in financing purchases and new development in the next few years. That would seem to be a natural development, since the estimated $136 billion in assets held by the nation's REITs is dwarfed by the $1.5 trillion owned by pension funds, which are by far the largest financial players. But REITs tend to be far more active buyers and sellers than pension funds, which traditionally have a long-term perspective.
"Right now REITs are capital-starved as a class," says Tom Crocker, chairman and chief executive, Crocker Realty Trust, Boca Raton. "It's almost impossible to raise fresh equity capital, and few companies want to borrow to buy assets. Plus, there just aren't that many deals out there priced at a level you can make money. In the near term, REITs will not be significant buyers of office space in Florida or elsewhere."
Florida activity
Although the pace of growth has slowed, REITs are still active players in Florida real estate.
Crocker Realty Trust, a privately held REIT with 6.5-million square feet of office space in seven states, purchased several office buildings in Boca Raton, West Palm Beach, Fort Lauderdale and Tampa in the past year. "We think these assets were underperformers," says Crocker. "We had an opportunity to roll rents up to market levels and improve occupancy rates."
Post Properties, an Atlanta-based REIT, is developing Parkside by Post, a new apartment complex in Orlando, and Harbor Place, a mixed-use development in Tampa with apartments, restaurants and a hotel. "Post invests for the long term," says Anthony Everett, vice president of Post Apartment Development in Tampa. "We hold our properties in our portfolio." But Post has scaled back its development plans, based on a lower rate of job-creation in the Orlando and Tampa job markets. "Construction starts aren't slowing as fast as job growth, and we're reaching a point where we could have a supply side problem. Therefore, we're being conservative on our development."
Highwoods is another REIT that is pulling back in Florida to focus on other markets. In June, the Raleigh, N.C.-based REIT sold all its south Florida properties to America's Capital Partners. The $323.2-million transaction involved 34 existing properties, 10 properties under development or redevelopment, and 49 acres of development land. Earlier in the year, Highwoods sold the landmark Comeau office property in West Palm Beach.
In Miami, A&B, a San Francisco REIT, purchased Airport Business Center, a 530,000-sq.-ft. complex west of Miami International Airport. "A&B used to have a large retail portfolio, which they're selling off in favor of office space," says Paul Ahmed, director of capital markets, Terranova Corp., Miami. "Like other REITs, A&B is going where they think the values will be greatest in the future."
On the other hand, Equity One, a Miami Beach REIT, recently purchased two shopping centers in Davie, totaling 410,000 square feet, following an acquisition earlier this year of a shopping center in Orlando.
Duke-Weeks Realty Corp., a $5.5-billion REIT with headquarters in Atlanta, became a one-third owner of The Codina Group, a high-profile Miami development firm. Duke-Weeks, whose holdings include 3.4-million square feet in south Florida, is planning new office and industrial developments. Another active REIT is Washington, D.C.-based CarrAmerica, which is developing a 62-acre corporate park in Boca Raton.
"For REITs, the highest-yielding deals are now in the development area," says James L. Fried, senior vice president, The Tri-Stone Cos., a Boca Raton real estate investment banking firm. "But I wouldn't sound the alarm for overdevelopment yet. Developers and their equity partners are still looking for bank financing. There is still a strong reluctance in the banking community to do speculative ventures."
For the future
As REITs look for new ways to boost returns to their shareholders, some trusts are using debt financing to leverage their capital. By borrowing from pension funds, investment bankers, corporations or wealthy individual investors, a REIT may be able to raise its return -- but also the risk.
Other REIT strategies include creating specialty portfolios in such areas as correctional institutions or entertainment properties, or teaming up with "brand name" real estate operators. Eventually, though, most REITs may simply have to settle for a less glamorous role in the marketplace, using property management techniques to deliver a consistent stream of income to their shareholders.
Many REITs today are delivering 8% to 9% dividends to investors, and their depressed share prices add to their attractiveness. "Some REITs are down 25% or more from their highs last year," says Crocker. "You can go out and buy office buildings for 75% of what they would trade for in the market, by buying shares in a REIT."
Although their explosive growth years may be over, REITs are expected to continue to attract investors, especially if technology stocks falter on Wall Street. Weaver expects that the role of REITs in financing real estate purchases will increase from about 10% of the market to about 15% in the next five years. "One of the advantages REITs have is that they can swap their stock for deeds to property," Weaver says. "On the other hand, other investment vehicles are competing more effectively with REITs, using some of the same techniques."
In the next decade, REITs won't even come close to matching the financial muscle of the nation's pension funds, say observers. "REITs come and go, but pension funds will last and last," says Morton P. Brown, a shareholder in the Miami law firm Fowler White.