Jones Lang LaSalle
Finding Commercial Value in Some New Zip Codes
By VIVIAN MARINO
OTHER big real estate investors may jostle over trophy buildings in torrid markets like New York or Los Angeles, but David Lichtenstein sets his sights on places like Pleasant Prairie, Wis.; Birch Run, Mich.; and Shawnee, Okla.
They're not exactly flashy ZIP codes, he knows, but Mr. Lichtenstein believes that there is money to be made in them just the same. His company, the Lightstone Group, based in Lakewood, N.J., has evolved into one of the country's largest private owners of real estate over the last 18 years, mainly by snapping up shopping centers, office buildings and apartments in the far reaches of America's suburbs and exurbs.
"The people there need to shop, too," Mr. Lichtenstein said. Besides, he added, explaining his investment strategy: "Do you want to go to a fishing hole where there's a lot of other people fishing, or do you want to be where you're the only guy with a hook in the water? We would concentrate on any place where the big boys aren't."
Real estate analysts are predicting, though, that more of the big institutional investors, like hedge funds and pension funds, which have already reaped sizable profits buying and selling skyscrapers and malls, will be casting their lines in Mr. Lichtenstein's direction this year. Fierce competition in the top-tier cities continues to drive up prices, the analysts noted, which means that initial yields, or the capitalization rates, are being pushed down significantly.
"There's more interest in the secondary or tertiary markets, in part, because the cap rates are a lot higher; it's definitely a spillover," said Robert White Jr., president of Real Capital Analytics, a research and consulting firm in New York. "Even the German investors, who are known for buying Class A properties in major cities, in the past year have bought in smaller cities."
Mr. Lichtenstein, whose company owns more than 170 properties in places that many people have never heard of, maintains that there can be value in the smaller cities and towns. "Pricing is often 50 percent less," he said. "A good office building in New York has a 4 percent cap rate, while that same building in other areas has an 8 percent cap." (A cap rate of 6 percent or more right now is generally considered good.)
There is also the potential to create more value in the less-crowded markets. Mr. Lichtenstein says his Lightstone Group doubled the operating income at the Brazos Mall in Lake Jackson, Tex., about 60 miles south of Houston, since buying it as part of a $48.2 million acquisition in late 2004. By making renovations, bringing in popular stores, a movie theater and a food court, Lightstone brought the occupancy rate up to nearly 96 percent from around 70 percent, he said. "There are no other malls within 50 miles," Mr. Lichtenstein said. "We listened to what the people there wanted."
Many smaller investors who have been priced out of the top 20 cities have also profited by buying property elsewhere. For the less intrepid, there are REIT's, or real estate investment trusts, which invest in portfolios of commercial property, and TIC's, or tenants-in-common programs, a nascent product that offers fractional ownership of properties.
One large REIT, ProLogis of Aurora, Colo., has most of its warehouses and distribution centers in cities like Austin, Tex.; Charlotte, N.C.; Orlando, Fla.; and Chattanooga, Tenn. (Mr. Lichtenstein recently started his own REIT, the Lightstone Value Plus Real Estate Investment Trust; it will not be listed on a stock exchange.)
Of course, some smaller markets have more success than others. Lightstone, for example, gave up on trying to turn around an outlet mall in Niagara Falls, N.Y., which lost much of its Canadian customer base after the terrorist attacks because of tightened border security. And even regions that are deemed up-and-coming by real estate analysts may not prove profitable for all property types. "You have to look at the so-called four food groups: retail, office, industrial and multifamily," said John J. Kriz, a managing director for real estate finance at Moody's Investors Service.
Indeed, that is what real estate brokerage firms like Colliers International helps its clients do. The firm predicted that commercial real estate as a whole would continue to flourish in 2006 and that the office and industrial sectors, in particular, would do well as businesses expand. But Ross Moore, the national director of research, warned, "The second-tier market and tertiary market will not see a whole lot of demand for office space; most demand will be in the Tier 1 market."
"Industrial is different," he added. "That should do well across the board, including the Midwest. With retail, you want to go where people are moving or where there is good tourism. Your best opportunities are really in the Sun Belt."
Many real estate analysts favor the same or similar secondary markets. Mr. Moore's list includes Austin; Fort Lauderdale, Fla.; Phoenix; Las Vegas; Orlando; and Seattle. Each, he says, has healthy economic and employment growth, and many, like Austin and Phoenix, have expanding populations. (His bottom three are Pittsburgh, Cleveland and Memphis, because they have "dreadful economic numbers," he said.)
Raymond G. Torto, principal and chief strategist at Torto Wheaton Research, a division of CB Richard Ellis of Los Angeles, also sees opportunities over the next two years in Orlando and Fort Lauderdale, and he adds the Florida cities of West Palm Beach, Jacksonville and Tampa to his favorites list. All have good economic and employment growth, he explained, and the potential for healthy price appreciation.
In addition, he likes Austin, Phoenix, Las Vegas, Fort Worth and Riverside, Calif. "Vegas has been a leader over the last two years, at 7 percent job growth, though it is slowing down a little bit," he said.
Mr. Torto says he believes that many smaller cities will also benefit from a shift in warehouse pipelines. As the ports and railyards of major cities become more crowded with imports, particularly from China, he said, demand for industrial space in the secondary markets will increase. That augurs well for places like Orlando; Cape Canaveral, Fla.; Norfolk, Va.; Allentown, Pa.; and Riverside, he said.
"On a price-per-square foot basis, you might find a similar rental that is 60 percent cheaper in Riverside than Los Angeles," he said.
And as warehouses are developed or expanded, demand for other properties, both commercial and residential, could also follow. "The expression goes, 'A rising tide raises all boats,' " Mr. Torto said. "Everything benefits in that area."
Finding Commercial Value in Some New Zip Codes
By VIVIAN MARINO
OTHER big real estate investors may jostle over trophy buildings in torrid markets like New York or Los Angeles, but David Lichtenstein sets his sights on places like Pleasant Prairie, Wis.; Birch Run, Mich.; and Shawnee, Okla.
They're not exactly flashy ZIP codes, he knows, but Mr. Lichtenstein believes that there is money to be made in them just the same. His company, the Lightstone Group, based in Lakewood, N.J., has evolved into one of the country's largest private owners of real estate over the last 18 years, mainly by snapping up shopping centers, office buildings and apartments in the far reaches of America's suburbs and exurbs.
"The people there need to shop, too," Mr. Lichtenstein said. Besides, he added, explaining his investment strategy: "Do you want to go to a fishing hole where there's a lot of other people fishing, or do you want to be where you're the only guy with a hook in the water? We would concentrate on any place where the big boys aren't."
Real estate analysts are predicting, though, that more of the big institutional investors, like hedge funds and pension funds, which have already reaped sizable profits buying and selling skyscrapers and malls, will be casting their lines in Mr. Lichtenstein's direction this year. Fierce competition in the top-tier cities continues to drive up prices, the analysts noted, which means that initial yields, or the capitalization rates, are being pushed down significantly.
"There's more interest in the secondary or tertiary markets, in part, because the cap rates are a lot higher; it's definitely a spillover," said Robert White Jr., president of Real Capital Analytics, a research and consulting firm in New York. "Even the German investors, who are known for buying Class A properties in major cities, in the past year have bought in smaller cities."
Mr. Lichtenstein, whose company owns more than 170 properties in places that many people have never heard of, maintains that there can be value in the smaller cities and towns. "Pricing is often 50 percent less," he said. "A good office building in New York has a 4 percent cap rate, while that same building in other areas has an 8 percent cap." (A cap rate of 6 percent or more right now is generally considered good.)
There is also the potential to create more value in the less-crowded markets. Mr. Lichtenstein says his Lightstone Group doubled the operating income at the Brazos Mall in Lake Jackson, Tex., about 60 miles south of Houston, since buying it as part of a $48.2 million acquisition in late 2004. By making renovations, bringing in popular stores, a movie theater and a food court, Lightstone brought the occupancy rate up to nearly 96 percent from around 70 percent, he said. "There are no other malls within 50 miles," Mr. Lichtenstein said. "We listened to what the people there wanted."
Many smaller investors who have been priced out of the top 20 cities have also profited by buying property elsewhere. For the less intrepid, there are REIT's, or real estate investment trusts, which invest in portfolios of commercial property, and TIC's, or tenants-in-common programs, a nascent product that offers fractional ownership of properties.
One large REIT, ProLogis of Aurora, Colo., has most of its warehouses and distribution centers in cities like Austin, Tex.; Charlotte, N.C.; Orlando, Fla.; and Chattanooga, Tenn. (Mr. Lichtenstein recently started his own REIT, the Lightstone Value Plus Real Estate Investment Trust; it will not be listed on a stock exchange.)
Of course, some smaller markets have more success than others. Lightstone, for example, gave up on trying to turn around an outlet mall in Niagara Falls, N.Y., which lost much of its Canadian customer base after the terrorist attacks because of tightened border security. And even regions that are deemed up-and-coming by real estate analysts may not prove profitable for all property types. "You have to look at the so-called four food groups: retail, office, industrial and multifamily," said John J. Kriz, a managing director for real estate finance at Moody's Investors Service.
Indeed, that is what real estate brokerage firms like Colliers International helps its clients do. The firm predicted that commercial real estate as a whole would continue to flourish in 2006 and that the office and industrial sectors, in particular, would do well as businesses expand. But Ross Moore, the national director of research, warned, "The second-tier market and tertiary market will not see a whole lot of demand for office space; most demand will be in the Tier 1 market."
"Industrial is different," he added. "That should do well across the board, including the Midwest. With retail, you want to go where people are moving or where there is good tourism. Your best opportunities are really in the Sun Belt."
Many real estate analysts favor the same or similar secondary markets. Mr. Moore's list includes Austin; Fort Lauderdale, Fla.; Phoenix; Las Vegas; Orlando; and Seattle. Each, he says, has healthy economic and employment growth, and many, like Austin and Phoenix, have expanding populations. (His bottom three are Pittsburgh, Cleveland and Memphis, because they have "dreadful economic numbers," he said.)
Raymond G. Torto, principal and chief strategist at Torto Wheaton Research, a division of CB Richard Ellis of Los Angeles, also sees opportunities over the next two years in Orlando and Fort Lauderdale, and he adds the Florida cities of West Palm Beach, Jacksonville and Tampa to his favorites list. All have good economic and employment growth, he explained, and the potential for healthy price appreciation.
In addition, he likes Austin, Phoenix, Las Vegas, Fort Worth and Riverside, Calif. "Vegas has been a leader over the last two years, at 7 percent job growth, though it is slowing down a little bit," he said.
Mr. Torto says he believes that many smaller cities will also benefit from a shift in warehouse pipelines. As the ports and railyards of major cities become more crowded with imports, particularly from China, he said, demand for industrial space in the secondary markets will increase. That augurs well for places like Orlando; Cape Canaveral, Fla.; Norfolk, Va.; Allentown, Pa.; and Riverside, he said.
"On a price-per-square foot basis, you might find a similar rental that is 60 percent cheaper in Riverside than Los Angeles," he said.
And as warehouses are developed or expanded, demand for other properties, both commercial and residential, could also follow. "The expression goes, 'A rising tide raises all boats,' " Mr. Torto said. "Everything benefits in that area."
posted by Jones Lang LaSalle NJ News Blog at 10:48 AM
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