Investors Seek Refuge Under Some Big Roofs

While Wall Street seems to keep sinking to new lows, the real estate investment business is riding high.

Individuals as well as huge institutions in search of stability are pouring billions of dollars into commercial properties and real estate securities, even though property markets have weakened and investment returns are declining. Heated bidding has jacked up the value of high-quality real estate ranging from New York skyscrapers to Marina del Rey apartment houses.

Many real estate investment professionals are benefiting from their industry’s newfound respect and prominence.

“In the past, I had to make the phone calls” to investors, said Robert M. Campbell, who heads an Orange County real estate investment firm, CT Realty. “This time they are calling me. It’s made my life and job much easier.”

Today’s high level of interest in commercial real estate contrasts sharply with that of a few years ago, when the industry’s solid returns were ignored by many investors who were dazzled by the profit generated by dot-com stocks and venture capital deals.

These days, real estate executives say, many of those same investors seek refuge in such mundane investments as self-storage facilities and community shopping centers.

“They [investors] are running for security,” said Hessam Nadji, head of research at real estate services firm Marcus & Millichap.

Evidence that investors are shifting money out of stocks to buy office buildings and shopping centers is hard to come by, but property sales statistics and anecdotal evidence suggest that more investors are turning to commercial real estate for safety and stable re- turns.

In the first half of 2002, nationwide sales of commercial real estate, buoyed by the $5-billion-plus sale of the Rodamco mall portfolio, exceeded last year’s levels and totaled $38.2 billion, said Real Capital Analytics Inc., a New York-based research firm that tracks sales above $5 million.

On Wall Street, about $2.7 billion has flowed into real estate mutual stock funds this year, even as investors have been dumping other equities, Merrill Lynch & Co. said.

In cities across the country, investors continue to bid up the value of commercial properties, particularly apartments, industrial and distribution facilities, shopping centers and office buildings in prime locations.

In downtown Boston, for example, a 41-story office building sold for $190 million in May 2001. The tower, upgraded and fully leased, fetched $267 million when sold again this spring, the industry newsletter Real Estate Alert reported.

In Silicon Valley, the value of first-quarter apartments sales tracked by investment firm Hendricks & Partners rose nearly 30% on a per-unit basis from the same period last year despite the deep slump in the area’s technology industry.

Investors also have been busy across Southern California. During the first half of the year, commercial real estate sales in Los Angeles and Orange counties as well as the Inland Empire soared nearly 50% above last year’s level to $5.05 billion, said Robert M. White Jr., president of Real Capital Analytics.

“There has definitely been a spike in activity in almost all property types,” White said.

Many real estate fund managers who are flush with cash complain about the lack of properties for sale or unrealistically high asking prices. But when a favorably located and leased property comes on the market, it often becomes the object of a bruising bidding war.

This month, SSR Realty, which acquires properties on behalf of institutional investors, had to outspend a dozen rivals to buy the 583-unit Marina Pointe apartments in Marina del Rey for $117 million.

“Buying is very difficult and very competitive for the best properties,” said Thomas P. Lyden, chief executive of New York-based SSR Realty.

Lyden and his peers acknowledge that the higher prices being paid for commercial real estate have been driving down returns. In many markets, including Los Angeles, vacancies have been on the rise and lease rates have declined, raising the risks to owners.

Nevertheless, many investors seem unfazed and are willing to settle for annual returns of less than 10%, rather than risk more losses and turmoil in the stock market, real estate observers say.

Recently, real estate investment firm ScanlanKemperBard Cos., which in the past often generated annual returns in excess of 20% on its properties, sought to raise $7 million to buy a Portland, Ore.-area shopping center that would initially generate a return of about 8%--the lowest ever for the firm.

But that did not keep investors away, and ScanlanKemperBard could easily have raised twice the amount needed, said Todd Gooding, a principal in the firm.

“Given what’s going on in other alternative investment markets,” Gooding said, “real estate is still a pretty strong bet.”