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REAL ESTATE PRICES TO KEEP CLIMBING, HEAVYWEIGHTS SAY

BY DONNA MITCHELL

Real estate prices show no signs of pulling back from their steady climb, and market participants will simply have to get used to that reality, said retail REIT executives last month during the NAREIT Investor Forum, in New York City.

Dismiss every thought that the real estate market is a bubble getting ready to burst, they said, because high-priced real estate is now the norm, not a spike that will reverse itself quickly, said Steven Roth, chairman and CEO of New York City-based Vornado Realty Trust. Roth told his audience that when a company can get a 10-year loan at interest rates hovering around 5 percent, there is still an opportunity to get double-digit returns.

“What is, is,” said Roth. “Our job is to understand the environment and play the game by the rules set by authorities greater than us.”

One of those playing the game is Michael Pralle, president and CEO of GE Commercial Real Estate Finance, which recently announced plans to get back into retail property investments. “In the real estate business, people who buy assets win,” said Pralle. “You have to choose your battles carefully, decide what you want to buy, and bid aggressively.”

But not if the property is not worth it, others said. Despite these ever-higher prices, Simon Property Group will not lower its yield expectations or underwriting standards for property acquisitions, CEO David E. Simon told the conferees. “If that means we sit on the sidelines and be patient, then that is what we’ll do,” said Simon. “We’ve got a lot of things to do.”

Earlier this year the firm unveiled its so-called asset-intensification strategy to add nonretail components to existing shopping centers. It will use a portion of the $500 million it just raised to fund redevelopment projects. The firm will develop more outlet malls, too, which currently deliver yields of about 14 percent, said Simon. In addition, the company is working on developing business overseas.

On the lending side, meanwhile, the REIT industry is enjoying a budding relationship with the capital markets, even if some investors along the capital supply line might not completely understand what they are buying, executives said.

The capital markets have granted REITs about $8 billion in financing so far this year, and all but two of the transactions took the form of unsecured debt, speakers said. “REIT paper is good paper,” said Thierry Perrein, director of global credit research at New York City-based Credit Suisse First Boston.

But the capital markets are more flexible and easier to use than the mortgage market, said Simon CFO Stephen E. Sterrett during a panel discussion. “One of the things we’ve been able to do is build credibility in the bond investor community,” he said. Simon recently obtained a $1 billion unsecured loan, assembling the lenders and getting the money all in one day, said Sterrett.

Quick access to capital is good for REITs, said Glenn J. Rufrano, CEO of New Plan Excel Realty Trust, New York City, but it is not all easy money. “There is a lot of risk being taken in this market,” said Rufrano, “and I’m willing to bet that the person taking it doesn’t have a clue what it is.”