"Asset sale pricing is being driven up by low-cost debt" and high expectations, "rather than underlying fundamentals" such as job creation or tenant demand, warns John W. Guinee, real estate analyst at Stifel & Co., in a report to clients after the yearly conclave of the National Association of Real Estate Investment Trusts.
Recovering prices have driven investors out of the market, despite the national economic slump -- leaving building owners and would-be investors to "laugh and cry," laughing at high prices, and crying about the lack of tenants.
The big exception is Manhattan, where leases in 34 "top buildings" are rising 10% a year, and vacancies are below 3% on premium floors (from the 25th floor to the roof).
But Washington-area "office leasing (is) very slow," and most other markets are paying "leasing musical chairs, with tenants upgrading into better space, often at a lower cost," while "job growth is very limited" and vacancies stay high.
The warehouse and factory recovery has also slowed. "Rental rate increases will remain elusive" for most landlords. But at least, with money so cheap, REITS have finally gotten debt levels under control.
Of the big Philly-based office landlords:
- Brandywine Realty Trust, newly invested in 1717 Arch (the ex-Bell Atlantic building, now called Three Logan in deference to tenant Comcast), and 25% of One and Two Commerce Square, "now owns or has an interest in over 50% of Class A buildings in the Philadelphia Central Busines District," which Stifel approves.
"However the suburban lease-up challenges are currently offsetting the positive investments." And Brandywine's suburban Washington (VA) market, like Philadelphia, is "soft, with little opportunity to increase rents," given the cuts in military contractors as the was in Iraq and Afghanistan grind down. Stifel cut its Buy rating to Hold last December.
- Liberty Property Trust, with its "very balanced strategy" of selling lesser properties and holding cash for "selective development" and acquisitions, is spending a lot on shareholder dividends, given its cash flow. The stock is still "attractively priced," but most of Liberty's investment is in "smaller, slower growth markets." Liberty is slowly selling offices and buying more warehouses and industrial properties, because that's where the little growth in the US is happening.