Many pension fund managers are looking to place a significant portion of their capital into real estate assets in the southeast region of the US. The areas attracting the most attention are Atlanta and the major cities of central and southern Florida. Job and population growth are the main driving forces behind the investment activity in these locations. These drivers are making existing properties more attractive and creating demand for the development of new ones. All four real estate sectors – office, industrial, retail and residential – are attracting interest from the pension fund investment community.
Atlanta is a market that is projected to show slow but steady improvement over the next 12 months.
Dr Rajeev Dhawan, director of the economic forecasting centre at Georgia State University, expects this to happen in Atlanta over the next couple of years. He predicts that the city will gain more than 45,000 jobs next year and another 44,000 in 2007. This compares with 29,740 this year. He sees unemployment holding steady at 5% through to 2007. Values of existing residential properties, he believes, should improve. This is based on his predictions of housing and apartment permits falling slightly to 2007.
Atlanta has always been considered one of the big five major industrial markets in the country. It has the airport and road infrastructure in place that enables tenants to move products on a local, regional or national basis. American Realty Advisors is looking to expand its industrial operations in the market. The real estate manager currently own five buildings totalling 323,000ft2 and this should be significantly increased by the end of the year when the company completes a transaction near the airport.
American Realty will buy two existing warehouse/
distribution buildings totaling 212,000ft2. One of these buildings offers 100,000ft2 and is vacant. It will be occupied by one of the company’s existing tenants which is looking to expand. American Realty director Steve Grant said: “This was a tenant-driven deal. They told us they needed to expand and asked us to look for more space in the airport sub-market.”
The purchase price was $13.3m (e11.1m)in an all-cash deal. American Realty will acquire the property for one of its separate-account pension fund clients. There is a third property in this deal. It is a 72,000ft2 building which is under construction and should be completed by April 2006.
One of the bigger players in the Southeast is Pramerica Real Estate Investors. The pension fund manager estimates that it will deploy $500m-1bn in real estate in the region on an annual basis. Overseeing investments in the US southeast is Dale Taysom, managing director and head of the transactions group. He said the group was very active in Florida. Its main interest is in condominiums, in retail from Publix-anchored centres to lifestyle properties, and industrial.
He likes the employment and population growth in the so-called ‘Sunshine State’. He said: “Many of the top-10 growth markets are in Florida and the zero state income tax is another plus.
“And many people like to live near water where the weather is warm.” The company is active in buying existing properties and investing in new developments.
Many real estate managers agree that Florida could have some excellent investment opportunities in residential properties over the next 12-18 months. Many are predicting a fallout in the current condominium conversion craze. The end result would be that many units planned for condo conversion would come back to the buying community as apartments. This would mean that a large number of units would be available with some of them happening via foreclosures.
Prices on apartments would then be heading north, something that hasn’t occurred for the past few years. Cap rates could go up by as much as 50-100 basis points. Some of the players going after these units would include the likes of BlackRock Realty, Pramerica and Clarion Partners.
There are some direct pension fund deals taking place in Florida. One of the most recent transactions involved the Sacramento County Employees Retirement System. The pension fund paid $34.5m to purchase the 148,591ft2 Weston Corporate Center in Weston. This property is located about 11 miles west of Fort Lauderdale. The deal represents the pension fund’s first Florida office asset; it already owns a retail complex.
Jeff States, investment officer for Sacramento County, oversees the real estate programme for the fund. He said the fund had been looking for an asset in Florida for some time. “We needed an office building in Florida to round out our portfolio.” The cap rate on this deal was 7.98%. The yield is a little higher than many office deals happening in the marketplace. Mr States said the reasoning behind this was leverage. He said: “The amount of assumed financing for this transaction turned off some buyers for the asset.” There was a total of $21.435m of debt or around 60% of the deal. The 40% equity was supplied by the pension fund. The buyer made an exception to add this property to its portfolio as it normally doesn’t allow leverage to exceed 30% on a portfolio basis and 50% on an individual asset.
The pension fund had two IRRs calculated for this deal. The unleveraged IRR was 8.62% and the leveraged IRR was 9.9%. Both of these returns factor-in a 10-year holding period. The office building was 94% leased at the time of the purchase. Sacramento County acquired the property through its separate-account real estate manager, BlackRock Realty.
The pension fund has invested all of the capital it allocated to BlackRock. It does have another $75m to $80 million of equity it could invest with its other separate-account manager, Cornerstone Real Estate Advisers. Some of this could be placed in the south. The most likely scenario would to use the capital to acquire either office buildings or industrial assets.
The job and population growth numbers in Florida makes a big impact on investors generally. About half of the growth in population in the United States comes from three states, Florida, Texas and California. This has made an impression on David Linn, at real estate pension fund consultant The Townsend Group. He said: “We think that these figures make a good case for investing in Florida. That includes buying apartments, retail and offices in the Orlando area.”
Mr Linn also believes that the condo conversion market in Florida could lead to some interesting investment opportunities in the future. He said: “There could be a fallout in the condo market and some investors could find some good opportunities.”
Reports have been written indicating that 1,000 people a day are moving to Florida. This has got the attention of Ed Rotter who heads real estate acquisitions in the southeast for Clarion Partners. He said: “The job and population growth figures
in Florida are very strong and create a need
for new housing opportunities.” Clarion Partners aims to be one of the largest players in the
south. Over the next 18 months the company
plans to invest over $1.5bn in the region across residential, office, industrial and retail assets.
Clarion is doing some new housing development projects in Florida through its commingled fund, Clarion Development Ventures II. One of these is a ground-up condo development in Sarasota. The 1350 Main Street project is 100% sold. It consists of 134 units at a development cost of $58m. The fund is also building a ground-up apartment development in Merimar in a joint venture with Trammell Crow Residential. This is the 512-unit Alexan Miramar. Its total development cost is $78.6m. Another development is the 250-unit La Via project in Pembroke Pines. This will cost $48.7m.
Clarion Development Ventures II has a total equity of $200m. One of its bigger investors is the Alaska State Pension Investment Board with a stake of $50m. Clarion will be using up to 80% leverage on the fund to generate $1bn. Most of the deals will involve making equity investments of $10m-25m per project. Residential, industrial, retail and office projects are all being considered.
CB Richard Ellis Investors has been an active player in Florida and Atlanta. Much of its activity has involved office buildings in a joint venture with American Capital Partners. This venture started out with some transactions
in Miami and Fort Lauderdale. It has now expanded to other markets like Tampa, Orlando and Atlanta. The investment strategy is to acquire existing office buildings which it can improve through re-leasing or renovation. The venture is mainly capitalised by a public pension fund advised by CB Richard Ellis Investors.