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Commercial real estate shows continuing strength Print E-mail
Monday, 04 September 2006
Occupancy at Reckson's complexes recently hovered around 94 percent as major corporations signed leases at renewal rents up to 12.5 percent higher than older leases.
Chief Executive Officer Scott Rechler recently boasted of record leasing activity at Reckson Associates Realty Corp., a major office landlord in Westchester County and the New York metropolitan region.  Investors have taken notice of the favorable trends at Reckson's 20-million-square-foot portfolio that features about 100 office and industrial properties. The company's stock is up 33 percent during the past year.

There also have been high-profile acquisitions, including the recently announced $4 billion sale of Reckson to SL Green Realty Corp., the largest owner of New York City office buildings.

"More and more landlords have pricing power in markets across the country, so they can actually push rents up," said Robert Promisel of Rye Brook, a principal at Adelante Capital Management, an investment management company in New York that specializes in real estate stocks. "In markets like New York, space is quite tight. The fundamentals are likely to stay strong for the foreseeable future."

An index of commercial leasing activity compiled by the National Association of Realtors has risen in 11 of the last 12 quarters. That suggests that the strength in the commercial real estate market could continue into 2007, according to David Lereah, chief economist for the association.

REITs have been a rare bright spot in a stock market that has had a lackluster year so far. The S&P 500 is up only 5 percent this year as investors worried about a slowing economy, rising interest rates and higher energy prices. Many REITs have seen gains four times as much.

Many of Carruthers' clients invest 5 percent to 15 percent of their portfolios in REITs through index funds. Carruthers said his recommendations include the Vanguard REIT Index Fund, which has averaged gains of 20.2 percent a year for the past five years.
A Web site ( outlines the basics of investing in REITs, including a history of the asset class, their diversification advantages and above-average dividends. Investors can also use the site to look for financial information about REITs, including ticker symbols, returns, dividend yields and market caps. In addition, there are lists of REIT mutual funds, audio conference calls by analysts and news articles. Because of their rich dividends, REITs are popular with retirees and investors who want steady income. By law, REITs must return at least 90 percent of their taxable profits to shareholders through dividends.

Though many analysts said REITs still have good fundamentals, some are concerned that there are greater risks because of the torrid pace in recent years. In addition, if the economy went into a major tailspin, commercial real estate could suffer.

"There obviously has been a lot of speculative money go into real estate in general," Carruthers said. "It obviously has had a very good five-year run. Will it continue? Nobody knows. ... But the speculative money could make it a little more volatile than it has been in the past."

Investors looking for examples of how a hot sector can turn cold quickly can look no further than home building stocks. As residential markets cooled in many regions this year, inventories of unsold homes rose. Confidence of builders recently dropped to a 15-year low. Investors in home building stocks have suffered, too. Shares of Toll Brothers Inc., which specializes in the luxury market, are down 45 percent during the past year.

In the long run, analysts said Toll and other builders could benefit from the retirement of the Baby Boomers. But in the short run, the investment climate could remain tough for Toll and others.


Edwina Baniqued

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