Nontraded REITs Continue to Stockpile Cash

A firm established last year to look at nontraded REITs, Blue Vault Partners, LLC, has published its 2010 first quarter review, which RetailTraffic overviewed. Not surprisingly, nontraded REITs are expected to raise 17% more in 2010 than in 2009, or about $7 billion. Due to the quick and reasonable liquid access to real estate ownership with professional management, REITs have done very well this year. So well, in fact, an investor with who we are negotiating on a deal actually brought up that he could get over a 10% yield with a nontraded REIT.

But therein lies the problem - that's not sustainable. The fees and overhead costs of running multi-billion dollar REITs can be significant and these REITs don't tend to use a lot of leverage. As the report points out, the median yield is only about 6.5%, which makes sense in our experience. For deals we've seen this year, at least with the health care REITs, the yields being sought range anywhere from 7.5% to 10% or 11%. Once salaries, overhead, fees, etc. are tacked on, how many hundreds of basis points are eaten? The other issue with investing in a REIT is limited use of leverage. The REITs that are still raising money have effective leverage of only 30%, according to the report. The REITs closed for the year at least have a leverage ratio of nearly 60%, but only about a third of REITs are closed. Though the market got leverage-drunk and is learning many lessons, 30% is way to low to generate a +10% yield on most investments.

Cleveland Redevelopment Train Keeps Rolling On.. with Hotels

The face of E. 9th St. through the heart of Cleveland got another boast this week as the Schofield Building redevelopment project was awarded a $5m state historic tax credit. The redevelopment concept includes bringing a Kimpton Hotel to Cleveland, which would the first in Ohio, and adding a first floor restaurant and high-end apartments. The property has a very visible location at the corner of E. 9th and Euclid.

This is great news for the continuing makeover of the Euclid Corridor. We wonder, however, whether there are plans for too many hotels. As we blogged previously, Optima International may be looking at redeveloping the Huntington Building (which is on the other corner from the Schofield) as a hotel, at least in part, and the project on Cleveland's east bank in the Flats includes a hotel as well. Either way, one can't shake the good feel walking the streets of Euclid and 9th. There are good things happening - let's just hope it doesn't get "too good" like three years ago.

New National Hotel Coming to Akron

Akron continues to show positive signs of growth and improvement. The latest is a new national hotel flag being added to downtown - Courtyard Marriott. Testa Companies, a well-known developer in northeast Ohio based near Akron, is developing in partnership with New Castle Hotels & Resorts, a hotel operator, the $16 million project, as Crain's Cleveland reported.  Testa has done some very cool things, including developing the lofts that house The VegiTerranean, a trendy vegan restaurant owned by Chrissie Hynde, of the Pretenders, who also has a loft there.

Updated 6/24:

The Akron Beacon Journal has additional information (and the added renderings). The plan is a 10-story, 120 room hotel next to the lofts we mentioned above. The average room rate will be $120, which seems right for a Marriott in Akron. Besides getting a good flag into downtown Akron, the city will benefit from such cool looking development, as the renderings show.

Optima closes on The Huntington Building in Cleveland

Optima International out of Miami Beach Florida recently closed on the The Huntington Building in Cleveland, a 22-story office building consisting of roughly 1.3 million square feet.  The story broke in late March by the Plain Dealer that Optima was considering the acquisition.  Word on the street is that they paid $18m, or $13.85/SF.  This is going to be very interesting to watch considering that over 600,000 SF of tenants will be vacating the building over the next few years and Costar reports a current total vacancy of 335,000 SF.  In addition, since purchasing One Cleveland Center two years ago, Optima has yet to make a new market office deal in that building. As probably an understatement, the Cleveland commercial real estate community is very interested to see what Optima has in store. There is apparently no redevelopment plan in place. Very interesting indeed.

Moody's Saying Prices Up, But Not By Much

Moody's just issued an investor report saying commercial real estate prices are up for the first time since January this year. The increase of 1.7% isn't much, and we view it as statistically irrelevant. The more important factor is that prices are not falling anymore. We do not believe there will be any real increases in cap rates in the foreseeable future. If anything, pricing should continue to improve as the wave of capital continues to roll. That capital is picky, and if fund managers/REITs/investors want to make any money, they are going to have to put that capital to use and start buying out of their strict guidelines. It will be slow, but we are starting to see signs of this.

First Place Never Felt So Lame

I just finished reading an article published in Business Week wherein Seattle has the largest drop in rental prices in the country, with the average monthly rent falling 13.8% during 2009. BusinessWeek's report undoubtedly raises some questions. Number one being if rents are still decreasing, what do you do?

For those thinking they might want to sell in the next 2-3 years, sooner than later will be to your advantage. Selling today would allow you to avoid potential future decreases and capitalize on a low capital gain tax rate likely to increase in the near future. The combined differential of rents and taxes could easily be 10-15% of the value of the building.

For those wanting to ride the wave, buying now will be in your best interest since interest rates will likely rise faster than rents which means that the down payment required will increase beyond what is needed today, for example.

Either way, markets have fluctuated throughout history and this just happens to be Seattle’s low moment. But for every loss there is a win, and the winners know how to take advantage of it while they can.

So what does it take to win? You’ll have to call me.

Give Back: Veterans Golf 2010 Invitational

The 2010 Veterans Golf Invitational will be happening at the West Seattle Golf Course on August 10th of this year. It is a tournament to benefit the American Lake Veterans Golf Course, which accommodates the special needs of disabled players. We donated to this cause to support those veterans who have given for our country; if you would like to support it too, contact Dow Lucurell of Uptown Espresso: uptownesp@aol.com

American Lake Veterans Golf Course:
www.veteransgolf.org

Cleveland's Health Corridor Gets a Boost

Ohio is recognizing Cleveland's Health-Tech Corridor as a "hub" deserving of grant money and special preferred status, which should be a huge boost to the Euclid Corridor, the $250 million renovation between University Circle and downtown Cleveland. There are a number of well-capitalized developers who have an interest in seeing the corridor succeed. So strong is the faith in the corridor's success, one developer is building a  +100,000 sf spec building, probably the first of its kind in a number of years in Cleveland.

According to the Plain Dealer, being a hub "brings with it a $250,000 matching grant and priority status for millions of dollars in grants and loans that the Ohio Department of Development and other state agencies dole out yearly." The corridor is already pretty successful, an obvious reason why the state would want to focus additional resources there. Per the Plain Dealer, the has more than 75 biomedical companies, 45 technology companies and seven business incubators.