Stock Slide Made This REIT Time

August 2, 2002
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GRAND RAPIDS — With the Dow Jones and S&P 500 Index tumbling and consumer confidence in the equity market approaching its lowest point in decades, investors seem to be turning to real estate.

And the local industrial market appears to be getting its share of attention.

According to Robert Bach, national director of market analysis for Grubb & Ellis, the investment market for core commercial properties was gaining momentum nationally. He said 12-month peaks in the volume of closings and new offerings were reached in May, and competition among buyers for prime offerings existed across most markets and property types.

“Generally, pricing has improved in the past six months but is still not quite as good as it was 12 to 18 months ago,” said Bach in a statement.

“The million-dollar question: Can the momentum in the capital markets be sustained when the leasing markets remain so weak and the economy may be stumbling again?”

Bach noted that private individuals and local investors were the biggest buyers last year with $8 billion in net acquisitions.

But through May, these investors bought only $2 billion worth of property — about half of the investment they made for the same period last year.

Bach added, however, that Real Estate Investment Trusts (REITs) have picked up the slack in the commercial acquisition market. Still, that effort may not be enough by itself.

“Year-to-date, net investment by REITs is approximately $2 billion greater than at this time last year. This net inflow of capital from the REITs may not be enough to compensate if the fresh capital that has been flowing from private local investors totally evaporates,” he said.

But local investment seems to be chugging right along, at least in the industrial market.

A.J. Veneklasen Inc. recently bought 49 acres at Walker and Three Mile Road from the Mary Tatroe Trust. The land was zoned agriculture, but was rezoned to office and industrial.

“Of that land, about 38 acres are useable, and there is going to be a mix of office and industrial uses out there,” said Chip Hurley, an industrial specialist with local realtor Grubb & Ellis/Paramount Properties, who represented the Tatroe Trust.

Quality Edge Inc., an aluminum roll-forming company, is putting up a 110,000-square-foot plant on the property and will be the development’s major tenant. (See related story.)

In addition to the Veneklasen deal, Paramount has sold four buildings this year for its client First Industrial Reality Trust. The Chicago-based company once had 25 industrial holdings and 2.8 million square feet in the local market, but decided to divest its interests here and in other medium-sized markets about two years ago.

Since January, Paramount sold First Industrial buildings on Kraft SE, 33rd Street SE and Walkent Court. The four total more than 300,000 square feet of industrial space.

“We sold them locally, in single or two-unit packages, because these are the sizes that are most applicable in West Michigan, and we obtained a good return for the seller,” said Duke Suwyn, Paramount president and CEO.

“If we were to market the buildings as one portfolio, it would be an $86 million sale,” said John Kuiper, an industrial specialist with Paramount, who also worked on the deal.

“Only an institutional investor would be interested, not local. So we broke them down into $1 to $5 million packages.”

Kuiper agreed with Bach that local investors were key to this year’s real estate market. In fact, he said individual buyers were a stronger force locally than they are in other parts of the country.

He added that Paramount keeps an eye on REITs, tracking these on a regular basis, but doesn’t pay as much attention to them as they do to individual investors.

Tom DeBoer, an office specialist at Paramount, told the Business Journal that local investors began turning to real estate last year when the equity market began fluttering.

“Back then we started getting calls from people who said they were darn sick of the stock market. They wanted something that, when they woke up in the morning, they didn’t have to check the computer to see where their investment was at,” said DeBoer.

As for stock purchases, DeBoer felt today’s equity buyer wasn’t looking for dividends like those in past decades did. Instead, he thought stock buyers were really hoping to become stock sellers, waiting for a price increase — even if there wasn’t reason for one — and a buyer to come along. 

In contrast, DeBoer said real estate is more tangible. He noted that the most conservative real estate investors buy land, while those willing to accept some risk for a potentially bigger payoff buy buildings. DeBoer said the key to buying buildings was to not only understand the value of real estate, but also the lease value that a structure has.

“These are two different things, as a lot of people have found out. There is a lot more substance than the risk that is involved,” he said. “But I think people are starting to come back around and look hard at real estate because the stocks have fallen off so far.”

Kuiper agreed and added that real estate offered more security.

“Maybe someone has spent $10,000 recently in a stock investment and it can literally just about go to zero,” he said. “One of the positive things about real estate is that the dirt is still there and the building is still there.

“It’s an investment. It can be a bad investment, but it’s not going to be a complete loss.”

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