The voracious appetite of investors for more commercial real estate has certainly dominated headlines in recent years. But that strong demand and favorable pricing is also accelerating disposition strategies among some owners.
If sales activity is any indication, than there are certainly more owners liquidating commercial real estate assets. During 2014, property sales rose 17 percent to $423 billion, according to data from Real Capital Analytics (RCA), a New York City-based research firm. “We are starting to see more portfolios and pooled transactions from our clients across all property sectors, but in particular office and multifamily,” says Matthew D. Lawton, executive managing director in the Chicago office of HFF, a commercial real estate capital intermediary. Year-to-date transactions through February across all property types are up roughly 55 percent year-over-year, adds Lawton.
“A combination of demand and limited additional supply on the market, coupled with the low interest rate environment that we are in, has really created a good environment to be a seller of real estate right now,” says Nick Anthony, chief investment officer at diversified REIT Duke Realty Corp. That has certainly been the case for Duke. The REIT sold about $1.5 billion in assets in 2013 and 2014, and the company expects to sell another $1.6 billion this year.
Since 2009, Duke has been working to reposition its portfolio to be more focused on industrial assets. Industrial real estate is less capital intensive and it generates a good income stream, which fits the REIT model very well, says Anthony.
The vast majority of dispositions for the REIT in the last few years have focused on its suburban office properties. For example, Duke is currently under agreement to sell a $1.1 billion office portfolio consisting of 52 properties and 6.9 million sq. ft. of space to Starwood. The deal will close in the second quarter. The portfolio includes Duke’s remaining office properties in four specific markets—South Florida, Raleigh, N.C., St. Louis and Nashville, Tenn.
It is no coincidence that Duke’s dispositions have spiked along with returning investor appetite for suburban office properties. Although it varies by product type and location, the REIT is seeing good pricing from a very robust pool of bidders. For example, Duke had a portfolio of suburban office properties on the market in St. Louis last year that drew 13 bidders. “It was a very strong bidding pool, and the top six bids were all within a couple percentage points of each other,” notes Anthony.
The pool of active sellers in the market runs the gamut from publicly-traded REITs and institutions to private equity funds, non-traded REITs and value-add investors. These sellers are motivated by an equally wide variety of strategies. Some are cashing in on rising values to generate gains, some are looking to raise capital to pay down debt or fund new investments, while others, like Duke, are taking advantage of strong demand and pricing to re-shape portfolios.
Sales range from owners culling one or two properties from portfolios to larger mega-portfolio transactions. For example, Clarion Partners purchased the Gables Residential portfolio in the first quarter for more than $3 billion. Another major deal currently under contract is Blackstone’s purchase of an apartment portfolio from the Praedium Group, which is expected to sell for $1.7 billion.
“There are a half dozen other large portfolios currently pricing in the market as we speak,” says Lawton. Sellers have an added incentive to sell off bigger packages of properties as portfolio transactions tend to generate 5 to 7 percent pricing premiums, he adds.
“I think you are seeing a little more of an acceleration of selling as we progress through the cycle, because people aren’t sure how long we are going to be in this favorable environment,” says Anthony. For Duke, its dispositions will likely peak this year, largely because the company has already disposed of the bulk of its suburban office assets. In 2009, about 55 percent of Duke’s portfolio consisted of suburban office properties. By the end of 2015, suburban office will likely represent less than 10 percent of its total portfolio, notes Anthony.
The company is redeploying a big chunk of the capital from dispositions back into its development pipeline. The REIT has about a $500 million in development projects that involve mainly bulk industrial properties, as well as some medical office space. Duke is also using the capital to de-lever its balance sheet. “We will always be looking to recycle product to improve the overall quality of our portfolio. But we will not be doing it at the level of the last three years.”