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Market share has high price for REITs

Market dominance is a major goal for developers, but what happens when that market goes flat? Recent research from Credit Suisse First Boston (CSFB) emphasizes the risk inherent in owning a concentration of centers in one market.

The CSFB Real Estate Supply/Demand Index ranks 54 U.S. markets according to their future supply/demand conditions. The index also lists retail REITs with property concentrations in the top-10 and bottom-10 markets. Positive and negative shifts in local market demand will have stronger impact on these companies, according to Credit Suisse researcher Lawrence Raiman. That's not a good sign for REITs with more than 5% of their total sq. ft. in one of the bottom-ranked markets, where anticipated supply could soon exceed demand and trigger rising vacancies.

Markets such as Las Vegas and Salt Lake City ranked low because they face new supply growth of 5%-7% of existing inventory. On the other hand, markets such as San Diego and Honolulu rank at the top due to new supply risk of just 0.5%-2.0% of current inventory. In turn, overbuilding risks in these markets are low.

Eight retail REITs are exposed to one of the index's top-10 markets, while nine companies have a significant property concentration in the bottom-10 markets. No REIT has more than one metro concentration in the top markets. Center Trust has exposure to top-ranked San Diego and bottom-ranked Sacramento. Taubman Centers has exposure to three of the bottom-tier markets: Hartford, Conn., Phoenix and Palm Beach County. “Offsetting some of this negative exposure for Taubman is its concentration in Detroit, the fourth-best ranked market,” Raiman says.

Because several large retail REITs including Kimco and Simon have national portfolios with no major exposure to individual markets, they do not appear in the study. “These companies do not get the necessary credit for maintaining diversified portfolios, which can thereby limit individual, nonsystematic risk in specific markets.”


Rank Demand growth in excess of supply growth Markets Selected REITs with exposure*
Source: Company data, SNL Securities 54 -4.24% Sacramento Center Trust
53 -3.68% Salt Lake City DDRC, JP Realty
52 -3.19% Houston
51 -3.01% Hartford Taubman
50 -2.99% Minneapolis
49 -2.66% Las Vegas
48 -2.55% Phoenix Center Trust, Taubman
47 -2.45% St. Louis
46 -2.38% New York
45 -2.36% Palm Beach County Taubman
54 markets avg. -1.03%
*Markets that represent 5% or more of a REIT's portfolio concentration (on a sq. ft. basis)
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