REIT-land's recent M&A is game of bigger = better NREI readers knew it a year ago. On page 92 of our September 1996 issue, I interviewed Sam Zell at the Building Owners and Managers Association (BOMA) meeting in Boston. Here's part of what he said in that exclusive one-on-one interview:

"When EOP (Equity Office Properties) goes public, it's going to put enormous pressure on Beacon, on Carr and Cali and all of these guys because we're so much bigger. The point is, if they're at 6 million sq. ft. and we're at 32 million sq. ft., we're going to go to 45 million and they're going to 8 million. Now let's talk about economies of scale. Let's talk about G&A. Let's talk about public company costs. Let's talk about financing costs. The idea that EQR can go into the public markets and do spot secondaries, and sell unsecured paper. All of these things are available to us because we're so big and we have such economy of scale. So little by little, the consolidation issue becomes irrelevant," said Zell.

Well, not exactly, right? Now that Equity Office is acquiring Beacon Properties in a deal valued at some $4 billion to create the largest REIT in the world, Zell is once again sitting on top of the real estate heap.

And while venerable publications such as The Wall Street Journal have focused on why Zell is paying such a premium in the deal, they need only have read Sam's words from our very pages last September.

It remains to be seen if Zell's hypothesis holds true, especially since office values are so intrinsically linked to the attractive prospect of increasing rollover rents in the present up-market. Will the first signs of any pending downturn negatively impact the mammoth Equity portfolio? It isn't likely, since the properties are truly "trophy" in nature.

Despite the gleeful and for some, traumatic, news, both Equity Office and Beacon kept up their torrid acquisition and development pace. In deals immediately following the merger announcement, Equity Office acquired 10 and 30 South Wacker Drive in Chicago for $462 million. And Beacon announced plans to develop a three-building, 585,000 sq. ft. office development in the Burbank area of Los Angeles, and it acquired 20 North Wacker and 200 West Adams in Chicago's Loop.

So, what's a few more million square feet in the portfolio, right? Throw another building on the barbie ...

In other major REIT-news last month, the long-rumored marriage of Starwood Lodging Trust/Corp. and the Westin Hotels & Resorts chain finally happened, for around $1.6 billion. The deal is expected to close in January 1998.

Maybe this means Starwood's chief Barry Sternlicht doesn't have to answer any more nosy reporters' questions about when he's going to launch his own brand.

Days after the announcement, Starwood was awarded a $1.2 billion unsecured line of credit by a Bankers Trust-led group.

All of this activity has many a market-watcher in nail-biting mode. Consider what our recent roundtable panelists in both Dallas and San Francisco, two quite different and divergent markets, had to say about the REIT influence in their markets (see Dallas in our special pullout section, and our San Francisco review).

The fact is, real estate people in these markets are worried that REITs will begin to overheat the development cycle in their drive to gain market share and pump up earnings volume for the rating agency/analyst communities.

Maybe Zell will be right after all. Now Equity Office can afford to grow slower than its smaller brethren without the pressure of growing its size for size's sake. That's a different strategy that you can bet many a REIT is now considering in a big way. And as long as the investment banks continue to extend huge lines of credit, investors buy the stock and the rating agencies like what they see, the pace of M&A in REIT-land may have only just begun.

Greystone survey reflects aggressive lending trends For the first time this decade, lenders are moving heavily toward construction loans, according to an informal survey of 12 top national commercial banks by Stamford, Conn.-based Greystone Realty Corp. While as recently as three years ago only half of the banks were lending for development, today 80% of them are lending for construction. The survey found that these lenders will leverage, on average, 85% of the development cost of a project, or 75% of the overall stabilized value of the property. Of th e commercial banks surveyed, over 90% said they would make the construction loan with no permanent takeout in place, though 80% would make the loan themselves.

"The commercial lenders are finding they've got to compete with the Wall Street lenders, who are aggressively lending at better rates, and with higher loan-to-value ratios to bring new mortgage product into the securitization pipeline," says Charles Lauckhardt, chief investment office at Greystone. "Development lending is clearly part of their strategy." Lauckhardt notes that the Wall Street firms have become very aggressive in their lending, generally lending 5% more of the construction costs than many commercial banks. However, Wall Street lenders won't make the construction loans unless they get the permanent takeout for the securitization, unlike commercial banks.

The lenders surveyed report that they're mostly interested in the development of suburban office product, shopping centers and garden-style apartments. Only one-third of the lenders surveyed would even look at CBD office buildings. "There has been terrific competition between lenders to make new loans on stabilized commercial real estate, but development lending has not taken off until recently," says Donald Conover, chairman of Greystone. The survey reflects that there is a real need for certain product types in specific markets and that Greystone will continue to invest in them.

EYKL notes Asian buying spree in the United States Investments in U. S. real estate by Asian sources over the last four years have totaled $6.3 billion in actual sales value, and Hong Kong leads the pack with an aggregate influx of $2.91 billion. So finds a study released at the MIPIM-Asia conference by Los Angeles-based E&Y Kenneth Leventhal Real Estate Group (EYKL).

"Asian investment in U.S. properties should continue its strong pace due to the safe haven attraction of U. S. real estate, its relative bargain price compared to world property markets, and the healthy U.S economy," says Jack Rodman, national director of EYKL's International/Asian practice. The EYKL study, which tracked large property deals, reveals that investments from Singapore have also soared in the last two years to $1.42 billion since 1995.

Other top investors are Taiwan ($521 million), Indonesia and Brunei ($261 million each), and China and Korea ($235 million each). The top state for Asian investments is California, with $1.4 billion or 22% of the total of Asian real estate investment during the last four years. Other popular states include New York ($1.3 billion), Illinois ($677 million), Texas ($602 million), Florida ($416 million) and Hawaii ($287 million). The top property type is hotels, which attracted $2.7 billion in investment capital or 43% of the entire Asian buying spree.

Hong Kong still unsettled, Kennedy-Wilson reports Two months after its takeover by China, the Hong Kong real estate market remains largely unsettled with office rents rising, slow sales activity and residential prices leveling off, according to New York-based Kennedy-Wilson International (Nasdaq:KWIC).

"There's several new developments in the works, which will significantly increase office supply in the coming years. That is very important since Hong Kong is attracting a growing number of new businesses and hopes to become the central hub of commerce for all of China in the coming years," says Richard Mandel, president of Kennedy-Wilson's Commercial Group. "Office rents have increased between 5% and 10%, which reflects a high degree of optimism with respect to future businesses in Hong Kong."

Kennedy-Wilson's Hong Kong subsidiary, Kennedy Goldman, analyzed the market trends and real estate activity 60 days after the takeover and recognized the upturn in the office sector. While office rents are rising, office sales, a popular transaction in Asia, have leveled off with few purchases taking place during the last two months. Despite the slowdown, Kennedy Goldman recently sold 4,829 sq. ft. of space in the Bank of America Tower to Shanghai, China-based Orient National Group for nearly $2,000 per sq. ft. or US$96.58 million.

In related news, Cushman & Wakefield's Hong Kong-based joint venture in Asia, Marlin Land, is changing its name to Cushman & Wakefield, Asia as part of an expansion that begins with the opening of offices in Beijing, Singapore and Shanghai by the end of the year. By year-end 1998, C&W, Asia, plans more than 10 offices in major Asian markets.

CalPERS calls for ITT shareholder vote The California Public Employees' Retirement System (CalPERS), Sacramento, has filed an "amicus curiae" (friend-of-the-court) brief in a Nevada federal court to prohibit ITT's spin-off into three public corporations until a vote by its shareholders is complete.

CalPERS, which owns 750,000 shares of ITT, believes ITT's board is compelling shareholders to trust its judgement regarding economic merits of the competing offers, but CalPERS questions this judgement.

"ITT's plan to spin-off, in the face of a competing offer by Hilton, is fundamentally unfair to its shareholders," says Charles P. Valdes, chairman of CalPERS' Investment Committee. "Regardless of the merits of the proposed competing offers, this proxy contest is loaded with corporate governance issues that should be decided by shareholders. It is inappropriate for ITT to dramatically alter its business and corporate structure, transfer the vast majority of its assets and profits, and reconfigure the corporate governance of the company without a vote from the owners of ITT, the shareholders."

CalPERS' amicus curiae brief follows on the heels of Hilton's thwarted takeover attempt of ITT. On Aug. 6, 1997, Hilton continued the pursuit when it increased its tender offer to $70 per share and filed a challenge to ITT's spin-off plan, asking that ITT be required to put the tri-vestiture to a shareholder vote.

Downtowns respond to supply & demand, CIREI says The nation's downtowns are no longer lagging economically and have made a change for the better. A review of investment sales by CCIM/Landauer shows nearly three out of 10 deals are taking place in core urban settings. And more impressive, these deals are representing 55% of the overall investment volume. Only a year ago, investors were combing the nation for top office buildings, high-cube warehouses and limited-service hotels. Not only has all that changed, but major markets have noted a surge in investment activity. It is the CBD office product that's leading the most recently transacted deals. Major transactions, several in the $100 million-plus range, are in Los Angeles, Boston, New York, Chicago, Dallas, Phoenix and San Francisco. "It wasn't so long ago that these downtowns were being given up for dead in the enthusiasm for edge cities, and all the hocus-pocus about telecommuting," says Dewey Struble, CCIM, president of Chicago-based Commercial Investment Real Estate Institute (CIREI).

>From a real estate investment perspective, it's a matter of such fundamentals as timing and pricing. "Basic supply and demand trends have been pushing toward equilibrium in the office sector for quite a few years, and investors can now see the point at which substantial increments in rent are within reach," says Struble. "When markets shift from a pricing structure based upon merely operating expenses, to a rental level reflecting the cost of new development, rents can surge at many times the rate of general inflation."

Commercial property is a residual product of the economy, where values rising and falling are in the economic scheme of things. Struble notes that big cities across the nation were hammered in the late 1990s with a recession. "Of the top-20 MSAs in the country, only Atlanta and Minneapolis escaped that contraction without significant job loss," says Struble. "But the recovery since then has stimulated employment in all our large urban areas. Real estate investors are now clearly ready to jump on the bandwagon."

Vornado, Edelstein team up on NYC job for YMCA Just to show that the strength of the New York City condominium market is back, Vornado Realty Trust and David Edelstein are erecting a 41-story, 210,000 sq. ft. condominium tower above the former McBurney School building at the West Side YMCA at 7 West 63rd Street. The YMCA of Greater New York contracted for the development, which will provide some $18.3 million in improvements to the West Side facility, already the largest YMCA in the country, with five new floors of program space for its enhanced youth, teen and senior programs, and rooms for meetings of neighborhood, community and other non-profit groups. The main YMCA building at 5 West 63rd Street will also benefit from improvements to its infrastructure.

Project architect Beyer Blinder Belle has designed a tower to complement the original Romanesque structure at 5 West 63rd Street. CK Architects is also part of the development team.

It took more than 10 years to see the West Side project to fruition. The process began in 1986 and, by last year, the necessary approvals were in place. In fact, this project mirrors a 1980s project for the Vanderbilt YMCA branch on East 47th Street.

Construction is scheduled to begin in early 1998 with completion set for about 18 months thereafter. Vornado is publicly traded REIT based in Saddle Brook, N.J. David Edelstein has developed other major condominium towers in New York, including 279 Central Park West, the Rockefeller University housing complex on 81st Street, and the 40-story Channel Club on East 86th Street.

Related Capital's new funds New York-based Related Capital Co. (RCC) has introduced two new publicly traded funds consolidating Summit Tax Exempt Bond Fund L.P. with two other limited partnerships, Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III, which share investment objectives and portfolio characteristics. The consolidated entities will be available this month and will be traded actively on the American Stock Exchange. The entities are organized as the new publicly traded Charter Municipal Mortgage Acceptance Co. called Charter Mac (AMEX:CHC) -- an open-ended, infinite-life entity formed to originate, acquire and hold for investment and tax-exempt bonds. The proceeds will finance and refinance the development and ownership of multifamily housing on a national basis.

Charter Mac initially holds investment in 33 tax-exempt bonds presently owned by the partnerships with a net value of $308.8 million. This fund is unleveraged multifamily product with the principal in the deal being Related Capital. "Charter Mac is one of the nation's largest multifamily tax-exempt bond funds," says Stuart Boesky, a senior managing director at RCC and Charter Mac's COO. "The consolidation provides investors with a liquid investment in a company which has access to inexpensive capital with which to grow."

RCC's timing in the financial marketplace has been a factor that helps the firm reach investors rapidly. "The one thing this company has always been able to do is to move fast and get to the niches and deal with the inefficiencies in the marketplace," says Alan Hirmes, a managing director at RCC and Charter Mac's CFO. "Whether it's a financial or real estate marketplace, that's been our strength -- to be where people aren't and deal in the places where there are higher margins."

Also available this month is another partnership fund called Aegis. This publicly traded REIT is a long-term fund targeting multifamily mortgages and shopping centers, mainly single-anchor centers, using acquisition and reposition strategies. The net value at inception is $121 million, and RCC's plans are to leverage the fund up within three years and render nearly $300 million to its investors. Aegis has 19 assets including unleveraged multifamily product, FHA-insured multifamily mortgages and shopping centers.

Collectively, RCC measures both funds at having 38,000 current private investors, for these funds are not institutional and give the investors quick due diligence that developers require in today's marketplace.

No sooner was Zell's Equity Office proclaimed the largest owner of office space in the land, than Toronto-based TrizecHahn announced its Sept. 29 purchase of the office portfolio of Washington, D.C.-based The JBG Companies for more than $500 million. The transaction adds some 4 million sq. ft. to TrizecHahn's portfolio, (for a total of 59 million sq. ft.) plus another 2 million sq. ft. of additional office development potential, a property management company with third-party contracts covering over 3 million sq. ft. and a new joint venture with The JBG Companies to provide development services.

Trying to benefit from the robust U.S. economy, strong real estate market and available capital, London-based MEPC plc announced Sept. 23 that it will sell its holdings in the United States and Australia to concentrate on operations within the United Kingdom. In fiscal 1996, the two subsidiaries accounted for 30% of MEPC plc's net assets and 48% of its earnings.

Dallas-based MEPC American Properties, the U.S. subsidiary, currently owns and manages a $1 billion, 13 million sq. ft. portfolio of regional shopping centers, office buildings and industrial developments across the United States.

Goldman Sachs has been retained to advise the company regarding inquiries from prospective buyers.

A day later, in a pooling transaction valued at $9 billion, Travelers Group and Salomon Inc. announced that they have agreed to combine Salomon with Travelers' Smith Barney Holdings Inc. subsidiary to form Salomon Smith Barney Holdings Inc. The deal is expected to be completed by year-end 1997.

Serving as co-chief executive officers of the merged firm will be James Dimon, currently chairman and CEO of Smith Barney, and Deryck C. Maughan, currently Salomon Brothers' chairman and CEO.

According to Dimon, based on 1996 experience, proforma the combined firm would have ranked No. 3 in equity underwriting, No. 2 in U.S. debt underwriting and No. 1 in municipal finance.

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