REITs must serve true client base: tenants

When the editors of National Real Estate Investor recently asked the managers of 85 real estate investment trusts (REITs) across the country how they were planning to grow their stock, there were three dominant answers: development (69%), acquisitions (65%), and secondary offerings (25%). While it would seem obvious that these activities all could have the desired result, few REITs have been performing well recently. Although there may be many reasons REIT stocks may be affected, there is one long-range problem that continues to plague their growth.

What is happening in the REIT market now suggests that there are many factors that affect REITs that are not market driven. One factor is obvious but seems to be of little concern to most managers of these stocks: The success of REITs must rely more and more on their ability to be attentive landlords and to provide customer service, than on their ability to acquire and develop and/or buy and sell properties.

Equis clients include Daimler/ Chrysler, United Healthcare, The Travelers, IBM, Xerox and a host of other Fortune 500 firms. Equis' discipline is corporate tenant advocacy. The company does not represent a landlord, does not own properties and deals with landlords throughout the world.

While the REIT phenomenon greatly affects my daily activity - negotiating with landlords while working closely with some of the world's largest corporate real estate executives, assessing their property inventories and correctly sizing their real estate needs - I am not a naysayer about these securities. In fact, I see the positive effects of REITs that practice progressive management. However, what I forecast is that unless REITs serve their tenants and focus more on their role as landlords, there will be less successful long-term REITs.

There are three REITs in particular that I have encountered that lead the way when it comes to this proactive thinking:

* Equity Office Properties holds focus groups with tenants to determine the best way to help them grow their businesses. They will work with tenants on amenities such as elevators and access, as well as telecommunication services.

* CarrAmerica has a Website that offers tips to its tenants and an on-line chat room. The site discusses ways to help tenants grow, such as parking, assessing space and learning about the duties of the on-site building manager. The Website also seeks tenant feedback and offers information.

* ProLogis has set up a tenant outreach system to help companies acquire immediate knowledge about distribution outlets for servicing deliveries. This service is especially important in the rapidly growing Internet e-commerce business. Instead of just taking orders for real estate, the companies create sites that will meet tenants' future warehousing and distribution needs as they expand in both size and location. These stocks will continue to grow and will be important to the industry.

And there are other difficulties in this acquire-and-grow focus. These REITs generally fall into patterns that cause them to be stagnant. For example, some REITs recently had problems acquiring financing. They had no way to generate new cash flow and could not buy more properties. The REITs that depended solely on acquisitions had no way to affect returns because acquisition borrowing had slowed.

Meanwhile, a smarter REIT, one that generates revenue by servicing the tenant with better telecommunication and amenities in their buildings, and listening to tenant needs, was growing. These REITs generate higher rents and better maintain their tenant base.

There are other REIT issues that are affecting the corporate real estate service industry:

* rents are being inflated by the desire to satisfy analysts' expectations and pay shareholders' dividends rather than by true market conditions;

* a lower number of landlords are family run businesses; and

* as a corporate entity, in fact a public company, the REIT has changed the complexion of lease negotiation.

In many cases there has been the loss of long-time relationships. Rebuilding these relationships has been necessary to regain the companies' business, especially in metropolitan areas.

These issues are coming at a time when the REIT industry is looking for ways to be more competitive. The National Association of Real Estate Trusts (NAREIT) is now lobbying for the REIT Modernization Act, recently introduced to Congress, that would extend the types of services and businesses from which REITs could operate and generate income. But before government controls come into play, these REITs should be more attentive to what they can do to implement services for their tenants.

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