Institutional Investors Beat REITs as Top Buyers of U.S. Office Properties

Institutional investors overtook publicly traded real estate investment trusts as the largest acquirers of U.S. office buildings in the first quarter, a sign of widening demand that may push property prices up.

Buyers including pension funds, insurance companies and sovereign-wealth funds added a net $1.39 billion to their office-building holdings in the first quarter, compared with $1.1 billion for REITs, according to data from CoStar Group Inc. (CSGP) Their shift to acquisitions signals that, after being net sellers last year, they are beginning to expand their holdings.

“Hopefully that means that they’re down to their core portfolio and they’re going to start adding to it,” Christopher Macke, senior real estate strategist at Washington-based CoStar, said in a telephone interview. “Assuming that the institutional folks continue their net buying and the REITs continue that as well, that should portend a positive direction for pricing in commercial real estate.”

Demand for commercial real estate is rising as the economy improves and yields remain low for fixed-income investment alternatives. Institutions were larger purchasers of office buildings than REITs were in three of four quarters last year, Macke said. They also were bigger sellers.

Investment-grade commercial property prices rose 2.2 percent in March from a year earlier, CoStar data show. Office sales more than doubled in the first quarter from a year earlier to $10.2 billion, according to Real Capital Analytics Inc., a New York-based real-estate data provider.

JPMorgan Chase

One of the largest deals so far this year included an institutional investor. The investment-management unit of JPMorgan Chase & Co. (JPM), along with developer Steve Samuels, bought Boston’s Landmark Center, an office and retail complex near Fenway Park, for $530.5 million.

“Investors right now have a strong interest in core real estate,” said Roy Rendino, chief executive officer of the Chicago-based National Council of Real Estate Investment Fiduciaries, a trade group for institutional investors.

Credit is more available to real estate investors as insurers and other financiers increase the amount of money devoted to mortgages. Commercial and apartment-building loan origination surged to $118.8 billion last year, up 44 percent from 2009, according to an April 25 report by the Washington- based Mortgage Bankers Association.

CMBS Comes Back

The revival of the commercial mortgage-backed securities market also is boosting credit availability. Sales of new commercial mortgage bonds are surging as investors seek higher yields with the Federal Reserve holding its benchmark interest rate at record lows. Wall Street firms have arranged $8.6 billion of bonds tied to property loans in 2011, compared with $11.5 billion during all of last year, according to data compiled by Bloomberg.

Issuance may climb to $45 billion this year, according to JPMorgan. It plummeted to $3.4 billion in 2009, during the financial crisis, from a record $234 billion in 2007, Bloomberg data show.

Purchases of office, retail and other real estate by REITs may slow this year as prices for some properties surge, Craig Guttenplan, senior REIT analyst at CreditSights Inc. in London, said in a telephone interview.

“A lot of them are going to be net sellers just because of where valuations are,” he said.

The proceeds from sales by REITs may be used for redeveloping properties or construction, Guttenplan said.

Debt, Stock Offerings

REITs raised $22 billion from debt and stock offerings in the first quarter, the highest total in data going back to 1988, according to the National Association of Real Estate Investment Trusts. About $7.7 billion of that total was raised by Health Care REIT Inc. (HCN) and HCP Inc. (HCP) and was related mainly to acquisitions.

REITs are facing increased competition for office properties, mainly in such major markets as New York and Washington, which is resulting in higher prices, Macke said.

Some pension funds are increasing their allocations to real estate as they search for higher yields and hedges against inflation, said Kenneth Rosen, chairman of Berkeley, California- based Rosen Real Estate Securities LLC.

“We think it’s a good time to do it,” he said.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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