Sept. 7 (Bloomberg)—Moscow has the second-highest rents for prime office space in Europe after it overtook Paris and Zurich in the second quarter, according to a study by Jones Lang LaSalle.

The annual cost of renting commercial premises at locations such as the Red Square area jumped 60 percent in the 12 months to June 30 to about $1,200 a square meter ($112 a square foot), the study released late yesterday showed. London is the only European city with a higher rate, the property consultant said.

Demand for the best premises in the Russian capital, Europe’s largest city by population, is surging as companies hire more staff. Moscow has about a fifth of the office space of Paris, in part because there was no commercial property market prior to the Soviet collapse in 1991.

There is a huge undersupply of office space on the market,'' said Olga Baturina, a senior research analyst at Jones Lang LaSalle in Moscow.Developers became aware of the high demand too late.’’

Moscow has 12 million square meters of office space, compared with about 29.2 million in London and 48.8 million in Paris, according to Jones Lang LaSalle. The lack of space and high prices has forced some companies to move into converted factories and institutions. Moscow’s population is about 10.5 million.

Prime real estate prices will extend their increase this year and next before stabilizing in 2008 and 2009, when many office projects are due to be completed, Baturina said. ``Prices are unlikely to go down.’’

President’s Office

The most costly commercial real estate is around Red Square and the Kremlin, where President Vladimir Putin works. Some transactions have reached an annual $1,500 a square meter in the area, according to Jones Lang LaSalle.

Rents for London’s most prestigious office space amounted to about $1,710 a year, the survey showed. The rate refers to the most paid for premises of at least 1,000 square meters. Paris is third at $933, followed by Zurich at $819, Geneva at $771 and Dublin at $715. Amsterdam was 15th on the list with $415.

Moscow passed Tokyo to become the world’s most expensive city this year after accommodation costs surged, a survey by Mercer Human Resource Consulting showed in June.

Russia’s richest men, including Vladimir Yevtushenkov and Vladimir Potanin, the nation’s 8th and 9th wealthiest individuals, are seeking to exploit rising prices and demand for office space.

Potanin’s Fund

Open Investments, which is controlled by Potanin’s Interros Co., plans to raise about $850 million this month in a share sale partly for commercial real estate projects. Competitor Sistema- Hals, which is controlled by Yevtushenkov, may seek to raise around $1 billion for real estate projects in a November share sale.

``Office prices will rise further, but as a reflection of inflation and the strong ruble,’’ Open Investments Chief Executive Officer Sergei Bachin said today in a telephone interview. Open Investments may purchase a plot of land in the center of Moscow to develop a building, Bachin said.

The Russian ruble has climbed 7.7 percent against the dollar this year. Russian inflation may top 9 percent in 2006.

Moscow will gain about 1.5 million square meters of office space when Moscow City, the capital’s biggest commercial real estate project that will include Europe’s tallest building, is completed in 2011, Baturina said.

To contact the reporters on this story: Todd Prince in Moscow at tprince2@bloomberg.net ; Bradley Cook in Moscow at bcook7@bloomberg.net .

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The development firm controlled by Robert L. Johnson has signed a deal to buy 100 hotels for $1.7 billion, a significant expansion of the real estate holdings of the founder of the Black Entertainment Television network.
Johnson’s RLJ Development LLC said Monday that it will purchase the properties, most of them operating under Hilton and Marriott brand names, from the hotel company White Lodging Services, based in Merrillville, Ind. The hotels are in 12 states including Illinois, Texas, Colorado, Florida and Indiana.

One of the holding companies Johnson formed after he sold BET to Viacom Inc. in 2001 for $3 billion, RLJ Development currently holds 30 properties. The company will acquire 87 of the White Lodging properties in the second quarter of 2006. The other 13 are under construction, and closing is expected within two years. White Lodging will continue to manage the hotels.

“We are thrilled to add these hotel properties to the RLJ Development portfolio,” Johnson said.

RLJ Development invests in upscale urban hotels, most of them under Hilton and Marriott brand names. In December, it closed its first private equity fund, the RLJ Urban Lodging Fund, that held a purchasing power of $900 million from investments by public and private pension funds, along with other investors.

Johnson, who formed BET in 1979 and owns the NBA’s Charlotte Bobcats, is also on the board of directors of Hilton Hotels Corp.

White Lodging, founded in 1985 by billionaire Dean White of Crown Point, Ind., had said in October it was seeking to sell the hotels in order to generate cash and concentrate on hotel management.

White Lodging does not expect any layoffs and plans to use proceeds from the sale to expand into other markets, said Judy Bronowski, the company’s vice president of strategic planning and communications.

“We’re muscle-building our organization and adding resources,” she said. “It’s part of our strategy to generate the liquidity so we can continue growing.”

The boom in commercial real estate has stirred interest in some unconventional plays. Two of them are untraded real estate investment trusts and tenant-in-common deals. Together last year they scooped up around $14 billion worth of assets. The pitches are enticing: Untraded REITs promise stable valuation, while TIC sponsors offer a tax shelter for capital gains. But is either right for you? Fees are high, and it’s easier to get in than out. Here’s a look at both:

Private REITs’ Dividend DrawUntraded REITs are a lot like the real estate investment trusts that trade on the stock market. Both pool cash to buy commercial properties, pay out at least 90% of their income in dividends, and register with the Securities & Exchange Commission.

Their differences, though, are striking. The price of a share of an untraded REIT —also called a private REIT, non-traded REIT, public unlisted REIT, and non-publicly traded REIT —is set by the sponsor, and it doesn’t fluctuate. An unlisted REIT that sells for $10 a share in February will be worth $10 a share a year from now. Unlisted REITs last for a set time period, typically 10 to 12 years. Investors then cash out through an initial public offering, a merger, or a liquidation. Dividends are now in the 6% to 7% range, vs. an average 4.7% for public REITs.

Although investor buying has slowed recently, sales of unlisted REITs have gone up elevenfold since the stock market peaked in 2000. And of course, real estate has surged in that period. “The lack of market volatility appeals to older investors,” says Robert Lee, a certified financial planner in Fairfax, Va. “They like to see their principal stable and get a 6% to 7% dividend.”

Critics charge that the stable principal and steady income have a steep price. Sponsors such as Wells Real Estate Funds, W.P. Carey (WPC), the Inland Group of Real Estate Cos., and CNL Financial Group levy lots of fees. Typically, only 84 cents to 90 cents of every $1 gets invested. The fees go to the sponsor and to the broker-dealers and personal financial planners selling the REITs. [Commissions are in the 8% to 9% range. In contrast, you can buy public REITs for as little as a $10.99 commission at an online broker.] Says Christopher Meyer, director of the Milstein Center for Real Estate at Columbia Business School: “It’s hard to imagine these are a good deal relative to paying for a public REIT with very little transaction costs.”

Another drawback is the illiquidity. While getting in for as little as $1,000 is easy, getting out is tough. Redemptions are typically limited to no more than 3% a year of the entire fund. Sponsors can suspend redemptions at any time. In general, the shorter the holding period the higher the surrender charge. For instance, in the Wells REIT 11 offering of 2003, an investor can redeem a limited number of shares after a year of ownership at $9.10 for every $10 invested. Three years later, the formula changes to 95% of the estimated value of shares.

Untraded REITs are successors to the real estate limited partnerships that were popular as tax shelters during the real estate boom of the 1970s and early 1980s. These limited partnerships collapsed in disrepute in the late 1980s and early ‘90s, thanks to a combination of changing tax laws and a real estate downturn. A major complaint among investors in those partnerships was their inability to get out once losses started mounting. Phillip Cook, a CFP in Torrance, Calif., sold limited partnerships 20 years ago, an experience he recalls with deep regret. One reason he avoids unlisted REITs “like the plague” is their lack of liquidity.

EXIT STRATEGY

What about overall returns? They’re no more certain than those on a publicly traded stock. For one thing, dividend yields are attractive, but they’re not guaranteed. More than 117,000 investors, for instance, eventually pooled their cash in the Wells REIT created in 1998. But its dividend was cut to 7% from 7.75% in September, 2003. The overall return of a private REIT depends on the success of the exit strategy, such as an IPO. So far, the track record is good. For instance, W.P. Carey has taken 11 of its funds public, providing investors with an average annual total return of 12%. Inland took Inland Real Estate (IRC) public in June, 2004, at 10 a share. The fund started in 1994, but most shareholders invested in 1998. They earned an average dividend yield of 9% a year from 1998 through the IPO. Now the shares trade at $15.40, with a 6.2% dividend. Still, a concern in many quarters of the commercial real estate market is that unlisted REIT companies currently are paying top dollar for properties, and those high prices cut into gains when it’s time to return money to shareholders.

Diversifying into commercial real estate is a smart strategy for many investors. But a better alternative to untraded REITs exists: public ones. Over the past five years [ended Dec. 31], they had an average annual total return of 19.1%, vs. 2.7% for the Standard & Poor’s 500-stock index. Of course, there’s no assurance that the sector will remain hot, but if the public market tanks, so will the private. At least with public REITs, investors can cash out with a click of the mouse.

By Christopher Farrell

A Capital-Gains GambitYou’re in a panic. You sold some commercial property for a few million bucks, and you’re facing a big capital-gains tax bill. You can avoid the bite—or defer it, to be exact—if you roll over the money into another property. But the law requires you to pick out the replacement asset within 45 days and close on it within 180 days. The clock is ticking.

In this time crunch, a solution for many investors may be a form of ownership derived from English common law called a tenancy in common, or TIC. A TIC allows up to 35 investors to jointly own real estate such as an office building, shopping center, or apartment complex. Unlike a real estate investment trust or a limited partnership, a TIC is structured so that participants are direct owners of real estate, allowing them to qualify for a tax-free “like-kind” exchange under Internal Revenue Service section 1031. If you stick with like-kind properties until your death, your heirs will avoid much if not all of the capital-gains tax.

TICs let investors get a piece of expensive, high-quality properties with creditworthy tenants that would otherwise be out of their reach. Most properties that are TIC-ified cost $30 million or more. Last year Santa Ana [Calif.]-based Triple Net Properties, the biggest TIC sponsor, bought a 30-story office building in downtown Chicago for $174 million. TICs have grown from almost nothing since a 2002 statement by the IRS clarified their status. Last year TIC sponsors sold $7.3 billion worth of properties to investors, according to Omni Brokerage of Salt Lake City.

Look out, though. Property prices can be high because some buyers, in their rush to beat the IRS deadline and preserve their capital gains, don’t shop around. And TIC sponsors, eager to acquire properties to resell, can spend too much for assets. “There are certainly some TIC sponsors out there who are very good and very responsible, but there’s also some massive amounts of overpaying,” says Brian Ward, chief executive of Orion Residential, a multifamily housing buyer in Seattle, who says he has been outbid by TIC sponsors on several deals.

The risk, of course, is that the building eventually will be sold for less than the mortgage, wiping out your equity. Some established players are concerned: “The number of sponsors who have popped up because they have dollar signs in their eyes, but they don’t have a lot of experience…that scares me,” says Patricia DelRosso, president of Inland Real Estate Exchange in Oakbrook, Ill., and president-elect of the Tenant-in-Common Assn., a trade organization.

PREMIUM PRICE

Fees aren’t cheap. In a typical deal, sponsors charge a property-acquisition fee of 2% to 6% of the equity they put into the deal. Sales commissions are 5% to 8% of equity collected, and there can be a 2% to 3% fee for organization and marketing expenses, not to mention the ordinary annual property management fees, which run from 2% to 6% of net rental income.

The governance of these investment vehicles is clumsy. Decisions on such matters as selecting major tenants require unanimous votes. The only solution to an impasse is for one side to buy out the other. And it can be hard to find a qualified buyer if you need to sell your interest.

Most TICs are open only to “accredited” investors, which generally means those who have $1 million or more in net wealth or annual income of $200,000 or more for the past two years. Investors who aren’t doing a 1031 exchange should think doubly hard about whether a TIC is right for them, because they’re paying a premium for a 1031-qualifying property but won’t be able to use the tax break.

The best advice is to plan so you’re not rushed into a TIC to beat the IRS deadline. A TIC can be a good choice. Just be sure you know what makes it tick.

By Peter Coy

Copyright © 2006 The McGraw-Hill Companies Inc. All rights reserved.

NEW YORK - The year 2005 was generally a good one for both sides of the Manhattan office market.

Vacancy rates declined, and that was good for building owners. And rents increased, but at a restrained pace, so those looking to lease space were generally not under intense price pressure.

In short, many real estate executives say, neither tenants nor landlords currently have the upper hand.

“We are at the sweet spot now, with a balanced marketplace,” said Paul Glickman, an executive vice president of Cushman & Wakefield, a brokerage and services company. “Equilibrium state is usually defined as a vacancy rate between 7 and 9 percent, and that is where we are.”

According to statistics supplied by C.B. Richard Ellis, another brokerage and services company, at year-end the vacancy rate was 9 percent for Midtown and 8.6 percent for Midtown South.

But a sharply higher vacancy rate of 14.1 percent in the downtown market, defined as the area south of Canal Street, helped to raise the year-end average for all of Manhattan to 10.1 percent.

Still, that was noticeably better than in 2004, when the average vacancy rate was 12.6 percent.

Real estate executives said the improvement in the leasing market was driven by an improving economy in the city and growth in the number of office jobs.

Since companies that expect to be hiring people often lease space in advance, the real estate effect is often felt before the actual job creation.

The impact of hurricanes is affecting many local commercial real estate markets, but job creation and increased trade are shaping the overall market, according to the National Association of Realtors Commercial Real Estate Spotlight.

David Lereah, NAR’s chief economist, said it takes time for commercial real estate to respond to changes in the overall economy. “There is a well-known lag effect in commercial real estate, with a strong rise in jobs over the last two years currently bearing fruit in terms of higher demand for commercial space, especially in the office sector,” he said. “In addition, increases in trade are benefiting industrial properties such as warehouse and distribution facilities.”

NAR President Thomas M. Stevens from Vienna, Va., explained other factors at play in commercial real estate sectors. “People displaced by hurricanes are having a large impact on the apartment market across many areas of the South,” said Stevens, senior vice president of NRT Inc. “Consumer spending is sustaining retail real estate, but that sector is seeing relatively modest growth and conditions vary widely.”

Condo conversion accounted for a big increase in multifamily transactions this year. “The overall flow of capital into commercial real estate is at an unprecedented level, with multifamily transactions accounting for about a third of the total,” he said.

Through the first nine months of 2005, a record of $188 billion in investment-grade real estate traded hands, not counting transactions valued at less than $5 million. “These figures demonstrate the value of commercial real estate as part of a diversified investment strategy,” Stevens said.

The NAR forecast for four major commercial sectors includes analysis of third-quarter data in 57 metro areas tracked. The sectors include the office, industrial, retail, and multifamily markets, plus some additional information for the hospitality sector. The metro data were provided by Torto Wheaton Research and Real Capital Analytics.

In the office sector there is sustained improvement, driven by approximately 580,000 new office jobs created over the last two years. Vacancy rates are projected to drop to 13 percent in the fourth quarter and to 11 percent by the end of 2006, compared with 15.4 percent in 2004. Office rents are seen to rise 4 percent for 2005 and another 5.5 percent in 2006; they were essentially flat in 2004 with a 0.4 percent gain.

Areas with the lowest office vacancies currently include Ventura County, Calif.; Orange County, Calif.; West Palm Beach, Fla.; New York City; and Fort Lauderdale, Fla., all with vacancy rates of 8.1 percent or less.

Net absorption of office space in the 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is expected to be 84.4 million square feet in 2005 and 78.3 million in 2006. This compares with 77.7 million square feet absorbed in 2004 and only 20 million in 2003.

The Washington area led the nation in total office space absorption in 2005, followed by New York, Phoenix, Los Angeles and Dallas.

The industrial sector also is experiencing a decline in vacancy rates – forecast at 9.5 percent in the fourth quarter and 8.4 percent a year from now. In 2004, industrial vacancies stood at 10.9 percent. Industrial rents are likely to grow 2.1 percent for 2005 and 3.4 percent in 2006, following a decline of 0.6 percent in 2004.

Trade patterns continue to benefit industrial property, but congestion in Southern California is diverting some traffic from China through the Panama Canal in order to reach Eastern markets. The areas with the lowest industrial vacancies are West Palm Beach, Fla.; Los Angeles; Riverside, Calif.; Long Island, N.Y.; and Las Vegas; all with vacancy rates of 6.1 percent or less.

Net absorption of industrial space in the 57 markets tracked should be 251.3 million square feet in 2005, and 216.1 million in 2006, up strongly from 176.5 million square feet absorbed in 2004 and a very modest 16.5 million in 2003.

In the retail sector, the vacancy rate is expected to ease to 7.2 percent in the fourth quarter and 6.9 percent a year from now, down from 7.5 percent in 2004. Rent growth is seen at 3.8 percent in 2005 and 3.6 percent in 2006, up from 3.3 percent in 2004.

Retail markets expected to have the lowest vacancies – forecast through 2007 – include Las Vegas; Oakland, Calif.; San Jose, Calif.; Ventura County, Calif.; and San Francisco. Net absorption of retail space in the 57 markets tracked is projected to be 56.2 million square feet in 2005 and 31.6 million in 2006, compared with 27.1 million in 2004.

The apartment rental market – multifamily housing – should see vacancy rates at 5.3 percent in the fourth quarter and 4.8 percent by the end of 2006, down from 6.2 percent in 2004. Average rent is likely to rise 2.8 percent in 2005 and 5.6 percent in 2006, up from a 1.5 percent increase in 2004.

Areas with the lowest apartment vacancies are Fort Lauderdale, West Palm Beach, Miami, Orlando and Los Angeles, all with vacancy rates of 2.7 percent or less. Houston- and Atlanta-area vacancies plummeted due to demand by hurricane evacuees, and will lead the nation in absorption of units during 2005.

Multifamily net absorption is forecast at 316,000 units in 57 metro areas tracked in 2005, and 264,000 in 2006, compared with 264,300 absorbed in 2004 and a modest 159,400 units 2003.

After Houston and Atlanta, the strongest multifamily absorption this year is expected in Chicago, Dallas and Boston.

Purchases of multifamily property rose 90 percent in 2005 – much of the rise is attributable to conversion of apartments into condos, with 150,000 units converted in the first 10 months of 2005. Converters dominate investment activity in every region except the Southwest, where private local buyers are most active, but conversion is expected to subside in 2006.

A fifth commercial sector, hospitality, is experiencing temporarily inflated occupancy levels that result from demand by hurricane evacuees. Hotels and motels in cities near impacted regions are seeing the greatest demand, but Houston, Dallas-Fort Worth, Atlanta, San Antonio and Memphis also are experiencing higher occupancies as a result.

Hospitality markets projected to have tightening room availability in 2006 include Los Angeles; New York; Phoenix; Portland, Ore.; and San Diego.

The Commercial Real Estate Spotlight is published by the NAR Research Division for the Realtor Commercial Alliance.

Real estate investment trust Commercial Net Lease Realty Inc. agreed to buy 74 convenience stores from SSP Partners for $170 million.

The properties are mainly in Texas and operate under the Circle K brand.

As part of the agreement, Susser will lease back the properties from Orlando-headquartered Commercial Net Lease Realty (NYSE: NNN) for a 20-year initial term under triple-net leases.

Commercial Net Lease Realty plans to hold some of the properties as inventory and then sell them, says CEO Craig Macnab.

The companies expect to complete the purchase before Jan. 21, 2006.

Commercial Net Lease Realty invests mainly in high-quality, retail properties subject generally to long-term, net leases with established tenants such as Barnes & Noble, Best Buy, CVS, OfficeMax and the United States of America.

As of Sept. 30, 2005, the company owned 464 investment properties in 41 states with a gross leasable area of about 9 million square feet. The properties are leased to 172 corporations in 60 industry classifications.

SSP Partners is a subsidiary of Corpus Christi, Texas-headquartered Susser Holdings LLC, which operates more than 300 retail convenience stores in Texas and Oklahoma and distributes motor fuel to more than 340 branded dealer units and 25 unattended units through its wholesale fuel division.

The number of high-paying office jobs in the city skyrocketed in 2005, driving businesses to lease additional space to accommodate workers and tightening the commercial real estate market.

According to a third-quarter market report by Colliers ABR, private sector employment jumped by 46,800 jobs through the first nine months of this year, more than double the number of jobs gained in all of 2004.

The extra jobs pushed the Manhattan vacancy rate down to 9.9%, the first time it has dropped below 10% in more than four years. Sublease space has also shrunk to 11.1 million square feet, the lowest level in over three years. Asking rents rose to $41.92 a square foot in September, up from $38.86 a year ago.

The trend is likely to continue, the report said.

“Beyond the end of 2005, look for the local New York City economy to expand at a modest but steady pace,” said Robert Sammons, the head of research at Colliers ABR and the author of the report. He expects the gross metro-area product to increase by 2.5% to 3% in 2006 and employment to increase by 1% to 1.5%.

“Barring any national catastrophes, the area’s outlook-including commercial real estate-should continue to perform well over the next year,” he said.

A COLLECTION of leading hotels are about to be put on the market again, as Blackstone, the private-equity firm, prepares to sell most of its current European hotel assets, worth between E320m ($375m, £214m) and E350m.

The group, which had owned London’s Savoy, Claridges and the Connaught, is understood to be close to selling its Marriott hotels in Munich and London’s Grosvenor Square, as well as its Nikko hotel in Düsseldorf, Germany, acquired in 2003.

Wealthy families and individuals, as well as large institutions, such as insurance companies and pension funds, are thought to be possible buyers.

Blackstone has renovated these hotels by investing 25% of the original purchase price in some cases. The hotels are now believed to be financially attractive for a sale. Profit on some of the hotels has increased by 60% in three years. Last year, Blackstone sold the Savoy in London to the Irish property developer, Derek Quinlan.

Blackstone, which sees itself as a hotel owner and operator, has over the past 13 years owned more than 1,000 hotels globally, 720 of which have been managed and operated by the company itself, with a total acquisition cost of more than $16bn. It has owned 190 hotels with 15,000 guest rooms over the same period in Europe.

With recent funds added to its firepower, the private-equity group will continue to make bolt-on acquistions. The $3.1bn Extended Stay America acquisition in the US is an example, incorporating the previous MainStay Suites and Homestead Studio Suites purchases.

In the US, Blackstone is understood to have almost closed a $2.1bn real estate fund and in Europe it has completed a E2bn fund, which will focus on western Europe rather than eastern Europe or the Middle East.