Check the Real Estate: It's Time to Delve In .

By JAMES B. STEWART
It's springtime for real estate.

Last summer I wrote that it was time to buy residential real estate if you were in the market and looking for a bargain. I never expect to call a market bottom, and certainly not for long-cycle assets like houses, but I seem to have come pretty close. The latest S&P/Case-Shiller survey results, released last week, suggest housing prices bottomed out around April 2009, when its 20-city composite index was down 32.6% from its peak reached in June/July 2006. Since then it has gained 3% through January 2010, with some markets much stronger, especially San Francisco and Minneapolis. (Charlotte, N.C., Las Vegas, Seattle and Tampa, Fla., continued to hit new lows, but at a much slower rate of decline.)

Now it may be commercial real estate's turn. Reis Inc., a commercial-real-estate research firm, reported last week that average rents in the office sector dropped just 0.8% in the first quarter of 2010 compared to the last quarter of 2009. Rents were stable or rose in 23 of the 79 markets Reis tracks. This may not be a bottom, but it's a considerable improvement from just three months ago, when rents in 70 of the markets fell. Given the reporting lag, the bottom may well have already been reached.

If so, this moment has important implications for investors, the banking and real estate sectors, and the economy as a whole. Last year I warned that commercial real estate was a "dark cloud" hanging over the banking industry, echoing comments that were coming from the Federal Reserve. Like many aspects of the financial crisis, the clouds seem to be dissipating.

That's not all that surprising, given the recent positive economic news. Unemployment seems to be stabilizing and even improving, and workers need office space. Consumers have been spending, returning to malls in droves. Rock-bottom interest rates have allowed strapped developers and real estate owners to refinance on favorable terms. There's no doubt that many grossly overpaid at the height of the boom, and there have been some highly-publicized defaults, like Tishman Speyer Properties' decision to walk away from the Peter Cooper Village and Stuyvesant Town apartment complexes in Manhattan. But despite big write-downs, most commercial real estate borrowers have had the cash flow to keep loan payments current or refinance to buy more time.

It's true that many commercial real estate assets have already rallied strongly since bottoming in March of last year. Vanguard REIT Index Fund is trading above $51, a high for the year, and double what it was at its low for the year, to cite just one widely held example. Those who were willing to embrace considerable risk when the economy seemed to be collapsing have been amply rewarded, as they should be. Now that those risks have subsided, so have the potential returns. But I still believe long-term investors will be rewarded. The Vanguard ETF generates a 3.8% dividend yield.

It's rarely practical for individuals to invest directly in commercial real estate, but there are plenty of other ways to gain exposure thanks to mutual funds, exchange traded funds, REITs and even individual stocks that are liquid and offer diversification. It's probably never been easier to participate in the real estate sector. I suggest a mix: an exchange traded fund, a managed mutual fund, one or more REITs, and possibly some stocks of banks with significant commercial real estate exposure.

There are a multitude of ETFs and mutual funds. Among publicly traded REITs, some of the biggest, best known, and most highly regarded are Simon Property Group, Vornado Realty Trust, and Boston Properties. Among bank stocks, the biggest banks, like J.P. Morgan Chase and Bank of America, have substantial commercial real estate loans, but they amount to a relatively low percentage of their total. At the other extreme are Western Alliance Bancorp and Zions Bancorp, which, as of September, had some of the highest exposure to commercial real estate in some of the most troubled markets in the country.

These two remain high-risk propositions in my view, and I don't own them. Western Alliance has doubled from its lows, but is down by a third from the $9 it hit last May. Zions has nearly quadrupled from its low of last March, but at $24, is still far from the $88 it hit in 2007. Neither is for the faint of heart, but both may offer higher potential returns. Many regional banks occupy a middle ground between the big money-center banks and the high exposure of these two.

Whatever mix you deem prudent, I believe it's time to reevaluate your exposure to the real-estate sector. In my view, real estate belongs in every diversified investment portfolio. It's not highly correlated to equities or fixed income, and it offers income opportunities as well as a potential hedge against inflation. I've been keeping some cash on hand designated for real estate, and I've concluded it's time to put some of it to work.

—James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.

Major Miami, Orlando Office Towers on Sale Block

Sept 26, 2007
By: Amanda Marsh, Associate Editor

Nipping on the heels of Stiles Capital Partners and Macquarie Office Trust's $117 million acquisition of SunTrust Financial Center in Tampa last week, Stiles is putting the 420,000-square-foot SunTrust International Center in Miami on the block--a deal that market sources say could fetch between $350 to $375 per foot, for a total upwards of $160 million.

Jones Lang LaSalle Inc. managing directors Jeffrey Morris and Jubeen Vaghefi, who represented Stiles and Macquarie in the Tampa deal, have been retained to market the 31-story Miami trophy office tower, located on the corner of Flagler Street and SE Third Avenue. Key tenants include Bank of America, Miami Business Review, Salomon Smith Barney and SunTrust Bank.

The building, which features a variety of on-site amenities and is convenient to local retail and transportation, was fully renovated in 2002. Stiles, in a joint venture with Guggenheim Real Estate, purchased the property in December 2003 from Walton Street Capital for $70 million, according to Real Capital Analytics.

Neither Stiles nor Jones Lang LaSalle were available for comment on the sale.Commercial loans

Additionally, Florida Office Property Co. tapped Jones Lang LaSalle managing director Thomas Beneville and vice president Jay Miele to market the 17-story, 228,000-square-foot Gateway Center in Orlando, which could sell for as much as $60 million. Commercial loans

The building (pictured) is currently 20 percent vacant with rental rates below market average, and tenants include R.W. Beck, Carter & Burgess Inc., Shuffield Lowman and the General Services Administration. Besides Gateway Center's upside potential, the building's surface lot has the space to accommodate another 240,000 square feet in prospective development.

"It's a core-plus property, is a nice size and (has good visibility) in the Orlando market," Beneville told CPN, noting that the building might attract an institutional investor or pension fund. He added that Orlando is attractive as an investment destination because of its good economics and job growth.

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Younan Acquires Sixth Office Property in Houston

Sept 26, 2007
By: Michael Fickes, Contributing Correspondent

Los Angeles-based Younan Properties Inc. has acquired Two Westlake Park, a 17-story Class A office building in the Katy Freeway West submarket of Harris County, Texas. The 381,300-square-foot building is the company’s sixth Houston office acquisition since June. The deal’s financial terms were not disclosed.

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In a prepared statement, Zaya Younan, chairman & CEO of Younan Properties, said the company planned to acquire more than five million square feet of commercial property in Houston. Two Westlake Park brings Younan's total Houston holdings to approximately 1.7 million square feet of class A office space.

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According to Younan, who is the third largest owner of Class A office space in Texas, the overall Houston office market is undergoing a recovery and has performed strongly in the first half of 2007. In the Katy Freeway submarket office vacancies are down around 7 percent. Two Westlake Park is 97 percent occupied by tenants such as Conoco-Phillips, BP, and Merrill Lynch.

Since its establishment in 2002, Younan Properties has accumulated more than 10 million square feet of Class A office space valued at more than $1.5 billion in Texas, Illinois and Arizona.

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Centene Moves from Suburban St. Louis to Downtown with New $250M HQ

Sept 24, 2007
By: Barbra Murray, Contributing Editor

Choosing to remain within the Metropolitan St. Louis area, healthcare services company Centene Corp. has decided to build its new corporate headquarters in the city's reemerging downtown area. The development, Centene Centre, could ultimately feature as much as approximately 1.3 million square feet of office and retail space, and will cost an estimated $250 million to complete.

Centene will build the property through BW Development, an entity it created with unnamed partners for the construction of the project. Centene Centre will occupy two blocks within the $650 million mixed-use Ballpark Village district that is being developed by The Cordish Co.; BW Development will acquire the land from Cordish for an undisclosed amount. The initial phase of the Centene project will consist of 700,000 square feet of office and ground-level retail space, as well as parking to accommodate 1,750 vehicles. Centene will initially occupy 400,000 square feet, leaving the remaining 300,000 square feet available for lease until Centene is in need of additional space. A police substation will make its home in part of the leasable space, and the retail segment will be sold to Ballpark Village developer Cordish. Phase II of Centene Centre, which could reach 550,000 square feet of space, will be developed based on demand. Construction of the property is on schedule to get underway in the spring of 2008 and upon completion, Centene will relocate its corporate headquarters from its current location in two buildings in Clayton.

Centene's plan to build its headquarters as opposed to leasing existing space makes sense given the current office market dynamics in the St. Louis area, where tenants seeking large chunks of space would be hard-pressed to find it. According to a second quarter report by real estate services firm Grubb & Ellis Gundaker Commercial, the current vacancy rate in Metropolitan St. Louis is 13.6 percent and dropping, but blocks of space exceeding 10,000 square feet have been gobbled up due in no small part to plans for the Highway 64/40 project. However, developers are beginning to answer the call for more accommodations. TriStar Properties will kick off development of a $23 million spec building featuring nearly 130,000 square feet at its Progress Point office park in O'Fallon next month; and Sachs Properties will add a 100,000-square-foot spec building at its mixed-use Chesterfield Village compound in Chesterfield.

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