Global Viewpoints

Prime Yields Under Downward Pressure Across Europe

Edited: Jennifer Brenner
Source: CB Richard Ellis

Widespread falls in prime yields were seen across the main European real estate markets in the final quarter of 2009, according to the latest data from CB Richard Ellis. Almost none of the locations covered by CBRE's European yield index saw upward movement in any sector in the fourth quarter, and the incidence of downward movement is spreading. These features were particularly marked in the office sector, in which nearly half of the monitored locations saw yields fall, and the downward movement in the yield index as a whole was more than twice that recorded in the previous quarter. This change is all the more notable given that the office market is also the sector experiencing the most significant rental decline, with nearly a third of the locations seeing a drop in prime office rents in the final quarter.

Commenting on these changes, Richard Holberton, Director, EMEA Research, said: “The strengthening in investment appetite for core, prime assets that we saw towards the end of last year is clearly pushing prime yields lower across an increasing number of markets. The UK continues to stand out in a European context as the focus of the largest yield movements, but prime office yields are now also under downward pressure in many of the major urban centres including Paris, Frankfurt, Milan and Madrid. Given current investor preferences, it is no coincidence that yields are being driven lower mostly in the large, mature, liquid markets.”

YIELDS

Office yields across Europe fell in the fourth quarter. The CB Richard Ellis office yield index for the EU-15 area fell by 22 basis points in the quarter, a significantly larger change than in either of the previous two quarters in 2009. Of the 46 locations in the survey, 22 saw yields move lower and 24 remained unchanged. Most of the yield reductions occurred in Western European markets, with the largest yield reductions in Glasgow (falling 115 basis points to 5.85%), and Birmingham and Manchester (falling 110 basis points to 5.75%).

Retail yields also fell during the fourth quarter. The CB Richard Ellis retail yield index for the EU-15 area fell by seven basis points in the quarter, but remains five basis points higher than it was a year ago. Of the 39 locations in the survey, 28 remained unchanged and 11 moved lower, eight of which were in the UK or France. The largest falls were in Birmingham and Manchester, which both fell 75 basis points to 5.75% and 5.50% respectively.

Industrial yields also fell. The CB Richard Ellis industrial yield index for the EU-15 area fell by 11 basis points for a second successive quarter, but is still 24 basis points higher than in Q4 2008. Seven of the 37 locations in the survey saw downward yield movements, 28 remained unchanged, and two rose. The largest yield reductions (of 75 basis points) were in Birmingham and Manchester (both falling to 7%). The two yield increases were in Barcelona (up 25 basis points to 8.25%) and Helsinki (up 15 basis points to 7.4%).

RENTS

Prime office rents across Europe fell in the third quarter of 2009. The CB Richard Ellis office rent index for the EU-15 area dropped by 1.1% in the quarter, reducing the year-on-year rate of growth to -8.7%. Sixteen of the 46 locations in the survey saw falls in the level of prime rent, two saw increases, and 28 remained unchanged. The increases were in the City of London where rents rose 3.5% to £43.50 per sq ft and in Tel Aviv, rising 2.2% to €188 per sq m. The largest falls occurred in Dublin, down 12.5% to €376 per sq m, and Lyon, down 8% to €230 per sq m.

Prime rents in the retail sector also fell during Q4 2009, with the CB Richard Ellis retail rent index for the EU-15 area falling by 1%, leaving it 2.5% lower over 2009 as a whole. Seven of the 39 locations in the survey saw a decline in the level of prime rent, 30 remained unchanged, and two showed increases. The largest falls were recorded in Lille (down 18.8% to €1,800 per sq m per annum) and Dubai (down 16.6% to €511 per sq m per annum). The two increases occurred in Glasgow (up 4% to €1,990 per sq m per annum) and Edinburgh (up 2.86% to €1,377 per sq m pa).

European industrial rents saw minimal change in the quarter. The CB Richard Ellis industrial rent index for the EU-15 area fell by 0.4%, taking the year-on-year rate of growth to -4.7%. Twenty-three of the 37 locations in the survey saw the prime rent remaining stable, nine declined, and five showed increases. The largest falls were in Budapest (down 10% to €54 per sq m per annum) and Barcelona (down 7% to €78 per sq m per annum). The largest increases occurred in Utrecht (up 7% to €70 per sq

Inland Western Retail Real Estate Trust, Inc. Announces New $300 Million Commitment for Secured Loans

Edited: Lisa Benston
Source: Inland Western Retail Real Estate Trust, Inc.

Inland Western Retail Real Estate Trust, Inc. (“Inland Western”) has obtained a commitment for new secured loans from JPMorgan Chase Bank, N.A. J.P. Morgan provided the $300 million non-recourse forward commitment that Inland Western will use to refinance 2010 debt maturities.

“This $300 million commitment, coupled with the $625 million loan we closed in December, demonstrates solid revitalization signs in the CMBS markets, as well as the existence of attractive credit in the marketplace for quality assets,” commented Steven Grimes, chief executive officer of Inland Western. “We are appreciative of JPMorgan’s continued strong support of Inland Western with this commitment.”

During the last twelve months, Inland Western has refinanced, including commitments, paid down and extinguished debt totaling $1.8 billion and has reached agreements or is in negotiations to extend another $396 million.

Inland Western Retail Real Estate Trust, Inc. is a self-managed real estate investment trust that acquires, manages and develops a diversified portfolio of real estate, primarily multi-tenant shopping centers across the United States. As of September 30, 2009, the portfolio under management totaled in excess of 49 million square feet, consisting of 299 wholly owned properties and 2 consolidated joint venture properties. The company also has interests in 12 unconsolidated properties and 14 properties in 7 development joint ventures.

EastGroup Properties Acquires Two Buildings in Charlotte for $5.3 Million

Edited: Lisa Benston
Source: EastGroup Properties, Inc.

EastGroup Properties  has acquired two business distribution buildings containing 193,000 square feet in Charlotte, North Carolina for a combined purchase price of $5,250,000. The buildings, which will be renamed Commerce Park 2 and 3, are located in Charlotte's southwest submarket. They were constructed in 1981 and 1987 and are presently 87% occupied by nine customers. The buildings are projected to generate an annualized 11.7% yield at their current occupancy and rents.

David H. Hoster II, President and CEO, stated, "The acquisition of Commerce Park 2 and 3 allows EastGroup to expand in an attractive in-fill submarket where we have a successful base of assets and increases our ownership in the Charlotte market to over 1.8 million square feet. This represents our third property purchase in the last eight months, and we continue to seek new investment opportunities."

EastGroup Properties, Inc. is a self-administered equity real estate investment trust focused on the acquisition, development and operation of industrial properties in major Sunbelt markets throughout the United States with an emphasis in the states of Florida, Texas, Arizona and California. The Company's goal is to maximize shareholder value by being the leading provider in its markets of functional, flexible, and quality business distribution space for location sensitive customers primarily in the 5,000 to 50,000 square foot range. The Company's strategy for growth is based on ownership of premier distribution facilities generally clustered near major transportation features in supply-constrained submarkets. EastGroup's portfolio currently includes 28 million square feet.

Behringer Harvard's U.S. Multifamily Platform Receives Additional $100 Million Co-Investment Boost From PGGM

Edited: Jennifer Brenner
Source: Behringer Harvard

Behringer Harvard announced that PGGM Private Real Estate Fund (PGGM), an investment vehicle for Dutch pension funds, has agreed to increase its investment in Behringer Harvard's growing portfolio of multifamily communities to $300 million.

This most recent commitment represents the third tranche under the co-investment agreement between PGGM and Behringer Harvard. An initial commitment in May 2007 earmarked $100 million that PGGM co-invested in individual assets through a joint venture with Behringer Harvard or one of its investment programs. In January 2008, PGGM provided an additional $100 million for similar co-investments. The most recent tranche of an additional $100 million brings PGGM's total co-investment commitment with Behringer Harvard to $300 million.

"Since the beginning of our successful partnership with PGGM, we have co-invested in 17 high-quality multifamily communities in 10 states representing 4,741 apartment homes," said Mr. Mark T. Alfieri, Executive Vice President – Real Estate of Behringer Harvard. "We are pleased to extend our relationship with an institutional real estate investor of the highest caliber. We believe that PGGM's decision to increase its investment in our U.S. multifamily platform is a vote of confidence in the quality of the diversified portfolio we have built together thus far."

The partners' portfolio of joint investments includes multifamily communities in major metropolitan areas including Washington, D.C., Las Vegas, Atlanta, Dallas, Houston, Denver, Fort Lauderdale and Los Angeles. In an arrangement similar to the terms of its previous co-investments with PGGM, Behringer Harvard will provide strategic management for each joint venture including acquisition, asset management and disposition services; legal and accounting services; and property management services.

Parkway Properties Announces Major Leasing Update

Edited: Jennifer Brenner
Source: Parkway Properties, Inc.

Parkway Properties, Inc. announced the recent signing of two major new leases and one large lease renewal. Combined Insurance Company of America ("Combined Insurance") signed an 11-year new lease for approximately 100,000 square feet at 111 East Wacker in Chicago, backfilling nearly 90% of the 113,000 square feet expected to be vacated by the Federal Home Loan Bank of Chicago ("FHLB") at lease expiration in February 2011. Combined Insurance will take occupancy of the space on July 1, 2010. The lease economics include a gross effective rental rate of $27.97 per square foot, which includes 19 months of free rent that will be spread throughout the lease term, and approximately $10.0 million in leasing costs. Lease termination fees of approximately $4.0 million are expected to be recorded on the FHLB space during 2010, with those funds being used to partially offset the leasing costs. The Company incurred approximately $2.0 million of the lease costs associated with this lease during 2009.

Parkway also signed an 11-year new lease for 33,000 square feet at 111 East Wacker with Silliker, Inc., in space that was previously leased by Health Care Service Corporation ("Blue Cross Blue Shield" or "BCBS") through 2012. The lease economics include an effective rental rate of $26.55 per square foot, which includes 21 months of free rent that will be spread throughout the lease term, and approximately $2.2 million in leasing costs. Parkway structured an early buyout from BCBS related to this 33,000 square feet and expects to receive lease termination fees of approximately $2.3 million that will be recorded during 2010. The remaining BCBS space of nearly 230,000 square feet is subject to lease expiration or a lease termination option in 2012, and Parkway expects that BCBS will exercise its termination option. If such termination option is exercised, Parkway expects to receive approximately $7.4 million in lease termination fees, which will be received and recorded into income over the remaining lease term.

These two leases, combined with the recently announced renewal of the General Services Administration ("GSA") for 11 years in 189,000 square feet at 233 North Michigan in Chicago, have reduced the lease rollover nearly 25% through 2012. While mitigating the rollover risk, this leasing activity will result in significant capital costs in 2010.

In December, 2009, Nabors Corporate Services exercised its one-year option to renew 205,000 square feet at One Commerce Green in Houston, Texas. This lease will now expire in December, 2011. There were no tenant improvements related to this lease renewal and the lease commission of approximately $225,000 was paid in the fourth quarter of 2009. The rental rate increased from $21.54 per square foot to $24.54 per square foot.

Steven G. Rogers, President and Chief Executive Officer, stated, "We are pleased with these two Chicago leases and the effect they have on mitigating future vacancy. In particular, the Combined Insurance lease for 100,000 square feet will backfill the vast majority of the expected loss created by the FHLB vacancy in February, 2011. Additionally, the Silliker lease puts us well on our way to mitigating our lease exposure related to BCBS, which we expect to vacate 230,000 square feet in 2012. While the leasing costs are high for these leases as compared to Parkway's historical average, the termination fees paid to Parkway reduce the leasing costs by over 50%, and secures good long-term, credit-quality customers in our important downtown Chicago assets. While costly in the short-term, we believe that eliminating exposure to certain large leases early will help stabilize the remaining lease roll through 2012."

Union Investment makes property acquisitions totalling 1.6 billion euros

Portfolio expanded with focus on European core markets / Major investment in sustainable buildings

Edited: Jennifer Brenner
Source: Union Investment Real Estate GmbH

Union Investment was again one of the most active players in the European real estate market in 2009. The Hamburg-based property fund manager acquired properties worth 1.6 billion euros over the past 12 months. A total of 18 properties and projects were purchased for its six open-ended retail and special funds.

“We are very pleased with investment results, given that our focus on core properties in prime locations means that investment potential is limited in many markets,” says Dr. Reinhard Kutscher, Chairman of the Management Board of Union Investment Real Estate GmbH. With cash inflows of some 2.63 billion euros, Union Investment’s open-ended real estate funds, which are marketed via the Volksbanken Raiffeisenbanken banking network, achieved their best sales since 2003. The company also outperformed the rest of the sector.

As a result of the acquisitions, the funds’ holdings in over 26 markets in Europe, the Americas and Asia are even more diversified. Nine new office, hotel and retail properties were acquired in Germany for some 500 million euros, and a further nine properties worth around 1.1 billion euros were purchased elsewhere in Europe. Major real estate acquisitions in 2009 included the Mercado shopping centre in Hamburg’s Altona district, the “K” shopping centre in Kortrijk, 2 Hamburg, 14 January 2010 .