Growth strategies of REITs addressed at NAIOP meeting.

The suburban commercial office market has changed dramatically over the past few years. Institutional investors and real estate investment funds, such as the Zell/Merrill Lynch Opportunity Funds and many pension funds for example, have made significant capital investments in the New York/Connecticut suburban marketplace.

One nationwide trend that has had little impact up to now in this market has been the Real Estate Investment Trust (REIT). However, that is expected to change in years to come. One REIT that has made its entrance into the Westchester/Fairfield market is Reckson Associates Realty of Melville, Long Island, which has purchased eight commercial office buildings from Halpern Enterprises in Westchester. That transaction is expected to close sometime this month.

At the January meeting of NAIOP at the Greenwich Hyatt, an overflow crowd of attendees heard Scott Rechler, executive vice president and COO of Reckson, discuss how his firm became a REIT last year and the firm's plans for growth in the Westchester-Fairfield market.

Another speaker at the event was Paul Ingrassia, director of Salomon Brothers Inc., who worked on the Reckson-Halpern deal and discussed the REIT market in general, and whether these public and privately-held trusts will become a force in the commercial and industrial real estate sectors in years to come.

The traditional structure of real estate property ownership is changing, and REITs are one form that have an impact on market share, asking rents and growth strategies of building owners in this region and nationwide.

Rechler noted that his company is a third generation family-owned real estate development firm that realized in 1993 that in order to grow it had to become a REIT. The firm, which currently owns 10 million square feet of commercial and industrial space on long Island and in New Jersey, went public in early 1995 at $24 a share. Today, Reckson's stock price is over $30 per share.

Rechler said the formation of the REIT allowed his firm to gain access to capital and have the ability to grow its portfolio; keep existing management in place; consolidate 65 existing partnerships into one company; and form a more conservative minded corporate structure. He noted that after the public offering, the firm has only 11 properties (29 percent) of its portfolio with mortgage debt. The move also gave Reckson the ability to be in a position to diversify its holdings outside of Long Island.

Since the firm went public, it has acquired 3.5 million square feet of commercial/industrial space valued at $160 million.

Rechler said that unlike most other existing REITs, Reckson is not interested in growing its portfolio outside of the region. He said the firm's strength is a knowledge of the regional marketplace. The purchase of the eight Halpern buildings, along with that firm's existing management, gives Reckson an understanding of the Westchester marketplace as well, he added. In addition, he said the firm is currently looking at further acquisitions in the Westchester/Fairfield region.

Ingrassia, a member of Salomon's Real Estate Finance Department since 1986, provided an overview on REITs in terms of how these trusts perform for investors, as well as for property owners.

He said that the interest in REITs waned last year, but activity is expected to increase in 1996. In 1994, there were 41 initial public offerings for REITs nationwide; in 1995 there were just five. Ingrassia in the past 10 years has been involved in more than $50 billion in public and private real estate transactions completed by Salomon.

However, he said the growth in the REIT investment sector has "come on secondary issues of stock." In 1994, there were 33 secondary issues; last year there were 55 such offerings.

Rather than invest in new REITs, Ingrassia said, "They (investors) want to focus on the horses that are already in the race."

He also informed the attendees that there are at least four public or private REITs that are currently studying possible acquisitions in the Westchester/Fairfield market.

For prudent property owners, Ingrassia said they should study the REIT market and the opportunities they could provide. He said property owners should study either: selling properties to a REIT, a partnership with a trust or negotiating a merger of some kind with a REIT.

NAIOP is the trade association for developers, owners, and investors in industrial, office and related commercial real estate.