REITS: How little guys get their piece of Downtown

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February 14, 2005 // UPDATED 1:52 pm - April 26, 2007
By: Sarah McKenzie
Sarah McKenzie

There are ways to claim a stake in one of Downtown's skyscrapers without being a savvy real estate tycoon.

While owning pricey commercial property in the urban core is typically a luxury of the wealthy, real estate investment trusts, or REITs (pronounced "reetz"), provide average investors a way to own a piece of Downtown.

REITs are publicly traded companies that manage large real estate portfolios to generate income for shareholders. The investment companies invest in shopping malls, office buildings, hotels, apartment buildings and other types of real estate. The companies must pay out 90 percent of their income to shareholders to avoid corporate income taxes.

In Downtown, REITs own several office buildings, including:

- The LaSalle Plaza, 800 LaSalle Ave., owned by Chicago-based Equity Office Properties Trust. (The property is currently on the market and has an assessed value of $54.1 million according to Hennepin County tax records);

- The US Bancorp Center, 800 Nicollet Mall, owned by Georgia-based Wells Real Estate Funds (assessed value of $111.7 million);

- The Northstar Center West, 625 Marquette Ave. S., owned by Chicago-based Trizec Properties (assessed value of $13.3 million);

- The Northstar Center East, 608 2nd Ave. S., also owned by Trizec (assessed value of $9.3 million); and

- The American Express Financial Advisors operations center, 1001 3rd Ave. S., which Illinois-based Western Retail Real Estate Trust, Inc. recently acquired, according to Finance and Commerce. The building's most recent assessed value is $27.7 million.

Jay Hyde, vice president of communications for the National Association of Real Estate Investment Trusts (NAREIT), said REITs have proven to be a solid investment amid a weak economy in recent years.

"Minneapolis looks to be a very healthy REIT market that's typical of the nation as a whole," Hyde said.

There are 191 publicly traded REITs in the country and 20 have invested in Minneapolis, according to NAREIT. In Minneapolis, REITs own an estimated $900 million worth of commercial real estate and roughly $216 million of Downtown properties.

While REITs are making inroads in the Twin Cities, they are not a dominant player Downtown, said Mark Reiling, managing principal of Colliers Turley Martin Tucker, a commercial real estate firm.

Reiling said pension funds likely have the biggest investments in Downtown buildings.

"Office buildings are capital-intensive - not just in the absolute dollars to buy them,but in the amount of money it takes to effectively operate them," Reiling said.

However, REITs let investors own an interest in a multimillion-dollar commercial property without worrying about managing or leasing the property. The administrative expenses involved in managing the properties are part of the REIT's overall operating budget. Investors do not pay fees to property managers.

"There are no stand-alone fees. You simply invest in a real estate investment trust as you do any other stock," NAREIT's Hyde said.

According to George Karvel, a University of St. Thomas real estate professor, "An individual like yourself - you can't afford to own the IDS tower or a large office building, but you can afford to own a share in Equity Office Properties, which owns LaSalle Plaza, and by doing that, you own a piece of LaSalle Plaza. [REITs allow] average people to buy and own parcels of real estate that are quite large, highly valued and diversified geographically."

Karvel said REITs are typically national in scope and lack name recognition, like other real estate owners.

"The average person probably doesn't have the vaguest idea who owns this stuff. REITs are a relatively recent phenomenon - their presence has become stronger," Karvel said. "Real estate is not a highly concentrated industry like General Motors. And new real estate construction contributes three times the amount to the economy as the auto industry."

The plethora of REITS helps keep them below the public's radar.

"Even the biggest real estate investment trusts are small compared to the size of General Motors. There are hundreds of people you haven't heard of who own real estate," Karvel said. "REITs are just one part of the real estate industry - they aren't the whole enchilada."

Bob Angleson, president of Minneapolis-based Welsh Companies, a commercial real estate firm, echoed Karvel.

"Overall, it's a pretty balanced ownership picture in Downtown Minneapolis," he said, adding that prospective owners, such as REITs, have more opportunities to dive into the Downtown market recently than in previous years because several marquee properties have gone on the market this year.

"It's a good time to sell because prices are as high as they're probably going to be and interest rates are low," Angleson said. "There's a lot of money out there buying properties, so there's a lot of interest."

He adds, "Minneapolis is a good, stable market. If you look at the companies here, [the city] has a significant base, especially in the financial side, which is always good. That's been a real strength in the market. It has a pretty good diversity of companies."

Kevin Fossum, a regional manager for Wells Real Estate Funds, a REIT that owns the US Bancorp Center, said that competition has remained fierce for Downtown properties despite the high vacancy rates.

"The value of commercial real estate has gone up considerably even though the vacancy rate has gone up, too, because the capital market has billions of dollars that need to get placed, and companies need to put [them] into real estate to diversify their portfolio," Fossum said.

Despite their low profile, NAREIT's Jay Hyde said REITs make a positive impact on communities in addition to bolstering the tax base. For one, REITs have an interest in keeping their properties well maintained because they are under the watchful eye of investors and mutual fund managers.

They also provide people opportunities to invest in buildings that might walk by on a daily basis.

"They can invest in companies that own properties where they work, shop or live," he said. "Only Donald Trump and a select few can go out and actually buy a building. For the rank and file investor - folks like you and me - this is as close as we'll ever get to owning a building or owning a piece of a building."